-----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, WR36AFBaWCtHzW9wlGky/hhyE8/PN6sMlfouLyWKmko4HYvek0ACVD37JGba5xq4 2dN2TwZu8jiJMUpEOR6nhA== 0001038838-04-001149.txt : 20041214 0001038838-04-001149.hdr.sgml : 20041214 20041214152001 ACCESSION NUMBER: 0001038838-04-001149 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041214 DATE AS OF CHANGE: 20041214 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27808 FILM NUMBER: 041201386 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 10-K 1 k093004.txt 10-K YEAR ENDED SEPTEMBER 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2004, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-27808 HEADWATERS INCORPORATED ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 87-0547337 - --------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 10653 South River Front Parkway, Suite 300 South Jordan, Utah 84095 ------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) (801) 984-9400 --------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: ----------------------------------------------------------- None Securities registered pursuant to Section 12(g) of the Act: ----------------------------------------------------------- Common Stock, $.001 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2004 was $829,944,861, based upon the closing price on the Nasdaq National Market reported for such date. This calculation does not reflect a determination that persons whose shares are excluded from the computation are affiliates for any other purpose. The number of shares outstanding of the registrant's common stock as of November 30, 2004 was 33,905,043. ___________________________ DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be issued in connection with registrant's annual stockholders' meeting to be held in 2005 are incorporated by reference into Part III of this report on Form 10-K. 2 TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS.......................................................... 4 ITEM 2. PROPERTIES........................................................ 21 ITEM 3. LEGAL PROCEEDINGS................................................. 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES............... 23 ITEM 6. SELECTED FINANCIAL DATA........................................... 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................... 25 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 49 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 50 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................ 50 ITEM 9A. CONTROLS AND PROCEDURES........................................... 50 ITEM 9B. OTHER INFORMATION................................................. 51 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 51 ITEM 11. EXECUTIVE COMPENSATION............................................ 51 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 51 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 51 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES............................ 51 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES........................... 52 SIGNATURES................................................................... 55 Forward-looking Statements This Annual Report on Form 10-K, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events and Headwaters' future results that are based on current expectations, estimates, forecasts, and projections about the industries in which Headwaters operates and the beliefs and assumptions of its 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. In addition, any statements that refer to projections of Headwaters' future financial performance, its anticipated growth and trends in its 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 caption entitled "Risk Factors" in Item 7 hereof. There can be no assurance that Headwaters' results of operations will not be adversely affected by such factors. Unless legally required, Headwaters undertakes 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. Headwaters' Internet address is www.headwaters.com. There Headwaters makes available, free of charge, its 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 Headwaters electronically files such material with, or furnish it to, the Securities and Exchange Commission ("SEC"). Headwaters' reports can be accessed through the investor relations section of its web site. The information found on Headwaters' web site is not part of this or any report it files with or furnishes to the SEC. 3 PART I ITEM 1. BUSINESS General Development of Business Introduction. 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 it to diversify and pursue other growth opportunities. Headwaters' revenues have grown from $27.9 million in 2000 to $892.1 million for the fiscal year ended September 30, 2004 on a pro forma basis as if all 2004 acquisitions had occurred as of October 1, 2003. Headwaters' acquisition strategy has concentrated on opportunities that complement existing business lines, command leading market positions, are accretive to earnings and generate significant positive cash flow. Headwaters conducts its business primarily through the following business units: 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 alternative fuel. Headwaters Resources (formerly known as ISG) is the largest manager and marketer of coal combustion products ("CCPs") in the United States. Headwaters Resources creates 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 Technology Innovation Group, known as 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. Headwaters Construction Materials (formerly known as American Construction Materials) is a market leader in designing, manufacturing and marketing architectural stone products under the Eldorado Stone brand acquired in June 2004 and also holds regional market leadership positions in manufacturing and marketing concrete blocks, mortar and stucco materials. In September 2004, Headwaters acquired Tapco Holdings, Inc. ("Tapco"), a leading manufacturer of building products accessories (such as window shutters, gable vents and mounting blocks) and professional tools used in exterior residential remodeling and construction. The acquisitions of the Tapco and Eldorado Stone businesses in 2004 have significantly transformed the Headwaters Construction Materials business unit and given Headwaters a national presence in the commercial and residential improvement market. Headwaters' Company History. Headwaters was incorporated in Delaware in 1995 under the name Covol Technologies, Inc. In September 2000, its name was changed to Headwaters Incorporated. Headwaters' stock trades under the Nasdaq symbol "HDWR". As used herein, "Headwaters," "combined company," "we," "our" and "us" refer to Headwaters Incorporated and its consolidated subsidiaries, including Headwaters Energy Services Corp. and its subsidiaries and affiliates; Headwaters Resources, Inc. and its subsidiaries; Headwaters Technology Innovation Group, Inc. and its subsidiaries and affiliates; and Headwaters Construction Materials, Inc. and its subsidiaries and affiliates, including Eldorado Stone LLC and Tapco Holdings, Inc., unless the context otherwise requires. As used in this report, "HES" refers to Headwaters Energy Services Corp., together with its consolidated subsidiaries and affiliates; "HRI" refers to Headwaters Resources, Inc. and its consolidated subsidiaries; "HTI" refers to Headwaters Technology Innovation Group, Inc., together with its consolidated subsidiaries and affiliates; and "HCM" refers to Headwaters Construction Materials, Inc., together with its consolidated subsidiaries and affiliates, including "Eldorado", which refers to HCM Stone, LLC and Eldorado Stone LLC and all of their subsidiaries; and "Tapco," which refers to Tapco Holdings, Inc., and its subsidiaries, unless the context otherwise requires. 4 Headwaters Energy Services Principal Products and their Markets. Headwaters Energy Services Corp., together with its subsidiaries and affiliates (collectively "HES"), develops and commercializes technologies that interact with coal-based feedstocks to produce a solid alternative fuel intended to be eligible for Section 29 tax credits. The sale of qualified alternative 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. Headwaters has licensed this technology to owners of solid alternative fuel facilities for which it receives royalty revenues. Headwaters also sells proprietary chemical reagents to licensees for use in the production of the coal-based solid alternative fuel and to other solid alternative fuel facility owners with whom Headwaters has reagent supply agreements. Licensees. Headwaters licenses its technologies to 28 of a company-estimated total of 75 coal-based solid alternative fuel facilities in the United States. In addition, during fiscal 2004 Headwaters sold its proprietary chemical reagents to approximately 32 licensee and other alternative fuel facilities. Current licensees include electric utility companies, coal companies, financial institutions and other major businesses in the United States. License agreements contain a quarterly earned royalty fee generally set at a prescribed dollar amount per ton or a percentage of the tax credits earned by the licensee. License agreements generally have a term continuing through the later of January 1, 2008 or the date after which tax credits may not be claimed or are otherwise not available under Section 29. Chemical Reagent Sales. The transformation of the feedstock to an alternative fuel involves the use of a chemical reagent in a qualified facility. Headwaters primarily markets two proprietary latex-based chemicals, Covol 298 and Covol 298-1, which are widely used for the production of coal-based solid alternative fuel. The chemical reagent alters the molecular structure of the feedstock to produce an alternative fuel. Headwaters believes the benefits of its proprietary chemical reagents as compared to competitive materials include clean and efficient combustion characteristics, ease of application, concentrated form of shipment and lack of damage to material handling, pulverizing or combustion equipment. Headwaters believes the chemical reagents used in the HES process are environmentally safe, possess superior handling characteristics, burn efficiently and are competitively priced. Additionally, Headwaters' chemical reagents have been reviewed often by the IRS and tested by independent laboratories. The parameters of the HES process are consistent with the criteria for future private letter rulings as outlined by the IRS in Revenue Procedure 2001-30, as modified by Revenue Procedure 2001-34 and IRS Announcement 2003-70. On-site Facility Services. In addition to licensing its technology and supplying chemical reagents, HES employs chemical, electrical and mechanical engineers and field personnel with extensive plant and equipment operating experience to perform on-site facility services and other technical support functions. HES's engineers have years of experience operating alternative fuel manufacturing equipment, including mixers, extruders, pellet mills, briquetters and dryers. HES's employees are experienced in applying its chemical reagents on multiple types of coal feedstocks. HES has operated alternative fuel facilities utilizing multiple types of coal feedstocks and has developed and demonstrated process improvements in commercial facilities. HES has also designed and constructed reagent mixing and application systems and has retrofitted existing facilities to use its reagents. For new customers, HES has a mobile, skid-mounted reagent delivery system that allows for on-site demonstration testing. HES believes that this full spectrum of services makes it unique in providing goods and services to the coal-based solid alternative fuel business. HES maintains analytical laboratories, including bench-scale equipment for the production of coal-based solid alternative fuel and comprehensive analytical testing equipment for performing standard coal analyses. Headwaters also monitors, documents and substantiates the chemical change process required to obtain Section 29 tax credits. Sources of Available Raw Materials and Inventory Requirements. Headwaters' chemical reagents are produced by Dow Reichhold Specialty Latex LLC ("Dow Reichhold") under long-term agreements. Headwaters does not maintain or inventory any chemicals. Instead, Headwaters arranges for the drop shipping of 5 the chemical reagents directly from Dow Reichhold's production facilities to the alternative fuel plants. The chemical reagents can be manufactured in its Dow Reichhold plants throughout North America assuring short lead-time deliveries and the ability to meet increasing reagent demand. Separately, the alternative fuel facility owners have unrelated feedstock agreements that provide a supply of raw coal for processing at their facilities. These licensees and customers in turn have production agreements to supply alternative fuel to end users (usually coal-fueled electricity generating facilities). Headwaters Resources Principal Products and their Markets. Headwaters Resources is currently the largest manager and marketer of coal combustion products ("CCPs") in the United States and also manages and markets CCPs in Canada and Puerto Rico. HRI has long-term exclusive management contracts with coal-fueled electric generating utilities throughout the United States and provides CCP management services at more than 110 power plants. HRI markets CCPs in areas where sufficient demand exists, and manages much of the disposal of the rest of the CCPs it obtains, typically in landfills. HRI has established long-term relationships with many of the nation's major utilities and also assists utilities with their overall CCP management programs. HRI markets CCPs as a replacement for manufactured or mined materials such as portland cement, lime, agricultural gypsum, fired lightweight aggregate, granite aggregate and limestone. Additionally, HRI provides its affiliate, Headwaters Construction Materials, CCPs for use in certain construction products such as mortars, stucco and concrete blocks. Utilities produce CCPs year-round, including in the winter when demand for electricity increases in many regions. In comparison, sales of CCPs and construction materials produced using CCPs are keyed to construction market demands that tend to follow national trends in construction with predictable increases during temperate seasons. CCPs must be stored, usually in terminals, during the off-peak sales periods as well as transported to where they are needed for use in construction. In part because of the cost of transportation, the market for CCPs used in construction is generally regional, although HRI ships products significant distances to states such as California and Florida that have limited coal-fueled electric utilities producing high quality CCPs. HRI enjoys advantages in both logistics and sales from its status as the largest manager and marketer of CCPs in the United States. HRI maintains more than 30 stand-alone CCP distribution terminals across North America, as well as approximately 90 plant-site supply facilities. HRI owns or leases approximately 1,300 rail cars and more than 150 trucks, and also contracts with other carriers so that it can meet its transportation needs for the marketing and disposal of CCPs. In addition, HRI has more than 50 area managers and technical sales representatives nationwide to manage customer relations. Fly Ash and Other CCPs. The benefits of CCP use in construction applications include improved product performance, cost savings and positive environmental impact. Fly ash improves both the chemical and physical performance of concrete. Chemically, fly ash combines silicon with free lime created by cement hydration to produce additional binding ability within concrete - decreasing permeability and enhancing durability. Physically, fly ash particles are smaller than cement particles, allowing them to effectively fill voids and create concrete that is denser and more durable. Fly ash particles are spherical and have a "ball bearing" effect which lubricates the concrete mix and allows enhanced workability with less water. The requirement of less water also contributes to decreased permeability and greater durability of concrete. Because fly ash is also typically less expensive than the cement it replaces, concrete producers are able to improve profitability while improving concrete quality. When fly ash is used in concrete it provides environmental benefits. In addition to conserving landfill space, fly ash usage conserves energy and reduces green house gas emissions. According to the EPA, one ton of fly ash used as a replacement for portland cement eliminates approximately one ton of carbon dioxide emissions associated with cement production. This is the equivalent of retiring an automobile from the road for two months. These benefits are recognized in major "green building" movements, such as the United States Green Building Council's LEED classification system. The value of utilizing fly ash in concrete has been recognized by numerous federal agencies, including the United States Department of Energy and EPA, which has issued comprehensive procurement guidelines directing federal agencies to utilize fly ash. The EPA has also created the Coal Combustion Products Partnership ("C2P2") to nationally promote CCP utilization. Almost all states specify or recommend the use of fly ash in state and federal transportation projects. Other government entities that frequently specify or recommend the utilization of fly ash in concrete include the Federal Highway Administration, the United States Army Corps of Engineers 6 and the United States Bureau of Reclamation. Numerous state departments of transportation are also increasing their reliance on fly ash as a component for improving durability in concrete pavements. Several major cement companies have identified increasing the use of fly ash as a key environmental strategy for the next two decades. Higher quality fly ash and other high value CCPs have the greatest value to HRI because of the wide variety of higher margin commercial uses. In fiscal 2004, HRI sold approximately 5.79 million tons of high value CCPs. The quality of fly ash produced by the combustion process at coal-fueled facilities varies widely and is affected by the type of coal feedstock used and the boilers maintained by the utilities. HRI assists its utility clients in their efforts to improve the production of high value CCPs at their facilities. HRI tests fly ash to certify compliance with applicable industry standards. A quality control system ensures that customers have a specific quality of CCPs for various applications while HRI's extensive investment in transportation equipment and terminal facilities provides reliability of supply. HRI supports its marketing sales program by focusing on customer desires for quality and reliability. Marketing efforts emphasize the performance value of CCPs, as well as the attendant environmental benefits. HRI undertakes a variety of marketing activities to increase fly ash sales. These activities include: o Professional Outreach. To promote the acceptance of fly ash in construction projects, all levels of HRI's sales and marketing organization are involved in making regular educational presentations such as continuing professional education seminars to architects, engineers, and others engaged in specifying concrete mix designs. o Technical Publications. HRI publishes technical reference information pertaining to CCPs and CCP applications. HRI also prominently promotes the environmental benefits of CCP use. o Relationships with Industry Organizations. HRI personnel maintain active leadership positions in committees of the American Concrete Institute and the American Society for Testing and Materials, and serve on the boards of the American Coal Ash Association, the Western Region Ash Group, the Texas Coal Ash Utilization Group, the Midwest Coal Ash Association and the American Coal Council. These organizations help establish standards and educate the construction industry and the general public about the benefits of CCP use. o Trade Shows. HRI promotes the use of CCPs at more than 30 local and national trade shows and association meetings each year. HRI is also an exhibitor at the nation's leading conferences for utilization of environmentally friendly building products. o Government Affairs. HRI has taken a leadership role in encouraging state and federal legislation and regulations that lead to greater utilization of fly ash by emphasizing its environmental, performance and cost advantages. Legislative recognition of the benefits of fly ash as well as the use of fly ash in governmental projects helps familiarize contractors, architects and engineers with the benefits of the product for other construction uses. o Advertising. HRI advertises for fly ash sales and utilization in a number of publications, including: Architectural Record, Construction Specifier, Concrete Products, Concrete Producer, Concrete International and Environmental Design & Construction. o Creation of Branded Specialty Products. HRI has developed several specialty products that increase market penetration of CCPs and name recognition for HRI's products for road bases, structural fills, industrial fillers and agricultural applications. These include: o Alsil(R) - Processed fly ash used as an industrial filler; o C-Stone(TM) - Quality crushed aggregate manufactured from fly ash and used in road base and feedlot applications; o Flexbase(TM) - Flue Gas Desulphurization (FGD) scrubber sludge, pond ash, and/or lime proportionally mixed for road base or pond liner material; o Powerlite(R) - Processed fly ash and bottom ash, meeting American Society for Testing and Materials C331 standards, for use as a high quality aggregate in the concrete block industry; and 7 o Peanut Maker(R) - A synthetic gypsum used as a land plaster in agricultural applications. New Technologies for CCP Utilization. In an effort to maximize the percentage of CCPs marketed to end users and to minimize the amount of materials disposed of in landfills, HRI's research and development activities focus on expanding the use of CCPs by developing new products that utilize high volumes of CCPs. Through these research and development activities, HRI has developed FlexCrete(TM), a new commercial and residential building product in its early commercialization stages. FlexCrete(TM) is an aerated concrete product with 60% fly ash content that is cured at lower temperatures and ambient pressure. HRI expects FlexCrete(TM) will offer advantages for construction, including low cost, ease of use, physical strength, durability, energy efficiency, fire resistance and environmental sensitivity. Technologies to Improve Fly Ash Quality. HRI has also developed technologies that maintain or improve the quality of CCPs, further expanding and enhancing their marketability. Utilities are switching fuel sources, changing boiler operations and introducing ammonia into the exhaust gas stream in an effort to decrease costs and/or to meet increasingly stringent emissions control regulations. All of these factors can have a negative effect on fly ash quality, including an increase in the amount of unburned carbon in fly ash and the presence of ammonia slip. HRI has addressed these challenges with the development and/or commercialization of two technologies. Designed to be simple, economical and highly effective, these technologies can be implemented without the large capital expenditures often associated with controlling quality problems. Carbon Fixation. Under certain conditions, unburned carbon in fly ash inhibits the entrainment of air in concrete thereby reducing its resistance to the effects of freeze-thaw conditions. Technologies designed to remove residual carbon are often capital intensive and are therefore rarely used. HRI has the exclusive license in North America to utilize a carbon fixation technology used to pre-treat fly ash. The technology uses a liquid reagent to coat unburned carbon particles in the fly ash and hinder the impact on the concrete mix. Carbon is not removed, but its effects on air entrainment are minimized. The technology also renders some ash products usable for the first time without having any adverse effects on the quality of finished concrete. Full scale carbon fixation units have been installed and are operating at major power plants. Ammonia Slip Mitigation. As electric utilities move to implement stringent new air pollution controls, many are treating boiler exhaust gases with ammonia to remove NOx. This can result in unreacted ammonia being deposited on fly ash. The use of ammonia contaminated fly ash in concrete production can result in the release of ammonia gas, exposing concrete workers to varying levels of ammonia. HRI has developed a technology that uses a chemical reagent to mitigate the ammonia slip effects. When water is added to the concrete mix containing ammoniated fly ash, the reagent converts ammonia to harmless compounds. The process allows the reagent to be added and blended with the dry fly ash at any time from when the fly ash is collected at the power plant to when the fly ash is used in the production of concrete. Sources of Available Raw Materials and Inventory Requirements. Coal is the largest indigenous fossil fuel resource in the United States. The U.S. Department of Energy (DOE) estimates that in 2003 annual coal production was in excess of one billion tons. Almost 92% of all coal consumed in the United States was for electrical power generation. The DOE further estimates that 2003 U.S. coal consumption was for electrical power generation was at a record level of slightly more than one billion tons. Coal serves as a primary resource for baseline electricity production in the United States and was used to produce approximately half of the electricity generated in the United States. The combustion of coal results in a high percentage of residual materials which serve as the "raw material" for the CCP industry. According to the American Coal Ash Association, about 37 million tons of CCPs are beneficially used each year in the United States with more than 81 million tons of CCPs disposed of in landfills. This provides for opportunities for continuing increases in CCP utilization. As long as a significant amount of electricity in this country is generated from coal-fueled generation, HRI believes it will have an adequate supply of raw materials. Headwaters Technology Innovation Group Headwaters Technology Innovation Group, Inc., together with its subsidiaries and affiliates (collectively "HTI"), provides research and development support to Headwaters. HTI maintains a staff of engineers, scientists and technicians with expertise in the design and operation of high-pressure and temperature process plants at its Lawrenceville, New Jersey pilot plant and laboratory facilities. The following are some of the technologies currently under development. 8 o Nanocatalyst Technology. HTI has developed the capability to work at the molecular level in the aligning, spacing and adhering of nano-sized crystals of precious metals on substrate materials. The net effect is higher performance with lower precious metal content, and nearly 100% selectivity for certain chemical reactions (i.e., byproducts and waste are minimized and the desired reaction is maximized). Potential applications for this nanotechnology include new processes for direct synthesis of hydrogen peroxide for the production of chemicals such as propylene oxide. This same technique can also be used to improve existing chemical refining of precious metal catalysts, improve volatile organic compound oxidation, naphtha reforming and the production of high performance catalysts including fuel cell catalysts. In September 2004 HTI entered into a joint venture with Degussa AG, located in Dusseldorf, Germany, to develop and commercialize a process for the direct synthesis of hydrogen peroxide (H2O2). The venture aims to invest in large facilities to produce low-cost hydrogen peroxide for chemical intermediates. High-volume producers will be able to use the H2O2 from these facilities to produce intermediates such as propylene oxide (PO). Subject to terms and conditions of the agreement, the joint venture intends to complete process development by 2007, and will be responsible for any subsequent development and commercialization of manufacturing facilities. o Direct Coal Liquefaction Technology. Headwaters has developed an advanced technology for producing clean liquid fuels directly from coal. Shenhua Group, China's largest coal company, has purchased elements of Headwaters' direct coal liquefaction (DCL) technology for its plant to be built in Majata, China. Although completion of the plant is several years away, it is expected to become the first commercial direct coal liquefaction plant in the world with an ultimate capacity of 50,000 barrels per day. In October 2004, HTI was awarded a contract by Oil India Limited, a government of India enterprise, to study the technical and economic feasibility of applying HTI's direct coal liquefaction technology in India. Oil India is a public sector company engaged in petroleum exploration and production in the Assam region of northeastern India, an area rich in natural resources but distant from established oil refining operations. Under a concurrently signed memorandum of understanding, the companies have agreed that pending a positive result from the feasibility study, if Oil India elects to proceed with a commercial-scale DCL project, HTI will provide the technology license under negotiated commercial terms. o Heavy Oil Upgrading Technology. HTI has obtained the exclusive worldwide license to develop, market and sublicense an innovative catalytic heavy oil upgrading technology known as (HC)3. This technology is a hydrocracking process used for upgrading heavy oil, bitumen or bottom-of-the-barrel residual oil. An upgrading plant using the (HC)3 technologies can produce synthetic crude or clean liquid fuels. The process uses a proprietary, highly active molecular catalyst. There are several heavy oil upgrading plants located around the world that could immediately apply and benefit from the (HC) 3 technologies with minimal modification to plant and equipment. o Gas-To-Liquids Technology. Commercialization of slurry-phase Fischer-Tropsch ("FT") technology provides a new source of clean transportation fuels from fossil fuel resources. HTI has developed a skeletal-iron FT catalyst specifically designed for slurry-phase reactors that converts gaseous materials into a range of liquid fuels and chemicals, e.g., propylene. In June 2004, HTI formed a joint venture with Rentech, Inc. called FT Solutions LLC in order to accelerate the development of FT technology. FT Solutions LLC combines the FT technologies of both parties and holds the rights to license the combined technology and supply engineering, technical services and catalysts for FT projects. Headwaters Construction Materials Principal Products and their Markets. Headwaters Construction Materials is a nation-wide market leader in designing, manufacturing and marketing shutters, gable vents, mounting blocks and tools (under various Tapco brands), and architectural manufactured stone (under the Eldorado Stone(R) brand). In addition, HCM is a regional leader in manufacturing and distributing concrete blocks and other masonry units (under the Southwest and Palestine brands), as well as various mortars and stuccos (under the Best Masonry, Magna Wall(R) and other brands). The acquisitions of Tapco, Eldorado and Southwest in 2004 have significantly transformed Headwaters Construction Materials business unit and given Headwaters a national presence in the commercial and residential improvement market. HCM uses fly ash in the manufacture of its block, mortar and stucco products and intends to use fly ash in its manufactured stone products. 9 Eldorado In June 2004, Headwaters acquired Eldorado Stone, LLC, together with its wholly-owned subsidiaries. Principal Products and their Markets. Eldorado offers a wide variety of high-quality, hand-made manufactured stone products to meet a variety of design needs. Eldorado's architectural manufactured stone siding incorporates several key features important to a successful siding product, including: high aesthetic quality, ease of installation, durability, low maintenance, reasonable cost and widespread availability. Eldorado's product line has been designed and is manufactured to be one of the most realistic architectural stone products in the world. Eldorado's architectural stone siding is a lightweight, adhered siding product used by national, regional and local architectural firms, real estate developers, contractors, builders and homeowners. Eldorado Stone(R) is used in construction projects ranging from large-scale residential housing developments and commercial projects to do-it-yourself home improvement jobs. In addition to its use as a primary siding material, the Eldorado product line is used in a variety of external and internal home applications such as walls, archways, fireplaces and landscaping. Headwaters believes that Eldorado's focus on product quality, breadth and innovation, combined with a geographically diversified manufacturing platform, provides it with significant advantages in leading architects, builders and end-users to choose Eldorado over traditional materials such as natural stone, brick or stucco. Eldorado Stone(R) is available in 60 distinct stone types, developed from 12 stone profiles and crafted in a variety of natural colors designed by Eldorado's artistic staff. Eldorado also offers regional stone products based on the characteristics of the stone native to the regions. Each stone profile is manufactured using numerous real stone models, which creates a realistic, non-repetitive, natural stone look and is crafted in a variety of natural colors. Eldorado believes its collection developed over the last 30 years of more than 10,000 natural stones, which are used as models for the profiles, is not easily replicated. Manufacturing. Eldorado manufactures the molds for its stone profiles as well as the manufactured stone created from these molds. Although Eldorado does not currently use fly ash in its manufactured stone products, Headwaters intends to replace a portion of the cement used in the production of Eldorado Stone(R) with fly ash for greater durability, aesthetic enhancement and environmental advantages. Headwaters believes that Eldorado's existing plants may be modified to allow this substitution without material additional expense. Eldorado has made recent investments in both its manufacturing operations and sales and marketing capabilities. It has initiated production at its new Rancho Cucamonga, California facility and has expanded its customer service operations and staffing. Eldorado currently manufactures its products through a network of plants strategically situated throughout the U.S. in proximity to its customers. These locations allow for a high level of customer service, shorter lead times and lower freight costs. Eldorado has manufacturing facilities at locations including: Rancho Cucamonga, California; Pueblo, Colorado; Red Bud, Illinois; Fayetteville, North Carolina; Apple Creek, Ohio; Greencastle, Pennsylvania ; Carnation, Washington; and Royal City, Washington. In addition, Eldorado has four distribution centers located at: Stockton, California; Orlando, Florida; Portland, Oregon; and Arlington, Washington. A new manufacturing facility is under construction in Dublin, Georgia. Sales and Marketing. Eldorado distributes its architectural manufactured stone products primarily 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. Eldorado also has a small direct sales force. Eldorado's sales force works closely with architects and contractors to provide information concerning the attributes and ease of installation of its manufactured product and to promote market acceptance over traditional building materials. Southwest Concrete Products In July 2004 HCM purchased the assets of Southwest Concrete Products, LP through HCM's indirect subsidiary, HCM Block & Brick, LP ("Southwest"). Southwest is a leading manufacturer of concrete blocks in South Texas. Principal Products and their Markets. Southwest, together with HCM's existing operations (Palestine Concrete Tile Co., LP), makes HCM one of the largest manufacturer and seller of concrete block in the Texas market, one of America's largest block markets. The Southwest acquisition also provides Headwaters with the opportunity to use fly ash in the manufacturing process for concrete block, brick and foundation blocks. 10 Manufacturing. Southwest operates one of the most modern concrete block and brick manufacturing facilities in the industry. It has recently launched a new line of concrete bricks. Southwest has operations in Alleyton, San Antonio and Houston which complement HCM's similar operations in Dallas and Palestine, Texas. Sales and Marketing. Combining SCP's modern manufacturing facilities for concrete block and brick with those of HCM provides coverage of all the key metropolitan areas in Texas, without duplication of facilities. The established position of the combined block facilities may also provides Eldorado a strategic location for expansion. Tapco In September 2004 Headwaters acquired Tapco Holdings, Inc. Tapco is a leading designer, manufacturer and marketer of building products and professional tools used in exterior residential home improvement and construction. Principal Products and their Markets. Tapco's building products, which are either injection-molded from polypropylene or extruded, enhance the appearance of homes and include window shutters, gable vents, mounting blocks for exterior fixtures, roof ventilation, exterior decor products and specialty siding products. 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. 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 the Manufactured House Products 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. 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 and can be manufactured to meet certain hurricane codes. The injection-molded exterior products feature copolymer construction and U.V. stabilized molded-through color. o Decorative Shutters. Tapco offers 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 two 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, is 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 insect protection and includes a double baffle system for weather resistance. o Mounting Blocks. Tapco manufactures 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 220 colors. 11 o Roof Vents. Tapco produces a line of roof ventilation products, including ridge, hip, and stack covers. Tapco believes that its roof ventilation products are the industry leaders in terms of functionality, durability, and appearance. 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. They are available in numerous styles and almost any size and any color. 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 Tapco's 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 its injection-molded specialty siding competitors. These characteristics increase the profitability of using The Foundry's product relative to other types of vinyl siding. o Exterior Decor. Tapco also manufactures a variety of other exterior decor items such as window headers, door surrounds and exterior trim. These items are available in over 30 colors and will fit any window or door. o 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. Brakes hold sheet metal in place for bending and cutting during the installation process. Tapco's MAX II, Pro-14 and Pro-19 brakes feature deep working areas, enabling greater flexibility in making any shape, and strong locking systems. Tapco's Pro-III Port-O-Bender is the best selling portable brake. Tapco also manufactures a brake, the MAX II Port-O-Bender, that is designed to shape heavier gauge metal that is typically used in commercial buildings. Tapco also offers numerous accessories for brakes which include the Pro Cut-Off, Side-Winder and Brake Buddy. 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 is accessory products to the one-step and two-step distribution channels under the "Master Series(R)" brand and Mid-America Building Products company name. Tapco distributes its accessory products to the retail mass merchandiser channel through Builders Edge(R) and Vantage(R) brands. Tapco distributes its products to the manufactured housing industry through Manufactured Housing Products ("MHP"), a division of Metamora Products Corporation. MHP has an exclusive supplier relationship with one of the largest distributors to the manufactured housing market. 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 thru" 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. 12 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 that include almost 200 independent sales representatives and a small group of regional sales managers and sales executives. Tapco maintains relationships with thousands of local contractors, professional builders, and other end-users by participating in over 1,000 local shows and 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 CDs and product literature. Major 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 fiscal 2004, two retail home center customers together represented approximately 25% of Tapco's total sales. Manufacturing. Tapco conducts its manufacturing, distribution and sales operations through 14 facilities, which total approximately 850,000 square feet. 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. 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, further minimizing waste. Tapco mandates quality control checks at each step of the manufacturing process. Sources of Available Raw Materials. Tapco has long-standing relationships with its major suppliers. The raw materials Tapco purchases include polypropylene and styrene pellets, plastic extrusions, and packaging materials for Tapco's building product lines. Tapco primarily purchases polypropylene and styrene from single (separate) suppliers. In addition, Tapco purchases fabricated anodized aluminum, hinges and other components, and packaging materials for its professional installation tools. 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. Major Customers Until Headwaters acquired Headwaters Resources in September 2002, Headwaters operated in and reported as a single industry segment, alternative energy. Since the acquisition of Headwaters Resources, Headwaters now operates in three business segments, alternative energy, coal combustion products, and construction materials. Additional information about segments is presented in Note 4 to the consolidated financial statements included herein. The following table presents revenues for all customers that accounted for over 10% of total revenue during 2002, 2003 or 2004. All of these revenues are attributable to the alternative energy segment. Most of the named customers are energy companies. Affiliate relationships are determined for the period in which events are calculated. 13
(in thousands) 2002 2003 2004 - ----------------------------------------------------------------------------------------- Pace Carbon Fuels, L.L.C. affiliates Less than 10% Less than 10% $57,602 DTE Energy Services, Inc. affiliates $19,660 $42,013 Less than 10% TECO Coal Corporation affiliates 20,292 Less than 10% Less than 10% Marriott International, Inc. affiliates 19,105 Less than 10% Less than 10% AIG Financial Products Corp. affiliates 16,900 Less than 10% Less than 10%
Research and Development In 2002, Headwaters' research and development expenses were $2.3 million, attributable primarily to activities at HTI. In 2003, research and development expenses increased to $4.7 million, with the increase primarily attributable to the inclusion of additional costs relating to HRI's research and development activities. In 2004, research and development expenses increased to approximately $7.3 million, with the increase attributable primarily to activities at HTI. Headwaters' Business Strategy Headwaters intends to pursue the following business strategy: Enable Customers to Maximize Production and Value of Alternative Fuel Facilities. In order for Headwaters' customers to maximize the production and value of their coal-based alternative fuel facilities, Headwaters intends to continue to assist them in operating their facilities more efficiently, and Headwaters intends to actively market the benefits of alternative fuel to electric power generators. Headwaters intends to continue to develop technologies that improve coal handling, enhance coal combustion characteristics and reduce air emissions. Develop and License New Technologies. Headwaters intends 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, improving the quality of fly ash, and converting or upgrading fossil fuels into higher value products. In addition, HTI's nanocatalyst technologies should provide Headwaters with an opportunity for commercialization of multiple custom designed catalysts. Headwaters intends to seek to develop strategic relationships with major companies in the energy and chemical industries to accelerate commercialization of its energy and catalyst technologies. Leverage Energy and CCP Relationships. HES and HRI maintain longstanding relationships with many of the largest coal-fueled electricity producers in the United States. Headwaters believes these relationships will provide opportunities to expand and strengthen its position among coal-fueled power generation utilities. Expand Commercial Use and Enhance Quality of CCPs. Headwaters intends to expand its 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 Headwaters' strategy is to expand alternative uses of CCPs, which allows for increased sales of CCPs as well as attracting and maintaining utility customers who value Headwaters' 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. Headwaters intends to use fly ash in the production of Eldorado architectural manufactured stone products as a partial replacement for cement. Headwaters intends to continue to market the environmental and performance benefits of CCP-based building products to industry decision makers. Leverage Distribution Systems. The Tapco, Eldorado and stucco products have strong pull-through effect from Headwaters' end customers, primarily architects, engineers and contractors. Headwaters plans to leverage the complementary distribution systems of Tapco, Eldorado and its stucco, blocks and mortar products to accelerate sales of Headwaters' 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 10,000 wholesale distributors as well as leading retail home centers. Further, Eldorado's strong presence in the Southwest United States and its leading regional concrete block presence in Texas creates new distribution channels for Tapco products. Headwaters intends to leverage these complementary distribution networks to create a national distribution network to market and sell its diverse portfolio of products to new customers and new segments of the construction market. 14 Leverage Manufacturing Capability. Headwaters is committed to implementing improvements throughout its manufacturing system. Headwaters intends to capitalize on Tapco's manufacturing expertise to reduce manufacturing costs across all of its business units. Through the application of state-of-the-art manufacturing processes, best practices and economies of scale, Headwaters intends to optimize its manufacturing processes, increase product volume, reduce waste and lower costs, all of which should lead to greater product margins. Pursue Complementary and Strategic Acquisitions. Headwaters continually evaluates the potential acquisition of companies, technologies or products that will complement its existing business lines, manufacturing and distribution strengths and build on its leading market positions. Acquisition opportunities will be evaluated based on strategic fit, accretion to earnings and ability to generate significant cash flow. Competition Headwaters experiences competition from traditional coal and fuel suppliers, natural resource producers, and companies that specialize in the use and upgrading of industrial byproducts. Many of these companies have greater financial, management and other resources than Headwaters, and may be able to take advantage of acquisitions and other opportunities more readily. Coal-based solid alternative fuels made using Headwaters Energy Services' technologies, from which Headwaters derives license fee revenues and revenues from sales of chemical reagents, compete with other alternative fuel products, as well as traditional fuels. For Headwaters Energy Services, competition may come in the form of the marketing of competitive chemical reagents and the marketing of end products qualifying as alternative fuel. Headwaters Energy Services competes with other companies possessing technologies to produce coal-based solid alternative fuels and companies that produce chemical reagents such as Nalco Chemical Company and Accretion Technologies, LLC. Headwaters Energy Services also experiences competition from traditional coal and fuel suppliers and natural resource producers, in addition to those companies that specialize in the use and upgrading of industrial byproducts. These companies may have greater financial, management and other resources than Headwaters has. Further, many industrial coal users are limited in the amount of alternative fuel product they can purchase from Headwaters Energy Services' licensees because they have committed to purchase a substantial portion of their coal requirements through long-term contracts for standard coal. Generally, the business of marketing traditional CCPs is intensely competitive. Headwaters Resources has substantial competition in two main areas: obtaining CCP management contracts with utility and other industrial companies; and marketing CCPs and related industrial materials. Headwaters Resources has a presence in every region in the United States but, because the market for the management of CCPs is highly fragmented and because the costs of transportation are high relative to sales prices, most of the competition in the CCP management industry is regional. There are many local, regional and national companies that compete for market share in these areas with similar products and with numerous other substitute products. Although Headwaters Resources typically has long-term CCP management contracts with its clients, some of such contracts provide for the termination of such contract at the convenience of the utility company upon a minimum 90-day notice. Moreover, certain of Headwaters Resources' most significant regional CCP competitors appear to be seeking a broader national presence. These competitors include Lafarge North America Inc., Boral Material Technologies Inc. and Cemex. Construction materials are produced and sold regionally by the numerous owners and operators of concrete ready-mix plants. Producers with sand and gravel sources near growing metropolitan areas have important transportation advantages. Headwaters Construction Materials has competition from numerous, larger manufacturers of mortars, stuccos and concrete masonry units. With respect to concrete masonry units, national and regional competition would include Oldcastle, Featherlite and Pavestone. In addition, notwithstanding Eldorado's large market share as a producer of manufactured architectural stone, Eldorado faces significant competition from other national and regional producers of similar products, and in particular from Owens Corning. Tapco's primary competition includes Alcoa and Pinckney in the accessories market, and CertainTeed and Nailite in the specialty siding market. Many of the world's major chemical companies are devoting significant resources to researching and developing nanocatalysts and catalytic processes. These companies have greater financial, management and other resources than Headwaters has. Headwaters' strategy is to pursue complimentary acquisitions or 15 enter into license agreements or joint ventures with major chemical companies for the further development and commercialization of Headwaters' nanocatalyst technologies. Positive and Negative Factors. There are positive and negative factors pertaining to the competitive position of Headwaters and its subsidiaries. Headwaters Energy Services enjoys the benefits of a leading market position in the Section 29 licensing and reagent sales businesses, license agreements that extend through the life of Section 29, and a manufacturing process and reagent products that have withstood IRS scrutiny. From a broader alternative fuel industry perspective, Headwaters Energy Services suffers from greater dependence on United States tax policy and administration than some competitors in alternative fuels. Headwaters Resources competitive position also has positive factors of a leading market position and long-term contracts. In addition, Headwaters Resources has built a nationwide CCP distribution system not enjoyed by its competition. Negatively, Headwaters Resources is sometimes adversely affected by inclement weather slowing concrete construction (the largest market for CCPs). For Headwaters Construction Materials, the block and bagged products businesses are not national in breadth, although the block business enjoys a strong regional market position in Texas. Where its market strength is limited, the HCM block and bagged products businesses do not have strong economies of scale, price leadership, and have only limited product brand strength. Eldorado Stone's competitive position has some identifiable positive factors. Eldorado is developing a recognized name in the architectural stone veneer industry and a strong market share. Its product has excellent authenticity and broad selection alternatives. Negatively, Eldorado Stone has a limited, albeit growing, distribution network, strong competition from regional producers that do not have long shipping routes, and financial limitations that may not be shared by its largest national competitor. Tapco has a leading market position in its siding accessories business because of its strong ability to manufacture and distribute a broad range of products economically and rapidly. However, Tapco's strong market position suggests that its future growth will come largely from finding new products to put into its manufacturing and distribution channels, not from increasing market share in the siding accessories industry. Intellectual Property Below is a summary of Headwaters' intellectual property. Collectively, the intellectual property is important to Headwaters, although there is no single patent or trademark that is itself material to Headwaters at the present time. Headwaters itself has one registered trademark and one pending trademark application. Headwaters Energy Services has nine U.S. patents and one registered trademark. Headwaters Technology Innovation Group has 19 U. S. patents and 18 U.S. patent applications pending. There are also nine foreign patents applications pending. Headwaters Technology Innovation Group has six registered trademarks. Headwaters Resources has 10 U.S. patents and 7 U.S. patent applications pending. Headwaters Resources also has three foreign patents with five pending foreign applications. Headwaters Resources has 15 registered trademarks and two pending applications. Headwaters Construction Materials has 93 U.S. patents and 36 U.S. patent applications pending (primarily for Tapco). There are eight foreign patents and 11 foreign patent applications pending. Headwaters Construction Materials has 37 U.S. registered trademarks, 18 foreign trademarks, and 34 foreign trademark applications pending (primarily for Eldorado). There can be no assurance as to the scope of protection afforded by the patents. In addition, there are other technologies in use and others may subsequently be developed, which do not, or will not, utilize processes covered by the patents. There can be no assurance that Headwaters' patents will not be 16 infringed or challenged by other parties or that Headwaters will not infringe on patents held by other parties. Because many of these patents represent new technology, the importance of the patents to Headwaters' business will depend on its ability to commercialize these technologies successfully, as well as its ability to protect its technology from infringement or challenge by other parties. In addition to patent protection, Headwaters also relies on trade secrets, know-how, and confidentiality agreements to protect these technologies. Despite these safeguards, such methods may not afford complete protection and there can be no assurance that others will not either independently develop such know-how or unlawfully obtain access to Headwaters' know-how, concepts, ideas, and documentation. Since Headwaters' proprietary information is important to its business, failure to protect ownership of its proprietary information would likely have a material adverse effect on Headwaters. Regulations Section 29. Headwaters' coal-based solid alternative (or synthetic) fuel business is subject to compliance with the terms of Section 29 of the Internal Revenue Code. Under current law, Section 29 tax credits for synthetic fuel produced from coal expires on December 31, 2007. There have been initiatives from time to time to consider the early repeal or modification of Section 29. For example, in 2004, a bill was introduced in the United States House of Representatives that would repeal the Section 29 credit for synthetic fuel produced from coal. Headwaters believes that it is unlikely that the bill will pass Congress, but it could be reintroduced n the future. The IRS has suspended the issuance of private letter rulings (PLRs) to synthetic fuel facility owners several times in the past. Most recently, in June 2003, the IRS stated, in summary, in Announcement 2003-46 that it "has had reason to question the scientific validity of test procedures and results that have been presented as evidence that fuel underwent a significant chemical change, and is currently reviewing information regarding these test procedures and results," and that pending its review of the issue it was suspending the issuance of new PLRs regarding significant chemical change. The IRS release of Announcement 2003-46 caused certain of Headwaters' licensees to temporarily reduce or cease synthetic fuel production, which resulted in a reduction of Headwaters' revenue and net income. In October 2003, the IRS stated in summary in Announcement 2003-70 that it continues to question whether processes it had approved under its long-standing ruling practice produce the necessary level of chemical change required under Section 29 and Revenue Ruling 86-100. Nonetheless, the IRS indicated that it would continue to issue PLRs regarding chemical change under the standards set forth in Revenue Procedures 2001-30 and 2001-34, and that the industry's chemical change test procedures and results are scientifically valid if applied in a consistent and unbiased manner. Although the IRS resumed its practice of issuing PLRs, it expressed continuing concerns regarding the sampling and data/record retention practices prevalent in the synthetic fuels industry, and PLRs issued following the release of Announcement 2003-70 have required taxpayers (i) to maintain sampling and quality control procedures that conform to American Society for Testing and Materials or other appropriate industry guidelines at the synthetic fuel facilities, (ii) to obtain regular reports from independent laboratories that have analyzed the fuel produced in such facilities to verify that the coal used to produce the fuel undergoes a significant chemical change and (iii) to maintain records and data underlying the reports that taxpayers obtain from independent laboratories including raw FTIR data and processed FTIR data sufficient to document the selection of absorption peaks and integration points. Also, in October 2003, the United States Senate Permanent Subcommittee on Investigations issued a notification of pending investigations. The notification listed the synthetic fuel tax credit as a new item. In March 2004, the Subcommittee described its investigation as follows: "The Subcommittee is continuing its investigation [of] tax credits claimed by Section 29 of the Internal Revenue Code for the sale of coal-based synthetic fuels. The investigation is examining the utilization of these tax credits, the nature of the technologies and fuels created, the use of these fuels, and others [sic] aspects of Section 29. The investigation will also address the IRS' administration of Section 29 tax credits." The Subcommittee conducted numerous interviews and received large volumes of data between December 2003 and March 2004. Since then, there has been little activity on the investigation. The effect that the Senate subcommittee investigation of synthetic fuel tax credits may have on the industry is unknown. While the investigation is pending, it may have a material adverse effect on the 17 willingness of buyers to engage in transactions to purchase synthetic fuel facilities or on the willingness of current owners to operate their facilities, and may materially adversely affect Headwaters' revenues and net income. The Subcommittee has not scheduled a hearing as of the date of this report. Headwaters cannot make any assurances as to the timing or ultimate outcome of the Subcommittee investigation, nor can Headwaters predict whether Congress or others may conduct investigations of Section 29 tax credits in the future. Section 29 Phase-Out. In addition, tax credits claimed by a synfuel plant operator may begin to be phased-out or eliminated prior to the sunset date of December 31, 2007 if the "reference price" of oil exceeds an annual range of oil prices, both adjusted annually for inflation. In May 2004, the IRS announced that the phase-out range for 2003 beginning at $50.14 and ending with a $0 tax credit at $62.94. Because the calendar year 2003 reference price of oil was below that range, there was not a phase-out of the credit for qualified fuel sold in 2003. The reference price of oil and the inflation adjustment factor (IAF) are determined annually (and released in early April for the previous year), while the predetermined oil price range is fixed, but adjusted annually for inflation. The reference price of oil is defined as the annual average wellhead price per barrel for all domestic crude oil not subject to regulation by the U.S. Licensees are subject to audit by the IRS. The IRS may challenge whether Headwaters' licensees satisfy the requirements of Section 29, or applicable Private Letter Rulings, including placed-in-service requirements, or may attempt to disallow Section 29 tax credits for some other reason. The IRS has initiated audits of certain licensee-taxpayers who claimed Section 29 tax credits, and the outcome of any such audit is uncertain. Recently, a licensee announced that IRS field auditors have issued a notice of proposed adjustment challenging the placed-in-service date of three of its synthetic fuel facilities. The licensee believes that the facilities meet the placed-in-service requirement, however, the matter is at an early stage and the timing and final results of the audit are unknown. The inability of a licensee to claim Section 29 tax credits would reduce Headwaters' future income from the licensee. Environmental. Headwaters' operations and those of its suppliers and customers involved in coal-based energy generation, primarily utilities, are subject to federal, state and local environmental regulation. The coal-based solid synthetic fuel operations of Headwaters and its licensees are subject to federal, state and local environmental regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of waste products, which add to the cost of doing business and expose Headwaters to potential fines for non-compliance. Moreover, in order to establish and operate the synthetic fuel plants, power plants and operations to collect and transport CCPs and bottom ash, Headwaters' and its licensees and customers have obtained various state and local permits and must comply with processes and procedures that have been approved by regulatory authorities. Compliance with permits, regulations and the approved processes and procedures help protect against pollution and contamination and are critical to Headwaters' business. Any failure to comply could result in the issuance of substantial fines and penalties and cause us to incur environmental liabilities. Headwaters believes that all required permits to construct and operate these solid alternative fuel facilities have been or will be obtained and believe the facilities are in substantial compliance with all relevant laws and regulations governing alternative fuel operations. In spite of safeguards, Headwaters' operations entail risks of regulatory noncompliance or accidental discharge that could create an environmental liability because hazardous materials are used or stored during normal business operations. For example, Headwaters and its subsidiaries use and share other hazardous chemicals in order to conduct operations involving distillation to purify products, analysis, packaging of chemicals and the selling, warehousing and manufacturing of organic chemicals in small research volumes. Headwaters' subsidiaries also use their facilities to perform research and development activities involving coal, oil, chemicals and industrial gases such as hydrogen. As a result, petroleum and other hazardous materials have been and are present in and on their properties. Headwaters generally hires independent contractors to transport and dispose of any hazardous materials generated and send any hazardous wastes only to federally approved, large scale and reputable off-site waste facilities. The federal Clean Air Act of 1970 and subsequent amendments (particularly the Clean Air Act Amendments of 1990), and corresponding state laws, which regulate the emissions of materials into the air, affect the coal industry both directly and indirectly. The coal industry is directly affected by Clean Air Act permitting requirements and/or emissions control requirements, including requirements relating to particulate matter (such as, "fugitive dust"). The coal industry may also be impacted by future regulation of fine particulate matter measuring 2.5 micrometers in diameter or smaller. In July 18 1997, the EPA adopted new, more stringent National Ambient Air Quality Standards, or NAAQS, for particulate matter and ozone. Although the NAAQS were challenged in litigation, slowing their implementation, the standards were upheld by the United States Supreme Court, and states will ultimately be required to revise their existing state implementation plans ("SIPs") to attain and maintain compliance with the new NAAQS. The new eight-hour ozone nonattainment designations and classifications were published April 30, 2004, along with Phase 1 of the final implementation rule for the eight-hour standard. Both rules took effect June 15, 2004, and both are currently being litigated. The Phase 2 implementation rule for the eight-hour standard is currently expected in February or March 2005. The fine particulate matter nonattainment designations have been projected to be finalized by the end of 2004, with their implementation rule to follow at some future date. Because electric utilities emit NOx, which are precursors to ozone and particulate matter, Headwaters Resources' utility customers are likely to be affected when the new NAAQS are implemented by the states. State and federal regulations relating to fugitive dust and the implementation of the new NAAQS may reduce Headwaters Resources' sources for its products. The extent of the potential impact of the new NAAQS on the coal industry will depend on the policies and control strategies associated with the state implementation process under the Clean Air Act. The 1990 Clean Air Act Amendments require utilities that are currently major sources of NOx in moderate or higher ozone non-attainment areas to install reasonably available control technology for NOx. EPA promulgated a rule (the "NOx SIP call") in 1998 requiring 22 eastern states to make substantial reductions in NOx emissions. Court action eliminated one state and portions of two others from the rule. Under this rule, EPA expects that states will achieve these reductions by requiring power plants to make substantial reductions in their NOx emissions. The affected states were required to implement Phase I of the NOx SIP call by May 31, 2004. On April 21, 2004, EPA published Phase II of the NOx SIP call, which will require an additional reduction of about 100,000 tons of NOx per year by 2007. In addition to the NOx SIP call, EPA's April 21, 2004 rule also addressed the requirement that it directly regulate NOx emissions from states upwind of four eastern states that petitioned EPA (pursuant to section 126 of the Clean Air Act). The section 126 rule will be withdrawn in any state that submits an approvable NOx SIP. Installation of reasonably available control technology and additional control measures required under the NOx SIP call or the section 126 rule will make it more costly to operate coal-fueled utility power plants and, depending on the requirements of individual SIPs, could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. The effect such regulation or other requirements that may be imposed in the future could have on the coal industry in general and on Headwaters Resources in particular cannot be predicted with certainty. No assurance can be given that the ongoing implementation of the Clean Air Act (including the 1990 Amendments) or any future regulatory provisions will not materially adversely affect Headwaters Resources. In addition, the 1990 Clean Air Act Amendments require a study of utility power plant emissions of certain toxic substances, including mercury, and direct EPA to regulate emissions of these substances, if warranted. EPA has submitted reports to Congress on Mercury (1997) and Utility Air Toxics (1998). On December 14, 2000, EPA announced its finding that regulation of hazardous air pollutant emissions from oil- and coal-fueled electric utility steam generating units is necessary and appropriate. On January 30, 2004, EPA published the proposed Utility Mercury Reductions Rule, which sought comments on two approaches for reducing mercury emissions from coal-burning power plants. EPA is currently projecting that the rule will be finalized in March of 2005. Additionally, on January 30, 2004, EPA published a proposal, known as the Clean Air Interstate Rule, that would require coal-burning power plants to upgrade their facilities to reduce emissions of sulfur dioxide ("SOx") by 70% and NOx by 65%. EPA currently anticipates finalizing that rule by the end of 2004. Taken together, these rules, once they are finalized, could result in reduced use of coal if utilities switch to other sources of fuel. The Clear Skies Initiative, announced by the Bush Administration in February 2002 (S.485 and H.R. 999, and revised by S.1844), seeks to develop strategies for reducing emissions of SOx, NOx and mercury from power plants. Because the Initiative must be implemented by legislation that has not yet been enacted, its effect on Headwaters Resources cannot be determined at this time. However, in February and April 2003, two four-pollutant bills (S.366 and S.843, respectively) for power plants were referred to the Senate Environment and Public Works Committee. In addition to the three pollutants covered under the Clear Skies Initiative, these bills include the greenhouse gas carbon dioxide. If enacted as written, these bills could result in reduced use of coal if utilities switch to other sources of fuel as a means of complying with more stringent emission limits. It is not likely that any of these bills will be enacted during 2004, but the Administration intends to make a strong push to enact Clear Skies in the 109th Congress. Many of the goals of Clear Skies legislation will be accomplished by the Utility Mercury Rule and the Clean Air Interstate Rule, once they are finalized (see discussion above). 19 Coal-fueled boilers have been impacted by regulations under the 1990 Clean Air Act Amendments, which established specific emissions levels for SOx and NOx in order to reduce acid rain. These emissions levels have required utilities to undertake many of the following changes: change their fuel source(s), add scrubbers to capture SOx, add new boiler burner systems to control NOx, add or modify fuel pulverizers/air handling systems to control NOx, introduce flue gas conditioning materials to control particulate emissions in conjunction with meeting SOx emissions targets and in some very isolated cases shut down a plant. All of these changes can impact the quantity and quality of CCPs produced at a power plant and can add to the costs of operating a power plant. Furthermore, proposed regulations to control mercury emissions could result in implementation of additional technologies at power plants that could negatively affect fly ash quality. Further, inappropriate use of CCPs can result in faulty end products. Since most of the products marketed by Headwaters Resources typically consist of a mixture of client-supplied CCPs, Headwaters Resources does not control the quality of the final end product, but may share such control with the manufacturer of the ingredient materials. Therefore, there is a risk of liability regarding the quality of the materials and end products marketed by Headwaters Resources. In cases where Headwaters Resources is responsible for end-product quality, such as a structural fill (where material is used to fill a cavity or designated area), Headwaters Resources depends solely on its own quality assurance program. Materials sold by Headwaters Resources vary in chemical composition. Fossil fuel combustion wastes have been excluded from regulation as "hazardous wastes" under subtitle C of the Resource Conservation and Recovery Act ("RCRA"). However, EPA has determined that national regulations under subtitle D of RCRA (dealing with state and regional solid waste plans) are warranted for coal combustion byproducts disposed of in landfills or surface impoundments, or used to fill surface or underground mines. EPA is planning to publish proposed rules for CCPs generated by commercial electric power producers in March 2007 and for management of CCPs at mine facilities in October 2007 which will address, among other things, state and regional solid waste plans for CCPs disposed of in landfills or surface impoundments, or used to fill surface or underground mines. These proposed rules could make coal burning more expensive or less attractive to Headwaters Resources' utility clients. Headwaters Resources manages a number of landfill and pond operations that may be affected by EPA's proposed regulations. In most of these operations the permitting is contractually retained by the client and the client would be liable for any costs associated with new permitting requirements. The effect of such regulations on Headwaters Resources cannot be completely ascertained at this time. Headwaters Resources is engaged in providing services at one landfill operation that is permitted and managed as a hazardous waste landfill. Headwaters Resources provides the services necessary to landfill the client's hazardous wastes and operates certain in-plant equipment and systems for the client. Accordingly, there can be no assurance that Headwaters Resources will not be named in third-party claims relating to the project. CCPs may contain small concentrations of metals that are considered as "hazardous substances" under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"). Land application of CCPs is regulated by a variety of federal and state statutes, which impose testing and management requirements to ensure environmental protection. Under limited circumstances, mismanagement of CCPs can give rise to CERCLA liability. Electric utility deregulation has slowed substantially from previous years' predictions. Deregulation could negatively impact Headwaters Resources because it could result in some sources of CCPs being put out of service because they are not economically competitive. On the other hand, deregulation efforts have spurred renewed interest in construction of new coal-fueled electricity generating capacity. Headwaters believes that no significant changes to the sources of CCPs under contract will occur. However, since this change to the industry continues to evolve, the impact of deregulation cannot be accurately projected, and Headwaters could be materially adversely affected if major changes occur to specific sources. Employees Headwaters employs approximately 3,680 full-time employees. There are approximately 45 employees in Headwaters' corporate administration. The following lists the approximate number of employees by business units: Headwaters Energy Services, 20 20 Headwaters Resources, 710 Headwaters Technology Innovation Group, 45 Headwaters Construction Materials, 2,860 Approximately 16 employees work under collective bargaining agreements. ITEM 2. PROPERTIES Headwaters' headquarters are located at 10653 South River Front Parkway, Suite 300, South Jordan, Utah 84095. The lease for this office space of approximately 26,500 square feet provides for a six-year term. The monthly rent is approximately $41,000, with certain adjustments for inflation plus expenses. Headwaters Energy Services directs its operations primarily from Headwaters' South Jordan, Utah location. Headwaters Technology Innovation Group owns approximately six acres in Lawrenceville, New Jersey where it maintains offices and its research facilities. Headwaters Resources owns or leases 16 properties nationwide for its fly ash storage and distribution operations with East, Central, and West regional divisions. Headwaters Resources also conducts operations at numerous other sites via rights granted in various CCP through-put, handling and marketing contracts (for example, operating a storage or load-out facility located on utility-owned properties). Headwaters Construction Materials owns or leases 51 properties nationwide for its building products manufacturing distribution, and sales operations. Tapco is headquartered in Wixom, Michigan and has major manufacturing facilities in Metamora, Michigan and Elkland, Pennsylvania. Eldorado is headquartered in San Marcos, California and has major manufacturing facilities in Rancho Cucamonga, California and Greencastle, Pennsylvania. ITEM 3. LEGAL PROCEEDINGS Headwaters has ongoing litigation and claims incurred during the normal course of business, including the items discussed below. Headwaters intends to vigorously defend or resolve these matters by settlement, as appropriate. Management does not currently believe that the outcome of these matters will have a material adverse effect on Headwaters' operations, cash flows or financial position. In 2004, Headwaters accrued approximately $1,400,000 of reserves for legal matters because it concluded that claims and damages sought by claimants in excess of that amount were not probable. Our outside counsel believe that unfavorable outcomes are neither probable nor remote and declined to express opinions concerning the likely outcomes or liability of Headwaters. The reserves represent the amounts Headwaters would be willing to pay to reach a settlement. However, these cases raise difficult and complex legal and factual issues, and the resolution of these issues is subject to many uncertainties, including the facts and circumstances of each case, the jurisdiction in which each case is brought, and the future decisions of juries, judges, and arbitrators. Therefore, although management believes that the claims asserted against Headwaters in the named cases lack merit, there is a possibility of material losses in excess of the amounts accrued if one or more of the cases were to be determined adversely against Headwaters for a substantial amount of the damages asserted. Headwaters believes the range of potential loss is from $1,400,000 up to the amounts sought by claimants. It is possible that a change in the estimates of probable liability could occur, and the changes could be significant. Additionally, as with any litigation, these proceedings require that Headwaters incur substantial costs, including attorneys' fees, managerial time, and other personnel resources and costs in pursuing resolution. Costs paid to outside legal counsel for litigation, which comprise the majority of Headwaters' litigation-related costs, totaled approximately $1,700,000 in 2002, $3,000,000 in 2003, and $3,800,000 in 2004. It is not possible to estimate what these costs will be in future periods. Boynton. In October 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to a synthetic fuel technology invented by Davidson. (This technology is distinct from the 21 technology developed by Headwaters.) This action is factually related to an earlier action brought by certain purported officers and directors of Adtech, Inc. That action was dismissed by the United States District Court for the Western District of Tennessee and the District Court's order of dismissal was affirmed on appeal. In the current action, the allegations arise from the same facts, but the claims are asserted by certain purported stockholders of Adtech. In June 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee alleging, among other things, fraud, conspiracy, constructive trust, conversion, patent infringement and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. The plaintiffs seek declaratory relief and compensatory damages in the approximate amount of between $15,000,000 and $25,000,000 and punitive damages. The District Court has dismissed all claims against Headwaters except conspiracy and constructive trust. The Court has scheduled trial for April 2005. Because the resolution of the litigation is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters' liability. AGTC. In March 1996, Headwaters entered into an agreement with AGTC and its associates for certain services related to the identification and selection of alternative fuel projects. In March 2002, AGTC filed an arbitration demand in Salt Lake City, Utah claiming that it is owed commissions under the 1996 agreement for 8% of the revenues received by Headwaters from the Port Hodder project. AGTC is seeking approximate damages in the arbitration between $520,000 and $14,300,000. Headwaters asserts that AGTC did not perform under the agreement and that the agreement was terminated and the disputes were settled in July 1996. Headwaters filed an answer in the arbitration, denying AGTC's claims and asserting counterclaims against AGTC. The arbitrator conducted hearings during July and August of 2004 and has received a post-arbitration briefing but has not yet issued a decision. Because the resolution of the arbitration is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters' liability. AJG. In December 1996, Headwaters entered into a technology license and proprietary chemical reagent sale agreement with AJG Financial Services, Inc. The agreement called for AJG to pay royalties and to purchase proprietary chemical reagent material from Headwaters. In October 2000, Headwaters filed a complaint in the Fourth District Court for the State of Utah against AJG alleging that it had failed to make payments and to perform other obligations under the agreement. Headwaters asserts claims including breach of contract, declaratory judgment, unjust enrichment and accounting and seeks money damages as well as other relief. AJG's answer to the complaint denied Headwaters' claims and asserted counter-claims based upon allegations of misrepresentation and breach of contract. AJG seeks compensatory damages in the approximate amount of $71,000,000 and punitive damages. Headwaters has denied the allegations of AJG's counter-claims. The court has scheduled trial for January 2005. Because the resolution of the litigation is uncertain, legal counsel cannot express an opinion as to the ultimate amount of recovery or liability. McEwan. In 1995, Headwaters granted stock options to a member of its board of directors, Lloyd McEwan. The director resigned from the board in 1996. Headwaters has declined McEwan's attempts to exercise most of the options on grounds that the options terminated. In June 2004, McEwan filed a complaint in the Fourth District Court for the State of Utah against Headwaters alleging breach of contract, breach of implied covenant of good faith and fair dealing, fraud, and misrepresentation. McEwan seeks declaratory relief as well as compensatory damages in the approximate amount of $2,750,000 and punitive damages. Headwaters has filed an answer denying McEwan's claims and has asserted counterclaims against McEwan. Because resolution of the litigation is uncertain, legal counsel cannot express an opinion as to the ultimate amount of liability or recovery. Headwaters Construction Materials Matters. There are litigation and pending and threatened claims made against certain subsidiaries of Headwaters Construction Materials with respect to several types of exterior finish systems manufactured and sold by its subsidiaries for application by contractors on residential and commercial buildings. Typically, litigation and these claims are controlled by such subsidiaries' insurance carriers. The plaintiffs or claimants in these matters have alleged that the structures have suffered damage from latent or progressive water penetration due to some alleged failure of the building product or wall system. The most prevalent type of claim involves alleged defects associated with components of an Exterior Insulation and Finish System (EIFS) which was produced for a limited time (through 1996) by best Masonry & Tool Supply. There is a 10-year projected claim period following discontinuation of the product. Typically, the claims cite damages for alleged personal injuries and punitive damages for alleged unfair business practices in addition to asserting more conventional damage claims for alleged economic loss and damage to property. To date, claims made against such subsidiaries have been paid by their insurers, with the exception of minor deductibles, although such insurance carriers typically have issued "reservation of rights" letters to Headwaters Construction Materials. None of the cases has gone to trial, and while two such cases involve 100 and 800 homes, respectively, none of the cases includes any 22 claims formally asserted on behalf of a class. While, to date, none of these proceedings have required that Headwaters Construction Materials incur substantial costs, there is no guarantee of insurance coverage or continuing coverage. These and future proceedings may result in substantial costs to Headwaters Construction Materials, including attorneys' fees, managerial time and other personnel resources and costs. Adverse resolution of these proceedings could have a materially negative effect on Headwaters Construction Materials' business, financial condition, and results of operation, and its ability to meet its financial obligations. Although Headwaters carries general and product liability insurance, Headwaters cannot assure that such insurance coverage will remain available, that the insurance carriers will remain viable, or that the insured amounts will cover all future claims in excess of the uninsured retention. Future rate increases may also make such insurance uneconomical for Headwaters Construction Materials to maintain. In addition, the insurance policies maintained by Headwaters excludes claims for damages resulting from exterior insulating finish systems, or EIFS, that have manifested after March 2003. Because resolution of the litigation and claims is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters Construction Materials' liability. Other. Headwaters and its subsidiaries are also involved in other legal proceedings that have arisen in the normal course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The shares of Headwaters' common stock trade on the Nasdaq National Market under the symbol "HDWR." Options on Headwaters' common stock are traded on the Chicago Board Options Exchange under the symbol "HQK." The following table sets forth for the periods presented, the high and low trading prices of Headwaters' common stock as reported by Nasdaq. Fiscal 2003 Low High ----------- --- ---- Quarter ended December 31, 2002 $12.81 $18.03 Quarter ended March 31, 2003 13.50 16.64 Quarter ended June 30, 2003 13.25 20.25 Quarter ended September 30, 2003 12.86 16.30 Fiscal 2004 ----------- Quarter ended December 31, 2003 $14.78 $20.87 Quarter ended March 31, 2004 19.50 25.99 Quarter ended June 30, 2004 19.50 29.60 Quarter ended September 30, 2004 23.12 32.02 As of November 30, 2004, there were 352 stockholders of record of Headwaters' common stock. Headwaters has not paid dividends on its common stock to date and does not intend to pay dividends on its common stock in the foreseeable future. Pursuant to debt agreements Headwaters entered into in September 2004, Headwaters is prohibited from paying cash dividends so long as any of the long-term debt is outstanding. Headwaters intends to retain earnings to finance the development and expansion of its business. Payment of common stock dividends in the future will depend, among other things, upon Headwaters' debt covenants, its ability to generate earnings, its need for capital, its investment opportunities and its overall financial condition. See Note 12 to the consolidated financial statements for a description of securities authorized for issuance under equity compensation plans. 23 Recent Sales of Unregistered Securities In June 2004 Headwaters issued $172.5 million in aggregate principal amount of 2 7/8% Convertible Senior Subordinated Notes due 2016 in a private placement pursuant to Section 4(2) of the Securities Act of 1933, as amended. The initial purchasers of the notes were Morgan Stanley & Co. Incorporated; J.P. Morgan Securities, Inc.; Adams, Harkness & Hill, Inc.; RBC Capital Markets Corporation; and Stephens Inc. The initial purchasers resold the notes to "qualified institutional buyers," as defined in Rule 144A under the Securities Act of 1933, as amended, in reliance of Rule 144A. The net proceeds from the issuance of notes were $166.3 million after deducting selling discounts and commissions and offering expenses. The proceeds were used to finance, in part, Headwaters acquisition of Eldorado Stone. The notes are due on June 1, 2016. Headwaters pays interest on the notes on June 1 and December 1 of each year, beginning December 2, 2004. Subject to the terms of the notes, holders may convert the notes into shares of Headwaters' common stock at a conversion price of $30.00 per share, which is equivalent to a conversion rate of 33.3333 shares of Headwaters common stock per $1,000 principal amount of notes. This conversion rate is subject to adjustment under the terms of the notes. Conversion can occur only under certain circumstances, including generally when the sale price of Headwaters common stock exceeds 130% of the conversion price, which would be $39.00 per share. The notes are general, unsecured obligations that are subordinated to all existing and future senior indebtedness and Headwaters' subsidiaries indebtedness and other liabilities. Headwaters may redeem any portion of the notes at anytime on or after June 4, 2011, and if specific conditions are satisfied, any time on or after June 1, 2007. On June 1, 2011, or upon the occurrence of a designated event, holders of the notes may require Headwaters to repurchase the notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" of Item 7 hereof for a more detailed description of the notes. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are derived from the consolidated financial statements of Headwaters. This information should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. In August 2001, Headwaters acquired HTI, the financial statements of which have historically been consolidated with Headwaters' financial statements using a one-month lag. Accordingly, no results of operations of HTI were included in the consolidated statement of income for 2001. HTI's August 31, 2001, 2002 and 2003 balance sheets were consolidated with Headwaters' September 30, 2001, 2002 and 2003 balance sheets and HTI's results of operations for the twelve months ended August 31, 2002 and 2003 were consolidated with Headwaters' 2002 and 2003 results. Effective October 1, 2003, Headwaters eliminated the one-month lag and accordingly, 13 months of HTI's results of operations have been included in the consolidated statement of income for 2004. Also, as more fully described in Note 3 to the consolidated financial statements, Headwaters acquired HRI on September 19, 2002 and accordingly, HRI's results of operations for the period from September 19, 2002 through September 30, 2004 have been consolidated with Headwaters' 2002 through 2004 results. HRI's results of operations up to September 18, 2002 have not been included in Headwaters' consolidated results for any period. Headwaters acquired VFL on April 9, 2004, Eldorado Stone on June 2, 2004, SCP on July 2, 2004, and Tapco Holdings on September 8, 2004. These entities' results of operations for the periods from the acquisition dates through September 30, 2004 have been consolidated with Headwaters' 2004 results and their operations up to the dates of acquisition have not been included in Headwaters' consolidated results for any period. In 2001, Headwaters recorded approximately $7.5 million of income tax benefit primarily related to the reduction of its deferred tax asset valuation allowance. In 2004, Headwaters recognized revenue relating to funds deposited in an escrow account totaling approximately $27.9 million, most of which related to prior periods (see Note 14 to the consolidated financial statements). In addition, revenue and net income for 2004 were materially affected by the 2004 acquisitions (see Note 3 to the consolidated financial statements). The selected financial data as of and for the years ended September 30, 2000 and 2001 and as of September 30, 2002 are derived from audited financial statements not included herein. The selected financial data as of September 30, 2003 and 2004 and for the years ended September 30, 2002, 2003, and 2004 were derived from the audited financial statements of Headwaters included elsewhere herein. 24
Year ended September 30, ----------------------------------------------------------------- (in thousands, except per share data) 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------------------------------------------- OPERATING DATA: Total revenue $27,886 $45,464 $119,345 $387,630 $ 553,955 Net income 3,682 21,517 24,286 36,631 64,317 Diluted earnings per share 0.07 0.87 0.94 1.30 1.95 As of September 30, ----------------------------------------------------------------- (in thousands) 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Working capital $ 8,393 $ 8,619 $ 15,023 $ 14,176 $ 44,387 Net property, plant and equipment 552 2,680 50,549 52,743 157,611 Total assets 33,441 55,375 372,857 373,275 1,540,779 Long-term obligations: Long-term debt 5,055 149 154,552 104,044 914,641 Deferred income taxes -- -- 51,357 50,663 121,469 Other long-term liabilities 7,861 8,711 5,442 4,703 10,338 ----------------------------------------------------------------- Total long-term obligations 12,916 8,860 211,351 159,410 1,046,448 Total stockholders' equity 10,747 31,086 98,596 140,157 308,155
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the information set forth under the caption entitled "ITEM 6. SELECTED FINANCIAL DATA" and the consolidated financial statements and notes thereto included elsewhere herein. Headwaters' fiscal year ends on September 30 and unless otherwise noted, future references to years refer to Headwaters' fiscal year rather than a calendar year. Introduction Over the last three years, Headwaters has executed on its two-fold plan of maximizing cash flow from its existing operating business units and diversifying revenues from reliance on the alternative energy segment. With the addition of the CCP management and marketing business through the acquisition of ISG in 2002, and the growth of the construction materials business culminating in the acquisitions of Eldorado and Tapco in 2004, Headwaters has achieved revenue growth and diversification into three business segments. Because Headwaters has also incurred increased indebtedness to make strategic acquisitions and related capital expenditures, one of management's key financial objectives is to continue to focus on increased cash flows for purposes of reducing indebtedness as quickly as possible. Headwaters' acquisition strategy targets businesses that are leading players in their respective industries, enjoy healthy margins from products and services and are not capital intensive, thus providing additional cash flow that complements the financial performance of Headwaters' existing business segments. Headwaters is also committed to the internal development of its energy-related technologies and nanotechnology through HTI; it has invested in and expects to continue to maintain its research and development activities. As a result of its diversification into CCPs and construction materials, Headwaters is affected by seasonality, with its highest revenues produced in the June 30 and September 30 quarters. With CCPs, Headwaters' strategy is to continue to negotiate long-term contracts so that it may invest in transport and storage infrastructure for the management and sale of CCPs. Headwaters also intends to continue to expand usage of high value CCPs, develop uses for lower value CCPs and expand usage of CCPs both in its construction products and the industry in general. Headwaters' acquisitions of Eldorado and Tapco have created a concentration in the residential housing market; however, the cyclicality and interest-rate sensitivity of this business is mitigated by the fact that approximately 75% of Tapco's products are used in the home improvement and remodeling market, which is typically counter cyclical to the new construction market because remodeling is generally less expensive than a new home and is often required to maintain older homes and preserve their value. As a result, during economic downturns, Tapco's products have experienced strong growth rates. In light of Headwaters' leading market shares in Edorado's and Tapco's markets, Headwaters will need to increase production capacity for Eldorado and develop and promote new products from Tapco in order to continue the current growth rate in this segment. 25 In fiscal 2005, Headwaters will focus on integration of its new acquisitions, including the marketing of diverse construction materials products through its national distribution network, and expansion of the corporate infrastructure necessary to provide the information and services that the business segments need to operate at optimal levels. Headwaters is highly leveraged as a result of the 2004 acquisitions. This leverage makes continued diversification at historical levels more difficult. Headwaters intends to focus on repaying its current debt as quickly as possible while continuing to look for diversification opportunities within prescribed parameters. Consolidation, Acquisitions and Segments Consolidation. The consolidated financial statements include the accounts of Headwaters, all of its subsidiaries and other entities in which Headwaters has a controlling financial interest. Headwaters also consolidates any variable interest entities for which it is the primary beneficiary; however as of September 30, 2004, there are none. For investments in companies in which Headwaters has a significant influence over operating and financial decisions (generally defined as owning a voting or economic interest of 20% to 50%), Headwaters applies the equity method of accounting. In instances where Headwaters' investment is less than 20% and significant influence does not exist, investments are carried at cost. All significant intercompany transactions and accounts are eliminated in consolidation. Headwaters acquired ISG on September 19, 2002 and accordingly, ISG's results of operations for the period from September 19, 2002 through September 30, 2004 have been consolidated with Headwaters' 2002 through 2004 results. ISG's results of operations up to September 18, 2002 have not been included in Headwaters' consolidated results for any period. Headwaters acquired VFL on April 9, 2004, Eldorado Stone on June 2, 2004, SCP on July 2, 2004, and Tapco on September 8, 2004. These entities' results of operations for the periods from the acquisition dates through September 30, 2004 have been consolidated with Headwaters' 2004 results and their operations up to the dates of acquisition have not been included in Headwaters' consolidated results for any period. Due to the time required to obtain accurate financial information related to HTI's foreign contracts, for financial reporting purposes HTI's financial statements have historically been consolidated with Headwaters' financial statements using a one-month lag. Effective October 1, 2003, Headwaters eliminated this one-month lag because of the decreased significance of HTI's foreign contracts. Accordingly, 13 months of HTI's results of operations have been included in the consolidated statement of income for 2004. Acquisitions. As described in the following paragraphs, Headwaters acquired four companies in 2004 and one company in 2002. Due to the significance of these acquisitions, in many instances the consolidated financial statements and components of those financial statements discussed in the following discussion and analysis are not comparable to prior years' financial statements or components thereof. VFL - On April 9, 2004, Headwaters acquired 100% of the common stock of VFL Technology Corporation ("VFL") and assumed all of VFL's outstanding debt. VFL is based in West Chester, Pennsylvania and manages approximately two million tons of CCPs annually. In addition, VFL has operating knowledge relating to the use of low quality CCP materials in value-added applications. The acquisition of VFL broadens the scope of services that Headwaters' CCP segment offers, as well as its client base, principally on the East coast of the United States and in the Ohio River Valley. VFL's results of operations have been included in Headwaters' consolidated statement of income since April 9, 2004. The VFL acquisition was accounted for using the purchase method of accounting as required by SFAS No. 141, "Business Combinations." The consideration Headwaters paid for VFL was negotiated at arms length and assets acquired and liabilities assumed were recorded at their estimated fair values as of April 9, 2004. Approximately $11.3 million of the purchase price was allocated to identifiable intangible assets consisting of contracts with utility companies, industrial clients and municipalities. This amount is being amortized over an estimated average useful life of eight years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, all of which is expected to be tax deductible. All of the intangible assets and goodwill have been allocated to Headwaters' CCP segment. Eldorado - On June 2, 2004, Headwaters acquired 100% of the ownership interests of Eldorado Stone LLC ("Eldorado") and paid off all of Eldorado's outstanding debt. Eldorado is based in San Marcos, California and is a leading manufacturer of architectural manufactured stone. With over 700 distributors, Eldorado provides Headwaters with a national platform for expanded marketing of "green" building products, such as mortar and stucco, by using higher amounts of fly ash. 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. 26 The Eldorado acquisition was accounted for using the purchase method of accounting. The consideration Headwaters paid for Eldorado was negotiated at arms length and assets acquired and liabilities assumed were recorded at their estimated fair values as of June 2, 2004. Eldorado has experienced significant growth over the last two years. Eldorado sells its products through an extensive distribution network. In addition, Eldorado employs a group of talented artists who create the molds used to produce the manufactured stone product. The quality of these molds adds significant value to the end product. Eldorado's manufacturing process, market presence and the quality of its product, including product design and product breadth, are major elements contributing to Eldorado's high value and related purchase price. These items, combined with Eldorado's high growth and extensive distribution network are not separable and, accordingly, contribute to a significant amount of goodwill. Approximately $9.0 million of the purchase price was allocated to identifiable intangible assets, consisting primarily of non-compete agreements. The intangible assets are being amortized over estimated useful lives ranging from three to ten years, with a combined weighted average life of approximately four years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, most of which is expected to be tax deductible. All of the intangible assets and goodwill have been allocated to Headwaters' construction materials segment. The determination of the final purchase price is subject to potential adjustments related to the working capital acquired at closing. In addition, the purchase price allocation will likely differ from that reflected in the consolidated financial statements after final asset valuation reports are received and a detailed review of all assets and liabilities, including income taxes, has been completed. Pre-acquisition contingencies, which are not material, are included in the value of liabilities assumed as of June 2, 2004 and any change from the recorded amounts is expected to be immaterial. The final purchase price allocation is expected to be completed by March 31, 2005. Any changes to the purchase price allocation are not expected to materially increase or decrease depreciation and amortization expense, but may have a material effect on the amount of recorded goodwill. SCP - On July 2, 2004, Headwaters acquired certain assets of Southwest Concrete Products, L.P. ("SCP") and assumed all of SCP's outstanding debt. SCP is based in Alleyton, Texas and is a leading manufacturer of concrete blocks in South Texas, complementing Headwaters' similar operations in Dallas and East Texas. SCP provides Headwaters with modern concrete-based manufacturing facilities and the opportunity to increase the use of CCPs in the manufacture of block and brick. SCP also has an experienced management team and the president of SCP subsequently assumed responsibility for all of Headwaters' construction materials operations other than for Eldorado and Tapco. SCP's results of operations have been included in Headwaters' consolidated statement of income since July 2, 2004. Headwaters also agreed to pay an earn-out to the sellers if certain earnings targets are exceeded during the 12 months ending December 31, 2005 (the "earn-out period"). The additional earn-out consideration will be the product of 5.7 times the amount, if any, that earnings before interest, taxes, depreciation and amortization ("EBITDA") of SCP exceeds $5.5 million during the earn-out period. If any earn-out consideration is paid, which will not occur until 2006, goodwill will be increased accordingly. The SCP acquisition was accounted for using the purchase method of accounting. The consideration Headwaters paid for SCP was negotiated at arms length and assets acquired and liabilities assumed were recorded at their estimated fair values as of July 2, 2004. Approximately $6.9 million of the purchase price was allocated to identifiable intangible assets, consisting primarily of customer relationships. The intangible assets are being amortized over estimated useful lives ranging from two to ten years, with a combined weighted average life of approximately seven years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, substantially all of which is expected to be tax deductible. All of the intangible assets and goodwill have been allocated to Headwaters' construction materials segment. 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. Tapco's results of operations have been included in Headwaters' consolidated statement of income beginning September 8, 2004. 27 The Tapco acquisition was accounted for using the purchase method of accounting. The consideration Headwaters paid for Tapco was negotiated at arms length and assets acquired and liabilities assumed were recorded at their estimated fair values as of September 8, 2004. Tapco has a leading market share in most of its product lines with some lines having a market share greater than 75%. Tapco has the ability to deliver its products within a few days of receiving the order which is appealing to architects, contractors and end users of the product. Tapco also offers wide-ranging product choices delivered through an extensive distribution network throughout the United States. Tapco's products, manufacturing process and distributors are currently substantially different than those utilized by Headwaters' other business units and a substantial amount of sales relate to the remodeling industry. As such, Tapco may further mitigate the cyclical nature of Headwaters' construction materials business in the future. Tapco's primary value, therefore, is due to its significant market presence and manufacturing efficiencies. These values are largely the result of Tapco's manufacturing and distribution capacities, product breadth and workforce which are not separable and, accordingly, contribute to a significant amount of goodwill. The final purchase price and the allocation thereof will differ from that reflected in the consolidated financial statements after final fixed asset and intangible asset valuation reports are received and a detailed review of all assets and liabilities, including income taxes, has been completed. The final purchase price allocation is expected to be completed by June 30, 2005. The final purchase price allocation is not expected to materially increase or decrease depreciation and amortization expense from the amounts recorded in 2004 and the amounts expected to be recorded in future periods, nor is it expected to have a material effect on the identified assets or liabilities, including goodwill. ISG Acquisition - On September 19, 2002, Headwaters acquired 100% of the common stock of ISG, assumed or paid off all of ISG's outstanding debt and redeemed all of ISG's outstanding preferred stock. ISG is the leading provider of high value CCPs to the building products and ready mix concrete industries in the United States. ISG also develops, manufactures and distributes value-added bagged concrete, stucco, mortar and block products that utilize fly ash through its construction materials segment. Headwaters' historical focus has been on using technology to add value to fossil fuels, particularly coal. The acquisition of ISG provided Headwaters with a significant position in the last phase of the coal value chain due to ISG's competencies in managing CCPs. The acquisition of ISG also brought to Headwaters management depth, corporate infrastructure and critical mass in revenues and operating income. The ISG acquisition was accounted for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their estimated fair values as of September 19, 2002. Approximately $109.2 million of the purchase price was allocated to identifiable intangible assets consisting primarily of contracts with coal-fueled electric power generation plants and patents. This amount is being amortized over the estimated combined useful life of approximately 20 years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, none of which is tax deductible. All of the intangible assets and all of the goodwill were allocated to the CCP segment. Segments. Until Headwaters acquired ISG in September 2002, Headwaters operated in and reported as a single industry segment, alternative energy. Since the acquisition of ISG, Headwaters has operated in three business segments, alternative energy, CCPs, and construction materials. VFL operates in the CCP segment and all of the other businesses acquired by Headwaters in 2004 operate in the construction materials segment. These segments are managed and evaluated separately by management based on fundamental differences in their operations, products and services. The alternative energy segment includes Headwaters' traditional coal-based solid alternative fuels business and HTI's business of developing catalyst technologies to convert coal and heavy oil into environmentally-friendly, higher-value liquid fuels, as well as nanocatalyst processes and applications. Revenues for this segment primarily include sales of chemical reagents and license fees. The CCP segment markets coal combustion products such as fly ash and bottom ash, known as CCPs, to the building products and ready mix concrete industries. Headwaters markets CCPs to replace manufactured or mined materials, such as portland cement, lime, agricultural gypsum, fired lightweight aggregate, granite aggregate and limestone. Headwaters has long-term contracts, primarily with coal-fueled electric power generation plants pursuant to which it manages the post-combustion operations for the utilities. CCP revenues consist primarily of product sales with a smaller amount of service revenue. Prior to 2004, the businesses in the construction materials segment manufactured and distributed value-added bagged concrete, stucco, mortar and block products. The acquisition of SCP expanded Headwaters' concrete block business and the acquisition of Eldorado added manufactured architectural stone to the construction materials product line. Tapco is a leading designer, manufacturer and marketer of building products used in exterior residential home improvement and construction. Revenues for the construction materials segment consist of product sales to wholesale and retail distributors, contractors and other users of building products and construction materials. 28 Critical Accounting Policies and Estimates Headwaters' significant accounting policies are identified and described in Note 2 to the consolidated financial statements. The preparation of consolidated financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. Headwaters continually evaluates its policies and estimation procedures. Estimates are often based on historical experience and on assumptions that are believed to be reasonable under the circumstances, but which could change in the future. Some of Headwaters' accounting policies and estimation procedures require the use of substantial judgment, and actual results could differ materially from the estimates underlying the amounts reported in the consolidated financial statements. Such policies and estimation procedures have been reviewed with Headwaters' audit committee. The following is a discussion of critical accounting policies and estimates. License Fee Revenue Recognition. Headwaters currently licenses its technologies to the owners of 28 coal-based solid alternative fuel facilities in the United States. Recurring license fees or royalty payments are recognized in the period when earned, which coincides with the sale of synthetic fuel by Headwaters' licensees. In most instances, Headwaters receives timely reports from licensees notifying Headwaters of the amount of solid synthetic fuel sold and the royalty due Headwaters under the terms of the respective license fee agreements. Additionally, Headwaters has experienced a regular pattern of payment by these licensees of the reported amounts. Estimates of license fee revenue earned, where required, can be reliably made based upon historical experience and/or communications from licensees for whom an established pattern exists. In some cases, however, such as when a licensee is beginning to produce and sell synthetic fuel or when a synthetic fuel facility is sold by a licensee to another entity, and for which there is no pattern or knowledge of past or current production and sales activity, there may be more limited information upon which to estimate the license fee revenue earned. In these situations, Headwaters uses such information as is available and where possible, substantiates the information through such procedures as observing the levels of chemical reagents purchased by the licensee and used in the production of the solid synthetic fuel. In certain limited situations, Headwaters is unable to reliably estimate the license fee revenues earned during a period, and therefore revenue recognition is delayed until a future date when sufficient information is known from which to make a reasonable estimation. Pursuant to the contractual terms of an agreement with one licensee, the license fees owed to Headwaters, which accumulated during a period of approximately two and a half years, were placed in escrow for the benefit of Headwaters, pending resolution of an audit of the licensee by the IRS. Prior to December 31, 2003, accounting rules governing revenue recognition, requiring that the seller's price to the buyer be "fixed or determinable" as well as reasonably certain of collection, appeared to preclude revenue recognition for the amounts placed in escrow because they were potentially subject to adjustment based on the outcome of the IRS audit. Accordingly, none of the escrowed amounts were recognized as revenue in the consolidated statements of income through December 31, 2003. During the March 2004 quarter, the fieldwork for the tax audit of the licensee was completed and there were no proposed adjustments to the tax credits claimed by the licensee. As a result, in March 2004 Headwaters recognized revenue, net of the amount Headwaters was required to pay to a third party, relating to the funds deposited in the escrow account totaling approximately $27.9 million. Approximately $3.0 million of this amount related to revenue recorded in the March 2004 quarter and approximately $25.0 million was recorded as revenue related to prior periods. Interest income of approximately $0.2 million was also recognized. During the June 2004 quarter, the IRS completed its administrative review of the licensee's tax audit and the escrowed amounts were disbursed from the escrow account and paid to Headwaters. In addition to the escrowed amounts, this same licensee has also set aside substantial amounts for working capital and other operational contingencies as provided for in the contractual agreements. These amounts may eventually be paid out to various parties having an interest in the cash flows from the licensee's operations, including Headwaters, if they are not used for working capital and other operational contingencies. As a result, Headwaters currently expects to receive at some future date a portion of those reserves, the amount of which is not currently determinable and therefore, not recognizable. 29 Realizability of Receivables. Allowances are provided for uncollectible accounts and notes when deemed necessary. Such allowances are based on an account-by-account analysis of collectibility or impairment plus a provision for non-customer specific defaults based upon historical collection experience. Collateral is not required for trade receivables, but Headwaters performs periodic credit evaluations of its customers. Collateral is generally required for notes receivable and has historically consisted of most or all assets of the debtor. With regard to Headwaters' trade receivables from the alternative energy segment, past allowances have been minimal as have any required write-offs. Trade receivables from the CCP and construction materials segments involve substantially more customers, and receivable allowances are required for discounts, rebates, allowances, and bad debts. Headwaters continually monitors the collectibility of its trade receivables. Net losses recognized on notes receivable were approximately $0.7 million in 2002, $2.1 million in 2003 and $2.6 million in 2004. Such losses were recorded due to insufficient collateral, or declines in the value of the underlying collateral which management deemed other than temporary at the time. Notes receivable generally relate to nonoperating activities and accordingly, losses are included in other expense in the consolidated statements of income. Headwaters reviews collectibility of notes receivable at the end of each reporting period. This collectibility review consists of consideration of payments of required interest and principal and the sufficiency of the collateral to support the outstanding note receivable balance. If an impairment is indicated, Headwaters writes down the note receivable to its estimated net realizable value. Headwaters considers its receivable allowances adequate as of September 30, 2004; however, changes in economic conditions generally or in specific markets in which Headwaters operates could have a material effect on required reserve balances. Valuation of Long-Lived Assets, including Intangible Assets and Goodwill. Long-lived assets consist primarily of property, plant and equipment, intangible assets and goodwill. Intangible assets consist primarily of identifiable intangible assets obtained in connection with acquisitions. (See "Acquisitions" above and Note 3 to the consolidated financial statements for a detailed discussion of the purchase price allocations for the 2004 acquisitions, including the valuations of intangible assets.) These intangible assets are being amortized on the straight-line method over their remaining estimated useful lives. Goodwill consists of the excess of the purchase price for businesses acquired over the fair value of identified assets acquired, net of liabilities assumed. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Intangible Assets," goodwill is not amortized, but is tested at least annually for impairment. Goodwill is normally tested as of June 30, using a two-step process that begins with an estimation of the fair value of the reporting unit giving rise to the goodwill. In addition to its annual review, Headwaters evaluates the carrying value of long-lived assets, including intangible assets and goodwill, as well as the related amortization periods, to determine whether adjustments to these amounts or to the useful lives are required based on current events and circumstances. Changes in circumstances such as technological advances, changes to Headwaters' business model or changes in Headwaters' capital strategy could result in the actual useful lives differing from Headwaters' current estimates. In those cases where Headwaters determines that the useful life of property, plant and equipment or intangible assets should be shortened, Headwaters would amortize the net book value in excess of salvage value over its revised remaining useful life, thereby increasing depreciation or amortization expense. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flow from that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Indicators of impairment include such things as a significant adverse change in legal factors or in the general business climate, a decline in operating performance indicators, a significant change in competition, or an expectation that significant assets will be sold or otherwise disposed of. There were no impairment losses recorded for long-lived assets in any of the years presented. SFAS No. 142 requires Headwaters to periodically perform tests for goodwill impairment. Step 1 of the initial impairment test was required to be performed no later than March 31, 2003; thereafter impairment testing is required to be performed no less often than annually, or sooner if evidence of possible impairment arises. Impairment testing is performed at the reporting unit level and Headwaters has identified four reporting units: (i) Headwaters Energy Services and (ii) HTI (which together comprise the alternative energy segment), (iii) CCPs and (iv) construction materials. Currently, goodwill exists in the HTI, CCPs and construction materials reporting units. Step 1 of impairment testing consists of determining and comparing the fair values of the reporting units to the carrying values of those reporting units. The fair value of each reporting unit is estimated based on the application of two approaches. Under the first approach, fair value is estimated based on the present value of future estimated cash flows. This requires 30 significant judgments including the estimation of future sales, profit margins, capital expenditures, future working capital requirements, and the reporting unit's required rate of return. The second approach estimates fair value based on the quoted market prices of companies reasonably comparable to the reporting unit. Based on the application of these two approaches, an estimate of fair value is determined for each reporting unit. Changes in key estimates and assumptions employed could materially affect the determination of fair value. If step 1 were to be failed for any of the reporting units, indicating a potential impairment, Headwaters would be required to complete step 2, which is a more detailed test to calculate the implied fair value of goodwill, and compare that value to the carrying value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is required to be recorded. Headwaters performed step 1 impairment tests of the recorded goodwill in the HTI and CCPs reporting units as of October 1, 2002, the beginning of fiscal year 2003. Headwaters performed its annual, recurring tests for potential impairment using the dates of June 30, 2003 and 2004. The tests indicated that the fair values of the reporting units exceeded their carrying values at October 1, 2002, June 30, 2003 and June 30, 2004. Accordingly, step 2 of the impairment tests was not required to be performed, and no impairment charge was necessary. It is possible that some of Headwaters' tangible or intangible long-lived assets or goodwill could be impaired in the future and that the resulting write-downs could be material. Legal Matters. Headwaters and its subsidiaries are involved in several legal proceedings and contractual matters that have arisen in the normal course of business, all as explained in more detail in "ITEM 3. LEGAL PROCEEDINGS" and Note 14 to the consolidated financial statements. Headwaters intends to vigorously defend or resolve these matters by settlement, as appropriate. Management does not currently believe that the outcome of these matters will have a material adverse effect on Headwaters' operations, cash flows or financial position. In 2004 Headwaters accrued approximately $1.4 million of reserves for legal matters because it concluded that claims and damages sought by claimants in that amount were probable. However, these cases raise difficult and complex legal and factual issues, and the resolution of these issues is subject to many uncertainties, including the facts and circumstances of each case, the jurisdiction in which each case is brought, and the future decisions of juries, judges, and arbitrators. Headwaters' outside counsel believe that unfavorable outcomes are neither probable nor remote and declined to express opinions concerning the likely outcomes or liability of Headwaters. Therefore, although management believes that the claims asserted against Headwaters in the named cases lack merit, there is a possibility of material losses if one or more of the cases were to be determined adversely against it for a substantial amount of the damages asserted. Headwaters believes the range of loss is from $1.4 million up to the amounts sought by claimants. Additionally, as with any litigation, these proceedings require that Headwaters incur substantial costs, including attorneys' fees, managerial time, and other personnel resources and costs in pursuing resolution. Costs paid to outside legal counsel for litigation, which comprise the majority of Headwaters' litigation-related costs, totaled approximately $1.7 million in 2002, $3.0 million in 2003, and $3.8 million in 2004. It is not possible to estimate what these costs will be in future periods. In accounting for legal matters and other contingencies, Headwaters follows the guidance in SFAS No. 5, "Accounting for Contingencies," under which loss contingencies are accounted for based upon the likelihood of an impairment of an asset or the incurrence of a liability. If a loss contingency is "probable" and the amount of loss can be reasonably estimated, it is accrued. If a loss contingency is "probable," but the amount of loss cannot be reasonably estimated, disclosure is made. If a loss contingency is "reasonably possible," an accrual is made for the most likely amount of loss, if determinable, and disclosure is made of the potential range of loss. Loss contingencies that are "remote" are neither accounted for nor disclosed. Gain contingencies are given no accounting recognition, but are disclosed if material. Year Ended September 30, 2004 Compared to Year Ended September 30, 2003 The information set forth below compares Headwaters' operating results for the year ended September 30, 2004 ("2004") with operating results for the year ended September 30, 2003 ("2003"). Revenue. Total revenue for 2004 increased by $166.4 million or 43% to $554.0 million as compared to $387.6 million for 2003. The major components of revenue are discussed in the sections below. 31 Sales of Chemical Reagents. Chemical reagent sales during 2004 were $132.6 million with a corresponding direct cost of $89.8 million. Chemical reagent sales during 2003 were $128.4 million with a corresponding direct cost of $87.4 million. The increase in chemical reagent sales during 2004 was due primarily to significantly increased synthetic fuel production by Headwaters' licensees (resulting in increased sales of $13.9 million), largely offset by decreased synthetic fuel production by customers with which Headwaters does not have a license agreement (resulting in decreased sales of $9.7 million). It is not possible to predict the trend of sales of chemical reagents. The gross margin percentage for 2004 of 32% was approximately the same as for 2003. License Fees. During 2004, Headwaters recognized license fee revenue totaling $72.7 million, an increase of $37.0 million or 104% over $35.7 million of license fee revenue recognized during 2003. The primary reason for the increase in license fee revenue in 2004 compared to 2003 was the recognition in March 2004 of $24.9 million of net revenue relating to funds previously deposited in an escrow account by one of Headwaters' licensees relating to alternative fuel sold prior to December 31, 2003, plus approximately $12.2 million of net revenue relating to the March, June and September 2004 quarters. For more information about the revenue related to this licensee, see "License Fee Revenue Recognition" in the "Critical Accounting Policies and Estimates" section above. CCP Revenues. CCP revenues for 2004 were $210.2 million with a corresponding direct cost of $150.1 million. CCP revenues for 2003 were $169.9 million with a corresponding direct cost of $123.1 million. The increase in CCP revenues during 2004 was due primarily to increased demand for high value CCP products, the acquisition of VFL in April 2004, and the renegotiation of certain service agreements. The increased demand for high value fly ash products was the result of continued strength in the construction market coupled with a tight market for cement, with cement shortages occurring in some regional markets. These conditions allowed Headwaters to increase prices in certain CCP markets. VFL's revenues for 2004 totaled $16.9 million. The gross margin percentage increased from 2003 to 2004 by approximately 1% due primarily to benefits realized from the renegotiation of the service agreements. Sales of Construction Materials. Sales of construction materials during 2004 were $134.0 million with a corresponding direct cost of $94.6 million. Sales of construction materials during 2003 were $49.4 million with a corresponding direct cost of $37.7 million. The increase in sales of construction materials during 2004 was due primarily to the acquisitions of Eldorado in June 2004, SCP in July 2004 and Tapco in September 2004. Revenues for these acquired companies for 2004 totaled $84.1 million. The increase in gross margin percentage from 2003 to 2004 was due primarily to significantly higher margins from the operations of the acquired businesses, partially offset by certain inventory and other balance sheet adjustments, some of which related to original purchase price allocations, related to the legacy construction materials businesses. Depreciation and Amortization. These costs increased by $4.1 million to $17.1 million in 2004 from $13.0 million in 2003. The increase was primarily attributable to the 2004 acquisitions and the resulting increases in depreciable property, plant and equipment and amortizable intangible assets. For this same reason, Headwaters expects 2005 depreciation and amortization expense to be substantially higher than it was for 2004. Research and Development. Research and development expenses increased by $2.6 million to $7.3 million in 2004 from $4.7 million in 2003. The increase was primarily attributable to increased HTI research and development activities and an extra month of HTI expenses in 2004. Headwaters remains committed to HTI's research and development efforts and future expenses are likely to outpace 2004 levels as a result of continuing efforts to commercialize existing technologies. Selling, General and Administrative Expenses. These expenses increased $26.2 million to $66.9 million for 2004 from $40.7 million for 2003. The increase in 2004 was due primarily to the 2004 acquisitions ($13.2 million) and increased incentive pay expenses ($8.4 million), along with certain increases in various other costs incidental to growth, primarily payroll-related costs. The increase in incentive pay expenses was the result of obligations under Headwaters' incentive bonus plans, resulting from improved operating results in 2004, a significant portion of which related to revenue recognized from escrowed funds in March 2004, as previously discussed. As a result of the 2004 acquisitions, 2005 selling, general and administrative expenses are expected to be substantially higher than for 2004, but should be more comparable to 2004 levels when viewed as a percentage of revenues. Other Income and Expense. During 2004, Headwaters reported net other expense of $22.7 million compared to net other expense of $17.0 million during 2003. The change of $5.7 million was primarily attributable to an increase in interest expense of $3.8 million in 2004 and a net increase in other expenses of $2.1 million in 2004. Interest expense increased from $15.7 million in 2003 to $19.5 million in 2004 due primarily to higher average levels of long-term debt in 2004 compared to 2003, primarily related to the 2004 acquisitions, and accelerated non-cash interest expense related to the substantial increase in debt repayments that were made in 2004 compared to 2003. In 2004, debt repayments totaled approximately $287.2 million, which consisted largely of early repayments. In 32 2003, debt repayments totaled approximately $40.2 million. As a result of the increase in repayments in 2004, non-cash interest expense, representing amortization of debt discount and debt issue costs, increased from $3.9 million in 2003 to $6.0 million in 2004. Due to the substantially higher amounts of outstanding debt at September 30, 2004 than existed for most of 2004, interest expense in 2005 is expected to be substantially higher than for 2004. The net change in other expenses of $2.1 million consisted primarily of a write-off of $0.8 million of deferred acquisition costs related to projects that were abandoned in 2004 and an increase of $1.4 million in losses on disposition of property, plant and equipment in 2004. Income Tax Provision. In 2004, Headwaters recorded an income tax provision at an effective tax rate of approximately 38.8%. In 2003, the effective tax rate was approximately the same at 39.0%. As described in more detail in Note 14 to the consolidated financial statements, in September 2004, Headwaters purchased a 9% interest in an entity that owns and operates a coal-based alternative fuel production facility. The solid alternative fuel produced at the facility qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code, and Headwaters is entitled to receive its pro-rata share of such tax credits generated. Headwaters has also agreed to purchase an additional 10% interest in the entity upon the earlier of receipt of a private letter ruling for the facility from the IRS, or June 17, 2005. At the time Headwaters purchases the additional 10% interest, Headwaters' pro-rata share of the tax credits will also increase. As a result of these tax credits, Headwaters expects its effective tax rate to decrease several percentage points in 2005. Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 The information set forth below compares Headwaters' operating results for the year ended September 30, 2003 ("2003") with operating results for the year ended September 30, 2002 ("2002"). Revenue. Total revenue for 2003 increased by $268.3 million or 225% to $387.6 million as compared to $119.3 million for 2002. The major components of revenue are discussed in the sections below. Sales of Chemical Reagents. Chemical reagent sales during 2003 were $128.4 million with a corresponding direct cost of $87.4 million. Chemical reagent sales during 2002 were $74.4 million with a corresponding direct cost of $50.1 million. The increase in chemical reagent sales during 2003 was due to increased synthetic fuel production by Headwaters' licensees (approximately $33.6 million), as well as sales of chemical reagents to new customers with which Headwaters does not have a license agreement (approximately $20.4 million). License Fees. During 2003, Headwaters recognized license fee revenue totaling $35.7 million, an increase of $5.2 million or 17% over $30.5 million of license fee revenue recognized during 2002. License fees in 2003 consisted of recurring license fees or royalty payments of $34.5 million and deferred revenue amortization of $1.2 million. License fees in 2002 consisted of recurring license fees of $29.0 million and deferred revenue amortization of $1.5 million. The primary reason for the increase in license fee revenue in 2003 compared to 2002 was a major licensee that purchased four facilities from a former licensee in October 2001, but did not begin operating those facilities until early calendar 2002. Headwaters earned approximately $11.3 million in license fees from this licensee in 2003 and $7.4 million in 2002. ISG Revenues and Cost of Revenues. CCP revenues and sales of construction materials and the related cost of revenue captions represent ISG's revenues and cost of revenues. Because ISG was purchased on September 19, 2002, there were only 12 days of operations included in 2002 compared to a full year in 2003. Depreciation and Amortization. These costs increased by $11.2 million to $13.0 million in 2003 from $1.8 million in 2002. The increase was primarily attributable to depreciation and amortization of ISG's tangible and intangible assets. Research and Development. Research and development expenses increased by $2.4 million to $4.7 million in 2003 from $2.3 million in 2002. The increase was primarily attributable to the inclusion of additional costs relating to ISG's research and development activities. In 2002, research and development expenses represented primarily costs related to HTI's activities, which remained relatively unchanged during 2003. Selling, General and Administrative Expenses. These expenses increased $27.0 million to $40.7 million for 2003 from $13.7 million for 2002. The increase in 2003 was due primarily to the inclusion of ISG's costs, and to a lesser extent, an increase in professional services expenses of approximately $1.1 million related to legal actions in which Headwaters is currently involved. 33 Other Income and Expense. During 2003, Headwaters reported net other expense of $17.0 million compared to net other expense of $0.8 million during 2002. The change of $16.2 million was attributable to i) an increase in interest expense of $15.1 million, ii) a decrease in interest income of $0.7 million, and iii) an increase in net losses on notes receivable and investments of $1.7 million, substantially offset by an increase in net other income of $1.3 million. Interest expense increased in 2003 due to the substantial increase in debt incurred in September 2002 to finance the acquisition of ISG. Interest expense in 2003 includes $1.5 million related to accelerated amortization of debt discount and debt issue costs associated with $25.5 million of early repayments of senior debt principal. Interest income decreased from 2002 to 2003 primarily due to lower average balances of cash and short-term investments as a result of Headwaters using a substantial amount of cash to purchase ISG and applying available cash generated in 2003 to repay long-term debt. Lower interest rates in 2003 also affected interest income. Losses on notes receivable were $1.4 million higher in 2003 as compared to 2002. In both years, the majority of the losses represented write-downs of a note receivable which is being accounted for on the cost recovery method. The write-downs in both years were necessary due to declines in the value of the underlying collateral. The carrying value of this note receivable at September 30, 2003 was $0.5 million. In 2003, Headwaters also recorded a $0.3 million loss on an investment. Net other income increased by $1.3 million in 2003 compared to 2002 primarily due to two non-recurring transactions in 2002. A $1.3 million gain on sale of assets resulted from the sale of a 50% interest in one of Headwaters' original synthetic fuel facilities. Also, Headwaters recorded approximately $2.6 million of losses related to the write-off of deferred project / financing costs resulting from the abandonment of certain projects or the postponement or redirection of activities for which costs had previously been deferred. Income Tax Provision. In 2003, Headwaters recorded an income tax provision at an effective tax rate of approximately 39%. In 2002, the effective tax rate was approximately 40%. Liquidity and Capital Resources Summary of Cash Flow Activities. Net cash provided by operating activities during 2004 was $91.9 million compared to $56.4 million of net cash provided by operations during 2003. The change was primarily attributable to an increase in net income in 2004 compared to 2003. In 2004, Headwaters issued 5.0 million shares of common stock under an effective shelf registration statement for net cash proceeds of $90.3 million. Headwaters used $50.0 million of the cash generated from the issuance of common stock to repay debt, and the remaining proceeds were temporarily invested in short-term trading investments and ultimately used for acquisitions. During 2004, a total of $287.2 million of debt was repaid, approximately $112.8 million of which was repaid when Headwaters "refinanced" its senior debt in March 2004 and again in September 2004. New debt issuances in 2004 totaled $1,068.1 million (net of debt issuance costs of approximately $24.4 million), and included $904.0 million of senior debt issued from March through September 2004 and $172.5 million of convertible senior subordinated notes issued in June 2004. Most of the new debt issuances were in connection with the Eldorado acquisition in June 2004 and the Tapco acquisition in September 2004. During 2004, investing activities consisted primarily of net payments for acquisitions totaling $952.3 million. More details about Headwaters' investing and financing activities are provided in the following paragraphs. Investing Activities. As described in more detail in Note 3 to the consolidated financial statements, Headwaters acquired four companies in 2004. The total purchase price for these acquisitions was approximately $987.8 million, net of cash acquired of $11.8 million. The acquisitions were funded by net cash payments totaling approximately $952.3 million, along with the assumption of approximately $16.5 million of debt and the issuance of $19.0 million of notes payable to the previous owners of one company. Most of the required cash was obtained from the issuance of $904.0 million of new senior debt in March 2004 through September 2004 and $172.5 million of convertible senior subordinated notes in June 2004. Headwaters intends to continue to expand its business through growth of existing operations, commercialization of technologies currently being developed, and strategic acquisitions of entities that operate in adjacent industries. It is possible that some portion of cash and cash equivalents and short-term trading investments and/or proceeds from the issuance of stock or debt will be used to fund acquisitions of complementary businesses in the chemical, energy, building products and related industries. Acquisitions are an important part of Headwaters' business strategy and to that end, Headwaters routinely reviews complementary acquisitions, including those in the areas of CCP marketing, construction materials, and coal and catalyst technologies. The new senior secured credit agreement limits acquisitions to $50.0 million each fiscal year, of which cash consideration may not exceed $30.0 million, unless Headwaters' "total leverage ratio," as defined, is less than or equal to 3.50:1.0, after giving effect to an acquisition, in which case the foregoing $30.0 million cash limitation does not apply. In 2004, Headwaters expensed approximately $0.8 million of deferred acquisition costs related to acquisition projects that were abandoned. 34 In 2004, payments for the purchase of property, plant and equipment totaled $14.0 million. These capital expenditures primarily related to the CCPs and construction materials segments. Due to the 2004 acquisitions, total capital expenditures for fiscal year 2005 will be much higher than for fiscal year 2004, and are currently expected to approximate the limitation on such expenditures included in the senior debt covenants of $50.0 million. As of September 30, 2004, Headwaters was committed to spend approximately $11.0 million to complete capital projects that were in various stages of completion. As described in more detail in Note 14 to the consolidated financial statements, in September 2004, Headwaters purchased a 9% interest in an entity that owns and operates a coal-based alternative fuel production facility. Headwaters' minority interest was acquired in exchange for an initial cash payment of $0.3 million and an obligation to pay $7.5 million in monthly installments from October 2004 through December 2007. Headwaters has also agreed to purchase an additional 10% interest in the entity upon the earlier of receipt of a private letter ruling for the facility from the IRS, or June 17, 2005. At such time, Headwaters will be required to make an additional cash payment of $0.3 million and pay an additional $7.5 million, plus interest, through December 2007. The total amounts that Headwaters will be required to pay are directly impacted by the amounts of solid alternative fuel produced at the facility, including the fixed payment obligations of $7.5 million (increasing to $15.0 million). In September 2004, Headwaters entered into an agreement with an international chemical company, based in Germany, to jointly develop and commercialize a process for the direct synthesis of hydrogen peroxide. Under terms of the joint venture agreement, Headwaters paid $1.2 million for its investment in the joint venture and is further obligated to pay an additional $1.0 million in 2005 and $1.0 million in 2006. Headwaters has also committed to fund 50% of the joint venture's research and development expenditures, currently limited to (euro)3.0 million (approximately $3.7 million at September 30, 2004), through September 2007. Although there is no legal obligation to do so, the joint venture partners currently have long-range plans to eventually invest in large-scale hydrogen peroxide plants using the process for direct synthesis of hydrogen peroxide. Headwaters had two notes receivable with a combined carrying value of approximately $2.5 million at September 30, 2003. In 2004, Headwaters wrote-off the balance of these notes plus accrued interest because of declines in the value of the underlying collateral that management deemed to be other than temporary. There are no significant note receivable balances as of September 30, 2004. Financing Activities. Headwaters has an effective universal shelf registration statement on file with the SEC that can be used for the sale of common stock, preferred stock, convertible debt and other securities. In December 2003, Headwaters filed a prospectus supplement to the shelf registration statement and issued 4.8 million shares of common stock under this shelf registration statement in an underwritten public offering. In January 2004, an additional 0.2 million shares of common stock were issued upon exercise of the underwriters' over-allotment option. In total, proceeds of $90.3 million were received, net of offering costs of $6.4 million. Following these issuances of common stock, approximately $53.0 million remains available for future offerings of securities under the shelf registration statement. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering would commence under the registration statement. Due to the recent issuance of senior debt and the covenants associated with that debt, as described below, Headwaters currently has limited ability to obtain significant additional amounts of long-term debt. New 2004 Senior Secured Credit Agreements - In September 2004 and as amended in October 2004, Headwaters entered into two credit agreements with a syndication of lenders under which a total of $790.0 million was borrowed under term loan arrangements and which provide for $60.0 million to be borrowed under a revolving credit arrangement. The proceeds were used to acquire Tapco and repay in full the remaining balance due under Headwaters' former 2004 senior secured credit agreement obtained in March 2004 (see below). The $790.0 million of term loan borrowings consisted of a first lien term loan in the amount of $640.0 million and a second lien term loan in the amount of $150.0 million. Both term loans are secured by all assets of Headwaters and are senior in priority to all other debt. The first lien term loan bears interest, at Headwaters' option, at either i) the London Interbank Offered Rate ("LIBOR") plus 3.0%, if the "total leverage ratio," as defined, is less than or equal to 3.75:1.0, and if not, at LIBOR plus 3.25%, or ii) the "base rate" plus 2.0%, if the total leverage ratio is less than or equal to 3.75:1.0, and if not, at the base rate plus 2.25%. Base rate is defined as the higher of the rate announced by Morgan Stanley Senior Funding and the overnight rate charged by the Federal Reserve Bank of New York 35 plus 0.5%. The initial interest rate on the first lien debt was set at 6.5%, but was subsequently reduced to approximately 5.4% in October 2004 pursuant to the terms of the agreement. The second lien term loan bears interest, also at Headwaters' option, at either LIBOR plus 5.5%, or the "base rate" plus 4.5%. The initial interest rate on the second lien debt was set at 9.75%, but was subsequently reduced to approximately 8.15% in October 2004 pursuant to the terms of the agreement. Headwaters can lock in new rates for both the first lien and second lien loans for one, two, three or six months. The next rate change will occur in January 2005. The first lien term loan is repayable in quarterly installments of principal and interest, with minimum required quarterly principal repayments of $12.0 million commencing in November 2004 through August 2007, then $4.0 million through August 2010, with three repayments of approximately $149.3 million through April 2011, the termination date of the first lien loan agreement. The second lien term loan is due September 2012, with no required principal repayments prior to that time. Interest is generally due on a quarterly basis. There are mandatory prepayments of the first lien term loan in the event of certain asset sales and debt and equity issuances and from "excess cash flow," as defined. Optional prepayments of the first lien term loan are permitted without penalty or premium. Optional prepayments of the second lien term loan are permissible only to the extent Headwaters issues new equity securities and then are further limited to a maximum of $50.0 million, so long as the first lien term loan remains outstanding. Any optional prepayments of the second lien term loan bear a penalty of 3% of prepayments made in the first year, 2% of prepayments made in the second year, and 1% of prepayments made in the third year. Once repaid in full or in part, no further reborrowings under either of the term loan arrangements can be made. In October 2004, Headwaters repaid a total of $24.0 million of the first lien term loan, which amount otherwise would have been due in November 2004 and February 2005. As required by the new senior secured credit facility, Headwaters entered into certain other agreements to limit its exposure to interest rate increases. The first set of agreements established the maximum LIBOR rate for $300.0 million of the senior secured debt at 5.0% through September 8, 2005. The second set of agreements sets the LIBOR rate at 3.71% for $300.0 million of this debt for the period commencing September 8, 2005 through September 8, 2007. Headwaters accounts for these agreements as cash flow hedges, and accordingly, the fair market value of the hedges is reflected in the consolidated balance sheet as either other assets or other liabilities. The hedges had a fair market value of $0 at September 30, 2004. Former 2004 Senior Secured Credit Agreement - In March 2004, Headwaters entered into a credit agreement with a group of banks under which a total of $50.0 million was borrowed under a term loan arrangement and which, as amended in June 2004, provided for an additional $75.0 million to be borrowed under a revolving credit arrangement. The initial $50.0 million of proceeds were used to repay in full the remaining balance due under Headwaters' former 2002 senior secured credit agreement (see below). Debt issuance costs of approximately $1.3 million were incurred in issuing this debt, all of which was expensed in 2004. The term loan was secured by all assets of Headwaters, bore interest at a variable rate linked to the Eurodollar rate or the lenders' base rate, both as defined in the agreement, and was repayable in quarterly installments of $1.25 million through September 2007, with a final payment of $32.5 million due November 2007. In connection with the purchase of Eldorado in June 2004, a total of $44.0 million was borrowed under the revolving credit arrangement, all of which was repaid in June 2004. In connection with the purchase of SCP in July 2004, a total of $20.0 million was borrowed under the revolving credit arrangement, all of which was repaid in September 2004. Also in September 2004, the remaining balance outstanding under the term loan was repaid in full using proceeds from the new 2004 senior secured credit facility described above. Convertible Senior Subordinated Notes - In connection with the Eldorado acquisition, Headwaters issued $172.5 million of 2 ?% convertible senior subordinated notes due 2016. These notes are subordinate to the new 2004 senior secured debt described above. Holders of the notes may convert the notes into shares of Headwaters' common stock at a conversion rate of 33.3333 shares per $1,000 principal amount ($30 conversion price), or approximately 5.75 million aggregate shares of common stock, contingent upon certain events. The conversion rate adjusts for events related to Headwaters' common stock, including common stock issued as a dividend, rights or warrants to purchase common stock issued to all holders of Headwaters' common stock, and other similar rights or events that apply to all holders of common stock. The notes are convertible if any of the following five criteria are met: 1) satisfaction of a market price condition which becomes operative if the common stock trading price reaches $39 per share for a certain period of time prior to June 1, 2011 and at any time after that date; 2) a credit rating, if any, assigned to the notes is three or more rating subcategories below the initial rating, if any; 3) the notes trade at 98% of the product of the common stock trading price and the number of shares of common stock issuable upon 36 conversion of $1,000 principal amount of the notes, except this provision is not available if the closing common stock price is between 100% and 130% of the current conversion price of the notes; 4) Headwaters calls the notes for redemption; and 5) certain corporate transactions occur, including distribution of rights or warrants to all common stockholders entitling them to purchase common stock at less than the current market price or distribution of common stock, cash or other assets, debt securities or certain rights to purchase securities where the distribution has a per share value exceeding 5% of the closing common stock price on the day immediately preceding the declaration date for such distribution. In addition, the notes are convertible if Headwaters enters into an agreement pursuant to which Headwaters' common stock would be converted into cash, securities or other property. Headwaters may call the notes for redemption at any time on or after June 1, 2007 and prior to June 4, 2011 if the closing common stock price exceeds 130% of the conversion price for 20 trading days in any consecutive 30-day trading period (in which case Headwaters must provide a "make whole" payment of the present value of all remaining interest payments on the redeemed notes through June 1, 2011). In addition, the holder of the notes has the right to require Headwaters to repurchase all or a portion of the notes on June 1, 2011 or if a fundamental change in common stock has occurred, including termination of trading. Subsequent to June 1, 2011, the notes require an additional interest payment equal to 0.40% of the average trading price of the notes if the trading price equals 120% or more of the principal amount of the notes. Headwaters has not included the additional shares of common stock contingently issuable under the notes in its 2004 diluted EPS as none of the contingencies have been met. However, as explained in more detail in Note 13 to the consolidated financial statements and in the "Risks Relating to Headwaters' Business" section of this Item 7, implementation of EITF 04-08 in December 2004 will require Headwaters to include in its diluted EPS calculation, on an if-converted basis, the additional shares issuable under the notes. Former 2002 Senior Secured Credit Agreement - In connection with the ISG acquisition in 2002, Headwaters entered into a $175.0 million senior secured credit agreement with a syndication of lenders, under which a total of $155.0 million was borrowed as a term loan on the acquisition date. The credit agreement also allowed up to $20.0 million to be borrowed under a revolving credit arrangement. The debt was issued at a 3% discount and Headwaters received net cash proceeds of $150.4 million. The original issue discount was accreted using the effective interest method and the accretion was recorded as interest expense. The debt was secured by all assets of Headwaters, bore interest at a variable rate linked to the Eurodollar rate or the lenders' base rate, both as defined in the agreement (approximately 5.4% at September 30, 2003) and was repayable in quarterly installments through August 30, 2007. During the December 2003 quarter, principal repayments totaling $39.7 million were made, including $33.5 million of optional prepayments. During the March 2004 quarter, the remaining balance was repaid in full using available cash and $50.0 million of proceeds from the former 2004 senior secured credit facility described above. In connection with the full repayment of this debt, non cash interest expense totaling approximately $5.0 million was recognized in the March 2004 quarter, representing amortization of all of the remaining debt discount and debt issue costs related to this debt. Senior Subordinated Debentures - In connection with the ISG acquisition, Headwaters also entered into a $20.0 million subordinated loan agreement, under which senior subordinated debentures were issued at a 2% discount, with Headwaters receiving net cash proceeds of $19.6 million. The original issue discount was accreted using the effective interest method and the accretion was recorded as interest expense. ISG management participated in one-half, or $10.0 million, of the $20.0 million of debt issued. The other half was issued to a corporation. The debentures bore interest at 18% and were due in 2007; however, in December 2003, the debentures were repaid in full, including a 4%, or $0.4 million, prepayment charge paid to the corporation holding $10.0 million of the debentures. This charge, along with all remaining unamortized debt discount and debt issue costs, is included in interest expense in the consolidated statement of income. Notes Payable to a Bank - In connection with the acquisition of SCP, Headwaters assumed SCP's obligations under its notes payable to a bank. The notes require monthly interest and quarterly principal payments and are repayable from April 2007 through April 2015. Two of the notes bear interest at LIBOR plus 0.5%, subject to an interest rate floor of 4.5% (4.5% at September 30, 2004), and the remaining note (in the amount of $1.1 million) bears interest at 0.5% below the bank's base rate (4.25% at September 30, 2004). Because the notes are callable by the bank, Headwaters has included the outstanding balance in current portion of long-term debt in the consolidated balance sheet. The notes are collateralized by certain assets of SCP and contain financial covenants, the most restrictive of which specifies a minimum fixed charge coverage ratio. Headwaters was in compliance with all debt covenants at September 30, 2004. Notes Payable to Former VFL Stockholders - In connection with the VFL acquisition, Headwaters issued $19.0 million of notes payable to the VFL stockholders, $13.0 million of which was repaid in June 2004 and $6.0 million of which was repaid in July 2004. The interest rate on $16.0 million of the notes was 9% and the interest rate on the remaining $3.0 million of notes was variable. 37 Short-term Borrowings with an Investment Bank - Headwaters had an arrangement with an investment bank under which Headwaters could borrow up to 90% of the value of the portfolio of Headwaters' short-term investments with the investment bank, limited to a maximum amount of $20.0 million. Headwaters borrowed $10.0 million under this arrangement during June 2004, all of which was repaid in June 2004. In July 2004, Headwaters borrowed $6.0 million under this arrangement, all of which was repaid in July 2004. This arrangement is no longer active. Options, Warrants, and Employee Stock Purchases - In 2004, cash proceeds from the exercise of options, warrants and employee stock purchases totaled $9.1 million, compared to $2.9 million in 2003. Option exercise activity is largely dependent on Headwaters' stock price and is not predictable. To the extent non-qualified stock options are exercised, or there are disqualifying dispositions of shares obtained upon the exercise of incentive stock options, Headwaters receives an income tax deduction generally equal to the income recognized by the optionee. Such amounts, reflected in cash flows from operations in the consolidated statements of cash flows, were $2.1 million in 2003 and $4.1 million in 2004. These income tax deductions do not affect income tax expense or the effective income tax rate; rather they are reflected as increases in capital in excess of par value in the consolidated balance sheet. Working Capital. In 2004, Headwaters' working capital increased by $30.2 million, to $44.4 million as of September 30, 2004. Several of the significant changes in the components of working capital were the result of the 2004 acquisitions, most notably the Eldorado and Tapco acquisitions. Headwaters expects operations to produce positive cash flows in future periods, which, when combined with current working capital, is expected to be sufficient for operating needs for 2005. Long-term Debt. Due to the recent issuance of senior debt and the covenants associated with that debt, as described below, Headwaters currently has limited ability to obtain significant additional amounts of long-term debt. However, as provided for in the new 2004 senior debt agreements, Headwaters has available $60.0 million under a revolving credit arrangement. Borrowings under this arrangement are generally subject to the terms of the first lien loan agreement and bear interest at either LIBOR plus 1.75% to 2.5%, or the base rate plus 0.75% to 1.5%. Borrowings and reborrowings of any available portion of the $60.0 million revolver can be made at any time through September 2009, at which time all loans must be repaid and the revolving credit arrangement terminates. The fees for the unused portion of the revolving credit arrangement range from 0.5% to 0.75%. Finally, the credit agreement allows for the issuance of letters of credit, provided there is capacity under the revolving credit arrangement. As of September 30, 2004, three letters of credit totaling $2.1 million were outstanding, with expiration dates ranging from October 2004 to June 2005. Headwaters may, in the future, make optional prepayments of the senior debt depending on actual cash flows, Headwaters' current and expected cash requirements and other factors deemed significant by management. The senior debt agreements contain restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt, investments, merger and acquisition activity, asset sales and liens, capital expenditures in excess of $50.0 million in any fiscal year (increasing to $60.0 million in 2011) and the payment of dividends, among others. In addition, Headwaters must maintain certain leverage and fixed charge coverage ratios, as those terms are defined in the agreements. Under the most restrictive covenants, contained in the first lien agreement, Headwaters must maintain 1) a total leverage ratio of 5.0:1.0 or less, declining periodically to 3.5:1.0 in 2010; 2) a maximum ratio of consolidated senior funded indebtedness minus subordinated indebtedness to EBITDA of 4.0:1.0, declining periodically to 2.5:1.0 in 2010; and 3) 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 1.10:1.0 through September 30, 2006, and 1.25:1.0 thereafter. Headwaters is in compliance with all debt covenants as of September 30, 2004. As described above, Headwaters has approximately $799.8 million of variable-rate long-term debt outstanding as of September 30, 2004, consisting of $790.0 million of senior debt and $9.8 million of notes payable to a bank. A change in the interest rate of 1% would change Headwaters' interest expense by approximately $7.7 million during the year ending September 30, 2005, considering all outstanding balances of variable-rate debt and required principal repayments. Income Taxes. As discussed previously, cash payments for income taxes are reduced for disqualifying dispositions of shares obtained upon the exercise of stock options, which totaled $4.1 million in 2004. Headwaters' cash requirements for income taxes in 2005 are expected to approximate the income tax provision, with some lag due to the seasonality of operations and because estimated income tax payments are typically based on annualizing the fiscal year's income based on year-to-date results. In 2004, Headwaters recorded an income tax provision at an effective tax rate of approximately 38.8%. As described in more detail in Note 14 to the consolidated financial statements, in September 2004, Headwaters purchased a 9% interest in an entity that owns and operates a coal-based alternative fuel 38 production facility. The synthetic fuel produced at the facility qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code, and Headwaters is entitled to receive its pro-rata share of such tax credits generated. Headwaters has also agreed to purchase an additional 10% interest in the entity upon the earlier of receipt of a private letter ruling for the facility from the IRS, or June 17, 2005. At the time Headwaters purchases the additional 10% interest, Headwaters' pro-rata share of the tax credits will also increase. As a result of these tax credits, Headwaters expects its effective tax rate to decrease several percentage points in 2005. Summary of Future Cash Requirements. Significant future cash needs, in addition to operational working capital requirements, are currently expected to consist primarily of debt service payments on outstanding long-term debt, income taxes and capital expenditures. Off-Balance Sheet Arrangements Although Headwaters has operating leases for certain equipment and real estate, and hedge agreements to limit its exposure to interest rate increases, Headwaters does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Contractual Obligations and Contingent Liabilities and Commitments The following table presents a summary of Headwaters' contractual obligations by period as of September 30, 2004.
Payments due by Period ----------------------------------------------------------- After 5 (in millions) Total 1 Year 2 -3 Years 4 -5 Years Years - ------------------------------------------------------------------------------------------------------- Senior secured debt $ 790.0 $48.0 $ 96.0 $32.0 $614.0 Convertible senior subordinated notes 172.5 -- -- -- 172.5 Other long-term debt 10.0 9.9 0.1 -- -- ----------------------------------------------------------- Total long-term debt 972.5 57.9 96.1 32.0 786.5 Unconditional purchase obligations 65.4 14.0 22.1 14.6 14.7 Operating lease obligations 47.8 14.8 20.5 8.4 4.1 Investment and joint venture obligations 21.0 5.6 14.0 1.4 -- Capital expenditures 11.0 11.0 -- -- -- Other long-term obligations 5.4 3.1 2.3 -- -- ----------------------------------------------------------- Total contractual cash obligations $1,123.1 $106.4 $155.0 $56.4 $805.3 ===========================================================
As provided for in the senior debt agreements, Headwaters has available $60.0 million under a revolving credit arrangement. Borrowings and reborrowings of any available portion of the $60.0 million revolver can be made at any time through September 2009, at which time all loans must be repaid and the revolving credit arrangement terminates. The credit agreement allows for the issuance of letters of credit, provided there is capacity under the revolving credit arrangement. As of September 30, 2004, three letters of credit totaling $2.1 million were outstanding, with expiration dates ranging from October 2004 to June 2005. There have been no other letters of credit issued and no funds have been borrowed under the revolving credit arrangement. As indicated previously, Headwaters and its subsidiaries are involved in several legal proceedings and contractual matters that have arisen in the normal course of business, all as explained in more detail in "Critical Accounting Policies and Estimates - Legal Matters," above, "ITEM 3. LEGAL PROCEEDINGS" and Note 14 to the consolidated financial statements. Section 29 Matters Headwaters Energy Services' license fees and revenues from sales of chemical reagents depend on the ability of licensees and customers to manufacture and sell qualified synthetic fuels that generate tax credits under Section 29 of the Internal Revenue Code. From time to time, issues arise as to the availability of tax credits, including the items discussed below. Because of the inherent risks associated with Headwaters' reliance on Section 29, Headwaters has sought to diversify its sources of revenue, largely through acquisitions, as described previously. 39 Legislation. Under current law, Section 29 tax credits for synthetic fuel produced from coal expire on December 31, 2007. In addition, there have been initiatives from time to time to consider the early repeal or modification of Section 29. For example, during 2004, a bill was introduced in the United States House of Representatives that would repeal the Section 29 credit for synthetic fuel produced from coal. Although it is unlikely that the bill will pass Congress in 2004, the bill could be reintroduced in 2005. If Section 29 expires at the end of 2007 or if it is repealed or adversely modified, synthetic fuel facilities would probably either close or substantially curtail production. At this time, given current prices of coal and costs of synthetic fuel production, Headwaters does not believe that production of synthetic fuel will be profitable absent the tax credits. In addition, if Headwaters' licensees close their facilities or materially reduce production activities (whether after 2007, upon earlier repeal or adverse modification of Section 29 or for any other reason), it would have a material adverse effect on the revenues and net income of Headwaters. Phase-Out. Section 29 tax credits are subject to phase-out after the average annual wellhead domestic oil price ("reference price") reaches a beginning phase-out threshold price, and is eliminated entirely if the reference price reaches the full phase-out price. For 2003, the reference price was $27.56 per barrel and the phase-out range began at $50.14 and would have fully phased out tax credits at $62.94 per barrel. For 2004, an estimated partial year reference price through September is $40.48 per barrel, and an estimate of the phase-out range (using 2% inflation) begins at $51.14 and completes phase-out at $64.20 per barrel. The NYMEX one-day futures trading price on December 1, 2004 was $45.49 per barrel. IRS Audits. Licensees are subject to audit by the IRS. The IRS may challenge whether Headwaters Energy Services' licensees satisfy the requirements of Section 29, or applicable Private Letter Rulings, including placed-in-service requirements, or may attempt to disallow Section 29 tax credits for some other reason. The IRS has initiated audits of certain licensee-taxpayers who claimed Section 29 tax credits, and the outcome of any such audit is uncertain. In 2004, a licensee announced that IRS field auditors had issued a notice of proposed adjustment challenging the placed-in-service date of three of its synthetic fuel facilities. The licensee believes that the facilities meet the placed-in-service requirement, however, the matter is at an early stage and the timing and final results of the audit are unknown. The inability of a licensee to claim Section 29 tax credits would reduce Headwaters' future income from the licensee. Senate Permanent Subcommittee on Investigations. On October 29, 2003, the Permanent Subcommittee on Investigations of the Government Affairs Committee of the United States Senate issued a notification of pending investigations. The notification listed the synthetic fuel tax credit as a new item. In March 2004, the Subcommittee described its investigation as follows: "The Subcommittee is continuing its investigation [of] tax credits claimed under Section 29 of the Internal Revenue Code for the sale of coal-based synthetic fuels. This investigation is examining the utilization of these tax credits, the nature of the technologies and fuels created, the use of these fuels, and other aspects of Section 29. The investigation will also address the IRS' administration of Section 29 tax credits." The Subcommittee conducted numerous interviews and received large volumes of data between December 2003 and March 2004. Since that time, to Headwaters' knowledge, there has been little activity regarding the investigation. Headwaters cannot make any assurances as to the timing or ultimate outcome of the Subcommittee investigation, nor can Headwaters predict whether Congress or others may conduct investigations of Section 29 tax credits in the future. The Subcommittee investigation may have a material adverse effect on the willingness of buyers to engage in transactions to purchase synthetic fuel facilities or on the willingness of current owners to operate their facilities, and may materially adversely affect Headwaters' revenues and net income. Recent Accounting Pronouncements In September 2004, the Emerging Issues Task Force ("EITF") reached a consensus requiring the inclusion of contingently convertible instruments in diluted EPS calculations. This consensus (EITF Issue 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share") will be effective for periods ending after December 15, 2004 and will require Headwaters to include in its diluted EPS calculation, on an if-converted basis, the additional shares issuable under the terms of Headwaters' outstanding convertible senior subordinated notes described in Note 9. The EITF consensus, when implemented, must be applied to all applicable prior periods, which for Headwaters will be the quarters ended June 30, 2004 and September 30, 2004. See Note 13 to the consolidated financial statements for more information on the expected effect on Headwaters' EPS of implementing the EITF consensus. Headwaters has reviewed all other recently issued accounting standards, which have not yet been adopted in order to determine their potential effect, if any, on the results of operations or financial position of Headwaters. Based on that review, Headwaters does not currently believe that any of these recent accounting pronouncements will have a significant effect on its current or future financial position, results of operations, cash flows or disclosures. Impact of Inflation Headwaters' operations were not materially impacted by inflation in 2004. 40 Risks Relating to Headwaters' Business If the continued existence of tax credits under Section 29 of the Internal Revenue Code ("Section 29") is repealed or adversely modified, Headwaters Energy Services' profitability will be severely affected. Headwaters Energy Services' license fees and revenues from sales of chemical reagents depend on the ability of its licensees and customers to manufacture and sell qualified synthetic fuels that generate tax credits. Under current law, Section 29 tax credits are not available for synthetic fuel sold after December 31, 2007. In addition, there have been initiatives from time to time to consider the early repeal or modification of Section 29. For example, in 2004 a bill was introduced in the United States House of Representatives that would repeal the Section 29 credit for synthetic fuel produced from coal. While passage of the bill appears to be unlikely, the bill could be reintroduced in Congress in the future. If Section 29 expires at the end of 2007 or if it is repealed or adversely modified, synthetic fuel facilities would probably either close or substantially curtail production. At this time, given current prices of coal and costs of synthetic fuel production, Headwaters does not believe that production of synthetic fuel will be profitable absent the tax credits. In addition, if Headwaters' licensees close their facilities or materially reduce production activities (whether after 2007, upon earlier repeal or adverse modification of Section 29 or for any other reason), it would have a material adverse effect on the revenues and net income of Headwaters. Furthermore, Section 29 tax credits are subject to begin phase-out after the unregulated average annual oil price reaches $50.14 per barrel, adjusted annually for inflation (the one day futures trading price on December 1, 2004 was $45.49 per barrel). If Headwaters' licensees' demand for Section 29 tax credits decreases, Headwaters Energy Services' revenues will decrease. Headwaters Energy Services' business depends upon the ability of its licensees and chemical reagent customers to utilize Section 29 tax credits as payments under its contracts are ultimately based on its customers' production of synthetic fuels. Their ability to utilize tax credits depends upon their taxable income. A decline in the profitability of its licensees could reduce their ability to utilize tax credits, and, in turn, could lead to a reduction in the production of synthetic fuel at their facilities. Such licensees could sell their facilities to a taxpayer with more capacity to utilize the tax credits, but any such transfer could result in short-term or long-term disruption of operations, and therefore adversely affect Headwaters' revenues and net income. IRS reviews under Section 29 may adversely affect Headwaters' licensees' production of synthetic fuel and therefore may adversely affect Headwaters Energy Services' profitability. The issuance of private letter rulings ("PLRs") under Section 29 by the Internal Revenue Service ("IRS") is important to the willingness of the owners of synthetic fuel facilities to operate and to their ability to transfer ownership of those facilities. However, PLRs may be modified or revoked by the IRS. The IRS has suspended the issuance of PLRs to synthetic fuel facility owners several times in the past, including most recently in 2003, and the IRS may suspend the issuance of PLRs in the future. In 2003, following an IRS announcement that it would suspend issuance of PLRs because it questioned the scientific validity of procedures and tests performed by synthetic fuel facility operators to determine that the fuel satisfied the requirements of Section 29, certain of Headwaters' licensees reduced or ceased production, which resulted in a material impact on Headwaters' revenue and net income. While the IRS later indicated it would resume the issuance of PLRs, it has continued to express concerns regarding the sampling and data/record retention practices prevalent in the synthetic fuels industry. The expression of IRS concern regarding current practices in the industry may adversely affect the willingness of buyers to engage in transactions or on the willingness of current owners to operate their facilities. If current owners are unable to sell their facilities or are unwilling to operate them, production will not be maximized, thereby materially decreasing its revenues and net income. Headwaters cannot predict whether the IRS may conduct reviews or investigations of Section 29 tax credits in the future, or whether the outcome of IRS audits involving licensees would be favorable. Senate investigation of Section 29 tax credits may adversely affect production by Headwaters' licensees and decrease the profitability of Headwaters Energy Services. 41 On October 30, 2003, the Permanent Subcommittee on Investigations of the Government Affairs Committee of the United States Senate (the "Subcommittee") issued a notification of pending investigations. The notification listed, among others, the synthetic fuel tax credit as a new item to be reviewed. If the pending investigation or any future Congressional action results in findings or announcements negative to the industry, it may adversely affect the willingness of buyers to engage in transactions to purchase synthetic fuel facilities or the willingness of current owners to operate their facilities, which would have a direct, negative impact on Headwaters' revenues and net income. In March 2004, the Subcommittee described its investigation as follows: The Subcommittee is continuing its investigation [of] tax credits claimed under Section 29 of the Internal Revenue Code for the sale of coal-based synthetic fuels. This investigation is examining the utilization of these tax credits, the nature of the technologies and fuels created, the use of these fuels, and others [sic] aspects of Section 29. The investigation will also address the IRS' administration of Section 29 tax credits. The Subcommittee conducted numerous interviews and received large volumes of data between December 2003 and March 2004. Since that time, to Headwaters' knowledge, there has been little activity regarding the investigation. If the IRS challenges or disallows Section 29 tax credits claimed by its licensees, Headwaters Energy Services' profitability may decrease because future production by these licensees may decrease. Licensees are subject to audit by the IRS. The IRS may challenge whether Headwaters Energy Services' licensees satisfy the requirements of Section 29, or applicable PLRs, including placed-in-service requirements, or may attempt to disallow Section 29 tax credits for some other reason. The IRS has initiated audits of certain licensee-taxpayers who claimed Section 29 tax credits, and the outcome of any such audit is uncertain. In 2004, a licensee announced that IRS field auditors have issued a notice of proposed adjustment challenging the placed-in-service date of three of its synthetic fuel facilities. The licensee believes that the facilities meet the placed-in-service requirement; however, the timing and final results of the audit are unknown. In the event that tax credits are disallowed, licensees may seek recovery from Headwaters Energy Services for operational or other reasons, although Headwaters believes there would be no basis for such claims. The inability of a licensee to claim Section 29 tax credits also would reduce Headwaters Energy Services' future revenue from the licensee. In addition, IRS audit activity may have adversely affected the willingness of buyers to engage in transactions to purchase synthetic fuel facilities or on the willingness of current owners to operate their facilities. If current owners are unable to sell their facilities or are unwilling to operate them at full capacity, production will not be maximized, which could have a significant effect on Headwaters Energy Services' revenues and net income. If Headwaters Energy Services' licensees' demand for Section 29 tax credits is adversely influenced by negative publicity involving the industry or transactions principally motivated by the reduction of taxes, Headwaters Energy Services' profitability will decrease. There has been public scrutiny, by the media and by policymakers, of Section 29. Outside the Section 29 context, there has been increased public scrutiny of transactions motivated principally by the reduction of federal income taxes. Headwaters Energy Services' licensees could determine that the risk of negative publicity or public scrutiny associated with the Section 29 tax credits exceeds the financial benefits from the utilization of the credits. Such licensees may seek to mitigate or eliminate such risk by reducing or ceasing production of synthetic fuel or disposing of their facilities, resulting in short-term or long-term disruption of operations, in which case Headwaters Energy Services' revenues and profitability would decrease. Headwaters Energy Services' revenues result from a small number of licensees and customers, so that any short-term or long-term decisions by one or a small number of licensees and customers to decrease or halt production would cause its profitability to decrease. Headwaters Energy Services has licensed its coal-based solid alternative fuel technology to approximately 20 licensees, from whom license fees accounted for approximately 9% of Headwaters' aggregate revenues on an actual basis for fiscal 2004. In addition, HES sells reagent to approximately 30 licensees and additional customers from which reagent sales accounted for approximately 24% of its aggregate revenues in 2004. Under current law, facilities must have been placed into service prior to July 1, 1998 to be eligible for Section 29 tax credits, so Headwaters Energy Services' business primarily depends on existing licensees and chemical reagent customers. If any of Headwaters Energy Services' significant licensees or chemical reagent customers shuts down its facilities, operates its facilities at low production levels or sells its facilities resulting in short-term or long-term disruption of operations, Headwaters' revenues and net income could be materially adversely affected. Headwaters Energy Services' licensees must address all operational 42 issues including, but not limited to, feedstock availability, cost, moisture content, British thermal unit content, correct chemical reagent formulation and application, operability of equipment, product durability and overall costs of operations. In some cases, licensees may be forced to relocate plants and enter into new strategic contracts to address marketing and operational issues. Licensee plant relocations disrupt production and delay generation of license fees paid to Headwaters. The growth of Headwaters Energy Services' revenues has depended in part on increased production over time of coal-based solid synthetic fuel by its licensees. While to date efficiencies in production and improvements in equipment and processes used at facilities have allowed increased production, capacity is ultimately finite for the specific facilities and could ultimately limit future growth. If Headwaters Energy Services is not able to develop and improve alternative fuel technologies in order to satisfy its customers' requirements, Headwaters may lose customers and associated licensing and chemical reagent revenues. For Headwaters Energy Services to remain competitive, HES must be able to develop or refine its technologies to keep up with future alternative fuel requirements. As licensees develop and modify their operations and choices of coal feedstocks, HES will need to modify existing methods or find new methods, know-how, additives and other techniques to meet licensee and customer demands, such as demands for improved efficiencies, lower costs and improvements in alternative fuel products, including chemical change and improved combustion characteristics. If Headwaters is unable to develop or refine HES' technologies, its customers may seek other suppliers or decrease production, thus adversely affecting licensing and chemical reagent revenues. Headwaters Resources primarily sells fly ash for use in concrete; if use and market acceptance of fly ash does not increase, Headwaters Resources will not grow. Headwaters Resources' growth has been and continues to be dependent upon the increased use of fly ash in the production of concrete. Headwaters Resources' marketing initiatives emphasize the environmental, cost and performance advantages of replacing portland cement with fly ash in the production of concrete. If Headwaters Resources' marketing initiatives are not successful, Headwaters Resources may not be able to sustain its growth. If portland cement or competing replacement products are available at lower prices than fly ash, Headwaters' sales of fly ash as a replacement for portland cement in concrete products could suffer, causing a decline in Headwaters Resources' revenues and net income. An estimated 60% of Headwaters Resources' revenues for the fiscal year ended September 30, 2004, which represents 23% of Headwaters aggregate revenues for the year, were derived from the use of fly ash as a replacement for portland cement in concrete products. At times, there may be an overcapacity of cement in the world market, causing potential price decreases. The markets for Headwaters Resources' products are regional, in part because of the costs of transporting CCPs, and because Headwaters Resources' business is affected by the availability and cost of competing products in the specific regions where it conducts business. If competing products become available at attractive prices and performance, Headwaters Resources' revenues and net income could decrease. Because demand for CCPs sold by Headwaters Resources is affected by fluctuations in weather and construction cycles, Headwaters Resources' revenues and net income could decrease significantly as a result of unexpected or severe weather or slowdowns in the construction industry. Headwaters Resources manages and markets CCPs and uses CCPs to produce construction materials. Utilities produce CCPs year-round. In comparison, sales of CCPs are generally keyed to construction market demands that tend to follow national trends in construction with predictable increases during temperate seasons. Headwaters Resources' CCP sales have historically reflected these seasonal trends, with the largest percentage of total annual revenues being realized in the quarters ended June 30 and September 30. Low seasonal demand normally results in reduced shipments and revenues in the quarters ended March 31 and December 31. The CCP industry is cyclical because of its dependence on building construction and highway construction, including infrastructure repair, and is affected by changes in general and local economic conditions. State construction budgets are affected adversely by economic downturns. Headwaters Resources' sales could significantly decrease as a result of a downturn in the economy in one or more markets that it serves. If Headwaters Resources' coal-fueled electric utility industry suppliers fail to provide Headwaters Resources with high value CCPs on a timely basis, Headwaters Resources' costs could increase and its growth could be hindered. Headwaters Resources relies on the production of CCPs by coal-fueled electric utilities. Headwaters Resources has occasionally experienced delays and other problems in obtaining high value CCPs from its suppliers and may in the future be unable to obtain high value CCPs on the scale and within the time 43 frames required by Headwaters Resources to meet its customers' needs. If Headwaters Resources is unable to obtain CCPs or if it experiences a delay in the delivery of high value CCPs, Headwaters Resources may be forced to incur significant unanticipated expenses to secure alternative sources or to otherwise maintain supply to its customers. Moreover, its revenues could be adversely affected if these customers choose to find alternatives to Headwaters Resources products. With Headwaters' recent acquisitions of Eldorado and Tapco, Headwaters Construction Materials has grown to be a significant part of Headwaters' business and Headwaters' future profitability is therefore increasingly dependent upon Headwaters' operations in this industry segment. In June 2004 Headwaters acquired Eldorado and in September 2004 it acquired Tapco. With the Eldorado and Tapco acquisitions, Headwaters Construction Materials has grown to be a significant part of Headwaters' business. This segment produced $134.0 million in revenues (or approximately 24% of total revenue) for fiscal year 2004; in combination with Tapco and Eldorado, on a pro forma basis, revenues for this segment would have been $457.4 million (or approximately 51% of total pro forma revenues) for fiscal year 2004. Headwaters' future profitability therefore is highly dependent upon its ability to operate successfully in this industry segment where its operations to date have not been as significant to its total revenues. If Headwaters does not successfully integrate Eldorado and Tapco with its existing business, Headwaters may not realize the expected benefits of the acquisitions, and the resources and attention required for successful integration may interrupt the business activities of Eldorado, Tapco and Headwaters existing business. There is a significant degree of difficulty and management distraction inherent in the process of integrating Eldorado and Tapco, even though other senior management continues to operate the businesses. These difficulties include integrating Eldorado and Tapco with Headwaters' existing construction materials business, while maintaining the ongoing operations of each business, coordinating geographically separate organizations and developing new customers and products. Successful integration will also depend in part on Headwaters' ability to retain key officers and personnel in each of Headwaters' business units. The combination with Headwaters has resulted in the combined company having more than 3,680 employees, which substantially increased Headwaters' previous workforce of approximately 1,000 employees. Integration of these additional employees, many of whom are manufacturing plant workers, could result in various issues, including issues related to human resource benefit plans and an increase in EEOC claims and claims for workers compensation. As Headwaters integrates Tapco's and Eldorado's manufacturing and distribution activities, Headwaters also has increased significantly its sales and products. Headwaters has limited manufacturing experience and may not be able to resolve manufacturing issues or increase efficiencies at manufacturing plants. The integration process requires Headwaters to expand significantly its operational and financial systems, which increases the operating complexity of its information technology systems. Implementation of controls, systems and procedures may be costly and time-consuming and may not be effective. If Headwaters cannot invest additional capital into Tapco and Eldorado, it may not be able to sustain or continue Tapco's and Eldorado's growth. Current levels of capital expenditures may be insufficient to support and sustain Tapco's and Eldorado's growth. Headwaters believes that an estimated $50 million of capital in its fiscal year 2005 will be required for company-wide growth and other purposes. Headwaters' senior secured credit facilities limit capital expenditures for the entire business to $50 million for fiscal year 2005. Because Tapco's and Eldorado's markets are heavily dependent on the residential construction and remodeling market, Tapco's and Eldorado's revenues could decrease as a result of declines in construction and remodeling activity due to unexpected or severe weather, a rise in interest rates, a limit on availability of credit for homeowners or other events outside Headwaters' control that impact home construction and home improvement activity. Tapco's and Eldorado's construction markets are seasonal and cyclical. The majority of their sales are in the residential construction market, which tends to slow down in the winter months. If there is more severe weather than normal or an increase in interest rates or a limit on availability of credit for homeowners which results in a slow down in new construction or remodeling and repair activities, there may be a negative effect on Tapco's and Eldorado's revenues if they are not able to increase market share. Interruption of Tapco's ability to immediately ship individual or custom product orders could harm Tapco's reputation and result in lost revenues if customers turn to other sources for products. 44 Tapco's construction materials business is highly dependent upon immediate shipments to contractors and distributors throughout the United States of individual orders, a large portion of which orders are manufactured upon demand to meet customer specifications. If there is significant interruption of business at any of Tapco's manufacturing plants or with Tapco's computer systems that track customer orders and production, Tapco is at risk of harming its reputation for speed and reliability with important customers and losing short-term and long-term revenues if these customers turn to other sources. A significant increase in the price of materials used in the production of Tapco's products that cannot be passed on to customers could have a significant adverse effect on net revenue. Further, Tapco depends upon a single source for a major production material, the interruption of which would materially disrupt Headwaters' ability to manufacture products and supply products to its customers, resulting in lost revenues and the potential loss of customers. Certain of Tapco's products, which provided approximately 70% of Tapco's revenues for the fiscal year ended October 31, 2003, are manufactured from polypropylene which material is sold to Tapco by a single supplier. The price of polypropylene is primarily a function of manufacturing capacity, demand and the prices of petrochemical feedstocks, crude oil and natural gas liquids. Historically, the market price of polypropylene has fluctuated. A significant increase in the price of polypropylene that cannot be passed on to customers could have a significant adverse effect on net revenue. There is no long-term contract with Headwaters' polypropylene supplier. Tapco does not currently maintain large inventories of polypropylene and alternative sources meeting Tapco's requirements would be difficult to arrange in the short term. Therefore, Tapco's manufacturing and ability to provide products to Headwaters' customers could be materially disrupted if this supply of polypropylene was interrupted for any reason. Such an interruption and the resulting inability to supply Tapco's customers with products could adversely impact Tapco's revenues and potentially Headwaters' relationships with Tapco's customers. Tapco's revenues would be materially adversely affected if it lost one or both of its two major customers. Two of Tapco's customers together accounted for approximately 25% of its revenues in its fiscal year ended October 31, 2003. There are no long-term contracts in place with these customers. Accordingly, any loss of or decrease in demand from these customers would have a material adverse effect on Tapco's business. HTI's technologies may not be commercially developed and marketed profitably, which could affect HTI's future profitability. Although HTI has developed and patented several technologies, commercialization of these technologies is in initial stages. Market acceptance of these technologies will depend on HTI's ability to enter into agreements with licensees or joint venturers to further develop and provide adequate funding to commercialize the technologies. HTI may not be able to enter into these agreements and adequate funding may not be available to fully develop and successfully commercialize its technologies. Further, Headwaters may not be able to market profitably HTI's technologies. HTI will conduct business in China, where intellectual property and other laws, as well as business conditions, may leave Headwaters' intellectual property, products and technologies vulnerable to duplication by competitors and create uncertainties as to Headwaters' legal rights against such competitors' actions. HTI has and is expected to continue to license or otherwise make its technology, including its nanotechnology and coal liquefaction technology, available to entities in China. HTI is also performing a feasibility study that could lead to licensing of technology in India. There is the risk that foreign intellectual property laws will not protect Headwaters' intellectual property to the same extent as under United States laws, leaving us vulnerable to competitors who may attempt to copy Headwaters' products, processes or technologies. Further, the legal system of China is based on statutory law. Under this system, prior court decisions may be cited as persuasive authority but do not have binding precedential effect. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws and regulations dealing with economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. As these laws, regulations and legal requirements are relatively new and because of the limited volume of published case law and judicial interpretations and the non-binding nature of prior court decisions, the interpretation and enforcement of these laws, regulations and legal requirements involve some uncertainty. These uncertainties could limit the legal protection or recourse available to Headwaters. In addition, dependence on foreign licenses and conducting foreign operations may subject Headwaters to increased risk from political change, ownership issues or repatriation or currency exchange concerns. 45 Headwaters operates in industries subject to significant environmental regulation, and compliance with and changes in regulation could add significantly to the costs of conducting business. The coal-based solid synthetic fuel operations of Headwaters and its licensees are subject to federal, state and local environmental regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of waste products, which add to the costs of doing business and expose Headwaters to potential fines for non-compliance. If the costs of environmental compliance increase for any reason, Headwaters may not be able to pass on these costs to customers. In order to establish and operate the synthetic fuel plants, power plants and operations to collect and transport CCPs and bottom ash, Headwaters, its licensees and customers have obtained various state and local permits and must comply with processes and procedures that have been approved by regulatory authorities. Any failure to comply could result in the issuance of substantial fines and penalties and cause Headwaters to incur environmental liabilities. Certain Eldorado and Tapco manufacturing operations are also subject to environmental regulations and permit requirements. If Eldorado and Tapco cannot obtain additional required environmental permits for their manufacturing facilities in a timely manner or at all, they may be subject to additional costs and/or fines. HTI's ordinary course of business requires using its facilities to perform research and development activities involving coal, oil, chemicals and energy technologies, including liquefaction of coal. As a result, petroleum and other hazardous materials have been and are present in and on HTI's properties. Regulatory noncompliance or accidental discharges, in spite of safeguards, could create an environmental liability. Therefore Headwaters' operations entail risk of environmental damage, and Headwaters could incur liabilities in the future arising from the discharge of pollutants into the environment or from waste disposal practices. Headwaters is involved in litigation and claims for which Headwaters incurs significant costs and are exposed to significant liability. Headwaters is a party to some significant legal proceedings and is subject to potential claims regarding operation of its business. These proceedings will require that Headwaters incur substantial costs, including attorneys' fees, managerial time and other personnel resources and costs in pursuing resolution, and adverse resolution of these proceedings could hurt Headwaters' reputation. With respect to the cases referred to in our "Item 3. LEGAL PROCEEDINGS" of this Form 10-K, the following amount of damages are being sought by the counter parties: Boynton: Boynton seeks declaratory relief as well as approximate compensatory damages between $15 million and $25 million and punitive damages; AGTC: AGTC claims approximate damages between $520,000 and $14.3 million; AJG: AJG seeks compensatory damages in the approximate amount of $71 million and punitive damages; McEwan: McEwan seeks declaratory relief as well as compensatory damages in the approximate amount of $2.75 million and punitive damages. Headwaters has ongoing litigation and claims incurred during the normal course of business, including the items referred to above. Headwaters intends to vigorously defend and/or pursue its rights in these actions. Headwaters does not currently believe that the outcome of these actions will have a material adverse effect on Headwaters' operations, cash flows or financial position; however, it is possible that a change in the estimates of probable liability could occur, and the change could be significant. Headwaters has significant competition in its industries which may cause demand for Headwaters products and services to decrease. Headwaters experiences significant competition in all of its segments and geographic regions. A failure to compete effectively or increased competition could lead to price cuts, reduced gross margins and loss of market share, which could hurt profitability. Many of Headwaters' competitors have greater financial, management and other resources than Headwaters and may be able to take advantage of acquisitions and other opportunities more readily. In certain instances Headwaters must compete on the basis of superior products and services rather than price, thereby increasing the costs of marketing its services to remain competitive. Headwaters Energy Services competes with other companies possessing technologies to produce coal-based solid alternative fuels and companies that produce chemical reagents. It also experiences competition from traditional coal and fuel suppliers and companies involved with natural resources, in addition to those companies that specialize in the use and upgrading of industrial byproducts. These companies may have greater financial, management and other resources than Headwaters has and may develop superior, or more cost-effective technologies. This could result in a decrease in market share and therefore revenues. 46 Headwaters Resources has substantial competition in two main areas: obtaining CCP management contracts with utility and other industrial companies; and marketing CCPs and related industrial materials. There are many local, regional and national companies that compete for market share in these areas with similar products and with numerous other substitute products. Although Headwaters Resources typically has long-term CCP management contracts with its clients, some of such contracts provide for the termination of such contracts at the convenience of the utility company upon a minimum 90-day notice. Moreover, certain of Headwaters Resources' most significant regional CCP competitors appear to be seeking a broader national presence, and some of these competitors have substantially greater resources than Headwaters and Headwaters Resources. If they were to begin to compete in the national market, or in regions where they currently do not have operations, Headwaters Resources' could lose market share and associated revenues. Headwaters Construction Materials competes against numerous national and regional manufacturers, some of which are significantly larger than Headwaters and may have greater financial, manufacturing and distribution resources than Headwaters. For the HTI business, many of the world's major chemical companies are devoting significant resources to researching and developing nanocatalysts and catalytic processes. These companies have greater financial, management and other resources than does Headwaters. Headwaters' business strategy to diversify through acquisitions may result in integration costs, failures and dilution to existing stockholders. An important business strategy of Headwaters is diversification and growth through acquisitions. Headwaters' ability to successfully implement Headwaters' strategy is subject to a number of risks, including difficulties in identifying acceptable acquisition candidates, consummating acquisitions on favorable terms and obtaining adequate financing, which may adversely affect its ability to develop new products and services and to compete in Headwaters rapidly changing marketplace. In addition, if Headwaters consummates acquisitions through an exchange of securities, its existing stockholders could suffer dilution. Successful management and integration of acquisitions are subject to a number of risks, including difficulties in assimilating acquired operations, including loss of key employees, diversion of management's attention from core business operations, assumption of contingent liabilities and incurrence of potentially significant write-offs. This strategy may not improve Headwaters' operating results and acquisitions may have a dilutive effect on existing stockholders. If Headwaters' internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act are not adequate, our reputation could be harmed and we could be subject to regulatory scrutiny, civil or criminal penalties or stockholder litigation. Section 404 of the Sarbanes-Oxley Act of 2002 requires that Headwaters evaluates and reports on its system of internal controls beginning with our Annual Report on Form 10-K for the year ending September 30, 2005. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties or stockholder litigation. Any inability to provide reliable financial reports could harm our business. Section 404 of the Sarbanes-Oxley Act also requires that our independent auditors report on management's evaluation of our system of internal controls. Headwaters is in the process of documenting and testing its system of internal controls to provide the basis for its report. Further, the growth and diversification of our business through acquisitions complicates the process of developing, documenting and testing internal controls. At this time, due to the ongoing evaluation and testing, no assurance can be given that there may not be significant deficiencies or material weaknesses that would be required to be reported. If Headwaters is unable to manage the growth of its business successfully, its revenues and business prospects could suffer. Headwaters has experienced significant growth recently, both internally and through acquisitions. Headwaters may not be able to successfully manage the increased scope of its operations or a significantly larger and more geographically diverse workforce as Headwaters expands. Any failure to successfully manage growth could harm its business and financial results. Additionally, growth increases the demands on Headwaters' management, Headwaters' internal systems, procedures and controls. To successfully manage growth, Headwaters must add administrative staff and periodically update and strengthen its operating, financial and other systems, procedures and controls, which will increase its costs and may reduce its profitability. Headwaters may be unable to successfully implement improvements to Headwaters' information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. 47 Unauthorized use of or infringement claims regarding Headwaters' proprietary intellectual property could adversely affect Headwaters' ability to conduct its business. Headwaters has relies primarily on a combination of trade secrets, patents, copyright and trademark laws and confidentiality procedures to protect its intellectual property. Despite these precautions, unauthorized third parties may misappropriate, infringe upon, copy or reverse engineer portions of Headwaters' technology. Headwaters does not know if current or future patent applications will be issued with the scope of the claims sought, if at all, or whether any patents issued will be challenged or invalidated. Headwaters' business could be harmed if it infringes upon the intellectual property rights of others. Headwaters has been, and may be in the future, notified that Headwaters may be infringing intellectual property rights possessed by third parties. If any such claims are asserted against Headwaters, Headwaters may seek to enter into royalty or licensing arrangements. There is a risk in these situations that no license will be available or that a license will not be available on reasonable terms, precluding use of the applicable technology. Alternatively, Headwaters may decide to litigate such claims or attempt to design around the patented technology. To date, while no single patent or trademark is material to Headwaters' business and the issues described in this paragraph have not resulted in significant cost or had an adverse impact on Headwaters' business, future actions could be costly and would divert the efforts and attention of Headwaters' management and technical personnel. Headwaters' highly leveraged capital structure affects its flexibility in responding to changing business and economic conditions and results in high interest costs. As of September 30, 2004, Headwaters had approximately $973 million of total debt outstanding, including $790 million of senior indebtedness under its senior secured credit facilities and $172.5 million of its 2 7/8% subordinated convertible notes ("notes"). Subject to restrictions in Headwaters' senior secured credit facility, Headwaters may also incur significant amounts of additional debt for working capital, capital expenditures and other purposes. Headwaters' combined debt total could have important consequences, including the following: o Headwaters may have difficulty borrowing money for working capital, capital expenditures, acquisitions or other purposes because of Headwaters' existing debt load and because Headwaters' borrowings are secured by all of its assets; o Headwaters will need to use a large portion of Headwaters' cash flow to pay interest and the required principal payments on its debt, which will reduce the amount of money available to finance Headwaters' operations, capital expenditures and other activities; and o Headwaters' senior secured credit facilities have a variable rate of interest, which exposes Headwaters to the risk of increased interest rates. Headwaters' ability to make scheduled payments of the principal of, to pay interest on or to refinance Headwaters' indebtedness depends on its future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond Headwaters' control. Headwaters' business may not continue to generate cash flow from operations in the future sufficient to service Headwaters' debt and make necessary capital expenditures. If unable to generate such cash flow, Headwaters may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Covenant restrictions under Headwaters' senior secured credit facility may limit Headwaters' ability to operate its business in a manner required to sustain profitability and generate growth. Headwaters' senior secured credit facilities, contain, among other things, covenants that may restrict Headwaters' ability to finance future operations or capital needs, to acquire additional businesses or to engage in other business activities. The senior secured credit facilities require approval for new acquisitions funded with aggregate cash consideration in excess of $30 million per year and $50 million in the aggregate until such time as Headwaters' debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio is reduced to a specified amount. In addition, Headwaters' senior secured credit facilities set forth covenants requiring us to maintain specified financial ratios and satisfy certain financial condition tests which may require that Headwaters take action to reduce its debt or to act in a manner contrary to its business objectives. A breach of any of these covenants could result in a default under the senior secured credit facilities, in which event the lenders could elect to declare all amounts outstanding to be immediately due and payable. If Headwaters is not able to repay its obligations when they become due or are accelerated, the lenders could foreclose on Headwaters' assets. The indenture for the notes does not restrict the amount of indebtedness, including senior indebtedness, that Headwaters may incur. 48 Headwaters may not have the ability to raise the funds necessary to finance the repurchase of Headwaters' notes or may otherwise be restricted from making such repurchase if required by holders pursuant to the indenture, which would result in a default under Headwaters' indenture which in turn might constitute a default under the terms of its other indebtedness, causing much or all of Headwaters' indebtedness to become due simultaneously when Headwaters is unable to pay it. On June 1, 2011, or in the event of a "designated event" under the indenture, holders may require Headwaters to repurchase their notes at a price of 100% of the principal amount of the notes, plus accrued and unpaid interest, including liquidated damages, if any, to, but excluding, the repurchase date. However, it is possible that Headwaters will not have sufficient funds available at such time to make the required repurchase of notes. In addition, any future credit agreements or other agreements relating to its indebtedness may contain provisions prohibiting the repurchase of the notes under certain circumstances, or may provide that a designated event constitutes an event of default under that agreement. If any agreement governing Headwaters indebtedness prohibits Headwaters from repurchasing the notes when Headwaters becomes obligated to do so, Headwaters could seek the consent of the lenders to repurchase the notes or attempt to refinance this debt. If Headwaters does not obtain such consent or refinance the debt, it would not be permitted to repurchase the notes. Headwaters' failure to repurchase tendered notes would constitute an event of default under the indenture, which might constitute a default under the terms of Headwaters other indebtedness, causing much or all of Headwaters' indebtedness to become due simultaneously when Headwaters is unable to pay it. Delaware law and Headwaters' charter documents may impede or discourage a takeover, which could cause the market price of Headwaters' shares to decline. Headwaters is a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of Headwaters, even if a change in control would be beneficial to existing stockholders. In addition, Headwaters' board of directors has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock, including the adoption of a "poison pill," which could be used defensively if a takeover is threatened. The ability of Headwaters' board of directors to create and issue a new series of preferred stock and certain provisions of Delaware law and Headwaters' certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving Headwaters or discourage a potential acquirer from making a tender offer for Headwaters' common stock, which, under certain circumstances, could reduce the market price of Headwaters' common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Headwaters is exposed to financial market risks, primarily related to changes in interest rates. Headwaters does not use derivative financial instruments for speculative or trading purposes, but has entered into hedge transactions to limit its exposure for interest rate movements, as explained below. As described in more detail in Note 9 to the consolidated financial statements, Headwaters has approximately $799.8 million of variable-rate long-term debt outstanding as of September 30, 2004, consisting of $790.0 million of senior debt and $9.8 million of notes payable to a bank. The $790.0 million of term loan borrowings under the senior debt agreements consisted of a first lien term loan in the amount of $640.0 million and a second lien term loan in the amount of $150.0 million. The first lien term loan bears interest, at Headwaters' option, at either i) the London Interbank Offered Rate ("LIBOR") plus 3.0%, if the "total leverage ratio," as defined, is less than or equal to 3.75:1.0, and if not, at LIBOR plus 3.25%, or ii) the "base rate" plus 2.0%, if the total leverage ratio is less than or equal to 3.75:1.0, and if not, at the base rate plus 2.25%. Base rate is defined as 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 0.5%. The interest rate on the first lien debt at September 30, 2004 was approximately 6.5%, but was reduced to approximately 5.4% in October 2004. The second lien term loan bears interest, also at Headwaters' option, at either LIBOR plus 5.5%, or the "base rate" plus 4.5%. The interest rate on the second lien debt at September 30, 2004 was approximately 9.75%, but was reduced to approximately 8.15% in October 2004. Headwaters can lock in new rates for both the first lien and second lien loans for one, two, three or six months. The next rate change will occur in January 2005. In connection with the new senior secured credit facility, Headwaters entered into certain hedge agreements to limit its exposure to interest rate increases. The first set of agreements established the maximum LIBOR rate for $300.0 million of debt at 5.0% through September 8, 2005. The second set of agreements sets the LIBOR rate at 3.71% for $300.0 million of debt for the period commencing September 8, 2005 through September 8, 2007. Headwaters accounts for these agreements as cash flow hedges, and accordingly, the fair market value of the hedges is reflected in the consolidated balance sheet as either other assets or other liabilities. The hedges had a fair market value of $0 at inception and through the period ended September 30, 2004. 49 In connection with the acquisition of SCP, Headwaters assumed SCP's obligations under its notes payable to a bank, totaling $9.8 million. Two of the notes bear interest at LIBOR plus 0.5%, subject to an interest rate floor of 4.5% (4.5% at September 30, 2004), and the remaining note (in the amount of $1.1 million) bears interest at 0.5% below the bank's base rate (4.25% at September 30, 2004). A change in the interest rate of 1% would change Headwaters' interest expense by approximately $7.7 million during the year ending September 30, 2005, considering all outstanding balances of variable-rate debt and required principal repayments. The majority of Headwaters' short-term investments, all of which are classified as trading securities, consist of fixed-rate U.S. government securities or securities backed by the U.S. government. Changes in interest rates can affect the market value of these investments, which are carried at market value in the consolidated balance sheet. The periodic adjustments to reflect changes in market value are included in interest and net investment income in the consolidated statements of income. Based on the current amount of short-term investments and expected near-term changes in the amount of short-term investments, Headwaters does not expect any material near-term investment losses to result from changes in interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary financial data required by this Item 8 are set forth in Item 15 of this Form 10-K. All information that has been omitted is either inapplicable or not required. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE As described in more detail in the following paragraphs, on October 14, 2002, Headwaters dismissed PricewaterhouseCoopers LLP ("PwC") and appointed Ernst & Young LLP ("E&Y"). On September 19, 2002, Headwaters acquired 100% of the common stock of ISG. E&Y audited ISG since its inception. ISG's revenues comprised approximately 65% of the consolidated revenues of the combined entity and ISG operated in 35 states and Canada. In addition, approximately 85% of Headwaters' employees came from the ISG acquisition. On October 14, 2002, Headwaters decided to retain E&Y as its independent accountants for the new combined company and accordingly dismissed PwC. Headwaters' Audit Committee participated in and approved the decision to change independent accountants. Headwaters did not consult with E&Y on any application of accounting principles or any other matter during the two fiscal years ended September 30, 2001 or subsequent thereto. The reports of PwC on the financial statements for the fiscal years audited by them contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for the two most recent fiscal years and through October 14, 2002, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PwC would have caused them to make reference thereto in their reports on the financial statements for such years. During the two most recent fiscal years and through October 14, 2002, there were no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). Headwaters requested that PwC furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of such letter is filed as Exhibit 16.1 to this Form 10-K. ITEM 9A. CONTROLS AND PROCEDURES Disclosure controls are procedures that are designed with an objective of ensuring that information required to be disclosed in Headwaters' periodic reports filed with the SEC, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified by SEC rules, regulations and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to Headwaters' management, including the Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), in order to allow timely consideration regarding required disclosures. 50 The evaluation of Headwaters' disclosure controls by the CEO and CFO included a review of the controls' objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Annual Report. Headwaters' management, including the CEO and CFO, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on their review and evaluation as of September 30, 2004, and subject to the inherent limitations as described above, Headwaters' CEO and CFO have concluded that Headwaters' disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective. In addition, they are not aware of any change in Headwaters' internal control over financial reporting during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, Headwaters' internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information to be set forth under the captions "Executive Officers" and "Proposal No. 1 - Election of Directors" in Headwaters' Proxy Statement to be filed in January 2005 for the Annual Meeting of Stockholders to be held in 2005 (the "Proxy Statement"), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information to be set forth under the caption "Executive Compensation and Related Information" in the Proxy Statement is incorporated herein by reference; provided, however, that Headwaters specifically excludes from such incorporation by reference any information set forth under the captions "Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Graph" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners and management to be set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information to be set forth under the caption "Transactions with Related Parties" in the Proxy Statement is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information to be set forth under the caption "Audit and Non-Audit Fees" in the Proxy Statement is incorporated herein by reference. 51 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements Consolidated Financial Statements of Headwaters Incorporated Page Report of Independent Auditors F-1 Consolidated Balance Sheets as of September 30, 2003 and 2004 F-2 Consolidated Statements of Income for the years ended September 30, 2002, 2003 and 2004 F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2002, 2003 and 2004 F-4 Consolidated Statements of Cash Flows for the years ended September 30, 2002, 2003 and 2004 F-6 Notes to Consolidated Financial Statements F-8 2. Financial Statement Schedules All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information has been provided in the consolidated financial statements or notes thereto. 3. Listing of Exhibits For convenience, the name Headwaters is used throughout this listing although in some cases the name Covol was used in the original instrument.
Exhibit No. Description Location ----------- ----------- -------- 3.1.9 Restated Certificate of Incorporation of Headwaters dated August 14, 2001 (3) 3.2.4 Restated By-Laws of Headwaters (7) 10.54 Employment Agreement effective May 1, 1998 with Steven G. Stewart (2) 10.60 Employment Agreement dated October 25, 2002 with Kirk A. Benson (7) 10.60.1 Amendment to Employment Agreement with Kirk A. Benson dated July 9, 2003 (9) 10.60.3 ISG Employment Agreement dated October 1, 2001 with Raul Deju (7) 10.60.4 Amendment of Employment Agreement dated August 2, 2004 with Raul Deju * 10.75 Agreement and Plan of Merger between Headwaters and Industrial Services Group, (4) Inc. dated July 15, 2002 10.75.2 First Amendment to Agreement and Plan of Merger and Equityholder Agreements among (5) Headwaters, Industrial Services Group, Inc. and Equityholders of Industrial Services Group, Inc. dated September 19, 2002 10.83 Incentive Agreement between Headwaters and Raul A. Deju dated as of November 12, (8) 2002 10.84 Credit Agreement among Headwaters and various lenders dated March 31, 2004 (11) (terminated) 10.84.1 Pledge and Security Agreement among Headwaters and various lenders dated March (11) 31, 2004 (terminated) 10.84.2 Amendment No. 1, dated as of June 23, 2004, to Credit Agreement among Headwaters (13) and various lenders as of March 31, 2004 (terminated) 10.85 Agreement and Plan of Merger between Headwaters and VFL Technology Corporation (11) dated February 10, 2004 10.86 Securities Purchase Agreement by and among Eldorado Stone Holdings Co., LP, et (12) al. and Headwaters dated April 21, 2004 10.87 Indenture dated as of June 1, 2004 between Headwaters and Wells Fargo Bank, as (13) Trustee, relating to 2-7/8% Convertible Senior Subordinated Notes due 2016 10.88 Asset Purchase Agreement between Headwaters and Southwest Concrete Products, LP (13) 52 10.89 Agreement and Plan of Merger by and among Headwaters Incorporated, Headwaters T (14) Acquisition Corp., and Tapco Holdings, Inc., dated as of September 8, 2004 10.90 Employment Agreement with John N. Lawless, III dated September 22, 2004 (15) 10.90.1 Nonstatutory Stock Option Grant effective as of September 22, 2004 (15) 10.90.2 Executive Change in Control Agreement with John N. Lawless, III effective as of (15) September 22, 2004 10.91 Credit Agreement among Headwaters and various lenders dated September 8, 2004 * 10.92 Second Lien Credit Agreement among Headwaters and various lenders dated September * 8, 2004 12 Computation of ratio of earnings to combined fixed charges and preferred stock * dividends 14 Code of Ethics (10) 16.1 Letter regarding change in certifying accountant (6) 21 List of Subsidiaries of Headwaters * 23.1 Consent of Ernst & Young LLP * 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer * 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer * 32 Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer * 99.1.1 Amended 2000 Employee Stock Purchase Plan, as further amended * 99.2 1995 Stock Option Plan (originally designated as Exhibit No. 10.5) (1) 99.2.1 First Amendment to the 1995 Stock Option Plan (originally designated as Exhibit (1) 10.5.1) 99.2.2 1996 Stock Option Agreement (7) 99.2.3 1998 Stock Option Agreement (7) 99.2.4 2001 Stock Option Agreement (7) 99.2.5 2002 Stock Option Agreement (7) 99.3.1 Incentive Bonus Plan dated 1 October 2004 * 99.4 2002 Stock Incentive Plan * 99.7 2003 Stock Incentive Plan (8) 99.8 General Employee Bonus Plan dated 1 October 2003 (10) - --------------------
* Filed herewith. Unless another exhibit number is indicated as the exhibit number for the exhibit as "originally filed," the exhibit number in the filing in which any exhibit was originally filed and to which reference is made hereby is the same as the exhibit number assigned herein to the exhibit. (1) Incorporated by reference to the indicated exhibit filed with Headwaters' Registration Statement on Form 10, filed February 26, 1996. (2) Incorporated by reference to the indicated exhibit filed with Headwaters' Annual Report on Form 10-K, for the fiscal year ended September 30, 1998. (3) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for events dated August 14, 2001 and August 28, 2001, filed September 12, 2001. (4) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for the event dated July 15, 2002, filed July 18, 2002. (5) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for the event dated September 19, 2002, filed October 4, 2002. (6) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for the event dated October 14, 2002, filed October 18, 2002. (7) Incorporated by reference to the indicated exhibit filed with Headwaters' Annual Report on Form 10-K, for the fiscal year ended September 30, 2002. (8) Incorporated by reference to the indicated exhibit filed with Headwaters' Quarterly Report on Form 10-Q, for the quarter ended December 31, 2002. 53 (9) Incorporated by reference to the indicated exhibit filed with Headwaters' Quarterly Report on Form 10-Q, for the quarter ended June 30, 2003. (10) Incorporated by reference to the indicated exhibit filed with Headwaters' Annual Report on Form 10-K, for the fiscal year ended September 30, 2003. (11) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K/A, for the event dated April 9, 2004, filed December 7, 2004. (12) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K/A, for the event dated April 21, 2004, filed December 7, 2004. (13) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K/A, for the event dated July 7, 2004, filed December 7, 2004. (14) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K/A, for the event dated September 8, filed December 13, 2004. (15) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for the event dated September 22, 2004, filed September 28, 2004. Exhibits The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15 (a) 3 above. Financial Statement Schedules The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15 (a) 2 above. 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HEADWATERS INCORPORATED By: /s/ Kirk A. Benson ----------------------------------------- Kirk A. Benson Chief Executive Officer (Principal Executive Officer) By: /s/ Steven G. Stewart ----------------------------------------- Steven G. Stewart Chief Financial Officer (Principal Financial and Accounting Officer) Date: December 10, 2004 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harlan M. Hatfield and Steven G. Stewart, and each of them, his/her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Kirk A. Benson Director and Chief Executive December 10, 2004 - ----------------------- Officer (Principal Executive Kirk A. Benson Officer) /s/ Steven G. Stewart Chief Financial Officer December 10, 2004 - ----------------------- (Principal Financial and Steven G. Stewart Accounting Officer) /s/ James A. Herickhoff Director December 10, 2004 - ------------------------ James A. Herickhoff /s/ Raymond J. Weller Director December 10, 2004 - ------------------------ Raymond J. Weller 55 /s/ E. J. "Jake" Garn Director December 10, 2004 - ------------------------ E. J. "Jake" Garn /s/ R. Sam Christensen Director December 10, 2004 - ------------------------ R. Sam Christensen /s/ William S. Dickinson Director December 10, 2004 - ------------------------- William S. Dickinson /s/ Malyn K. Malquist Director December 10, 2004 - ------------------------- Malyn K. Malquist /s/ Blake O. Fisher, Jr. Director December 10, 2004 - ------------------------- Blake O. Fisher, Jr. 56 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Headwaters Incorporated We have audited the accompanying consolidated balance sheets of Headwaters Incorporated as of September 30, 2003 and 2004, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2004. 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 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Headwaters Incorporated at September 30, 2003 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2004, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Salt Lake City, Utah November 10, 2004 F-1
HEADWATERS INCORPORATED CONSOLIDATED BALANCE SHEETS As of September 30, ------------------------------ (in thousands, except per-share data) 2003 2004 - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 18,732 $ 20,851 Short-term trading investments 2,921 6,735 Trade receivables, net 52,399 129,899 Inventories 7,827 43,812 Current and deferred income taxes 711 15,933 Other current assets 5,294 13,333 ------------------------------ Total current assets 87,884 230,563 ------------------------------ Property, plant and equipment, net 52,743 157,611 ------------------------------ Other assets: Intangible assets, net 112,414 298,803 Goodwill 112,131 815,396 Debt issue costs and other assets 8,103 38,406 ------------------------------ Total other assets 232,648 1,152,605 ------------------------------ Total assets $ 373,275 $1,540,779 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 17,177 $ 29,238 Accrued personnel costs 8,669 26,213 Other accrued liabilities 20,387 72,852 Current portion of long-term debt 27,475 57,873 ------------------------------ Total current liabilities 73,708 186,176 ------------------------------ Long-term liabilities: Long-term debt 104,044 914,641 Deferred income taxes 50,663 121,469 Other long-term liabilities 4,703 10,338 ------------------------------ Total long-term liabilities 159,410 1,046,448 ------------------------------ Total liabilities 233,118 1,232,624 ------------------------------ Commitments and contingencies Stockholders' equity: Common stock, $0.001 par value; authorized 50,000 shares; issued and outstanding: 27,878 shares at September 30, 2003 (including 467 shares held in treasury) and 33,775 shares at September 30, 2004 (including 414 shares held in treasury) 28 34 Capital in excess of par value 130,936 235,581 Retained earnings 12,213 76,530 Treasury stock, at cost (2,783) (2,610) Other (237) (1,380) ------------------------------ Total stockholders' equity 140,157 308,155 ------------------------------ Total liabilities and stockholders' equity $ 373,275 $1,540,779 ============================== See accompanying notes. F-2
HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME Year ended September 30, ------------------------------------------------- (in thousands, except per-share data) 2002 2003 2004 - ----------------------------------------------------------------------------------------------------------------------------- Revenue: Sales of chemical reagents $ 74,419 $ 128,375 $ 132,603 License fees 30,456 35,726 72,721 Coal combustion products revenues 6,818 169,938 210,155 Sales of construction materials 1,774 49,350 134,027 Other revenues 5,878 4,241 4,449 ------------------------------------------------- Total revenue 119,345 387,630 553,955 ------------------------------------------------- Operating costs and expenses: Cost of chemical reagents sold 50,134 87,386 89,789 Cost of coal combustion products revenues 3,764 123,146 150,080 Cost of construction materials sold 1,388 37,689 94,566 Other operating costs 5,244 3,919 436 Depreciation and amortization 1,760 12,982 17,051 Research and development 2,322 4,674 7,340 Selling, general and administrative 13,699 40,715 66,936 ------------------------------------------------- Total operating costs and expenses 78,311 310,511 426,198 ------------------------------------------------- Operating income 41,034 77,119 127,757 ------------------------------------------------- Other income (expense): Interest and net investment income 1,000 310 944 Interest expense (553) (15,687) (19,453) Losses on notes receivable and investments (743) (2,436) (2,842) Other, net (502) 775 (1,299) ------------------------------------------------- Total other income (expense), net (798) (17,038) (22,650) ------------------------------------------------- Income before income taxes 40,236 60,081 105,107 Income tax provision (15,950) (23,450) (40,790) ------------------------------------------------- Net income $ 24,286 $ 36,631 $ 64,317 ================================================= Basic earnings per share $ 1.00 $ 1.35 $ 2.02 ================================================= Diluted earnings per share $ 0.94 $ 1.30 $ 1.95 ================================================= See accompanying notes. F-3
HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Retained Common stock Capital in earnings Treasury Total -------------------- excess (accumulated stock, stockholders' (in thousands) Shares Amount of par value deficit) at cost Other equity - ---------------------------------------------------------------------------------------------------------------------------------- Balances as of September 30, 2001 23,807 $ 24 $ 83,226 $(48,704) $ (3,038) $ (422) $ 31,086 Exercise of stock options and warrants 1,315 1 5,383 5,384 Tax benefit from exercise of stock options 2,990 2,990 Common stock issued in connection with acquisition of Hydrocarbon Technologies, Inc. 178 -- 2,823 2,823 Common stock issued in connection with acquisition of Industrial Services Group, Inc. 2,100 2 32,716 32,718 Purchase of 83 shares of treasury stock, at cost (1,188) (1,188) 32 shares of treasury stock transferred to employee stock purchase plan, at cost 214 126 340 Cancellation of 73 shares of treasury stock (73) -- (1,087) 1,087 -- Amortization of deferred compensation from stock options and other 157 157 Net income for the year ended September 30, 2002 24,286 24,286 --------------------------------------------------------------------------------------------- Balances as of September 30, 2002 27,327 27 126,265 (24,418) (3,013) (265) 98,596 --------------------------------------------------------------------------------------------- Exercise of stock options and warrants 551 1 2,139 2,140 Tax benefit from exercise of stock options 2,050 2,050 59 shares of treasury stock transferred to employee stock purchase plan, at cost 482 230 712 Amortization of deferred compensation from stock options and other 28 28 Net income for the year ended September 30, 2003 36,631 36,631 --------------------------------------------------------------------------------------------- Balances as of September 30, 2003 27,878 $ 28 $ 130,936 $ 12,213 $ (2,783) $ (237) $ 140,157 ============================================================================================= See accompanying notes. F-4 HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) Retained Common stock Capital in earnings Treasury Total -------------------- excess (accumulated stock, stockholders' (in thousands) Shares Amount of par value deficit) at cost Other equity - ---------------------------------------------------------------------------------------------------------------------------------- Balances as of September 30, 2003 27,878 $ 28 $ 130,936 $ 12,213 $ (2,783) $ (237) $ 140,157 Exercise of stock options and warrants 878 1 8,119 8,120 Tax benefit from exercise of stock options 4,070 4,070 53 shares of treasury stock transferred to employee stock purchase plan, at cost 771 173 944 Common stock issued for cash, net of offering costs of $6,432 4,958 5 90,253 90,258 Issuance of restricted stock 61 -- 1,432 (1,432) -- Amortization of deferred compensation from stock options and other 289 289 Net income for the year ended September 30, 2004 64,317 64,317 --------------------------------------------------------------------------------------------- Balances as of September 30, 2004 33,775 $ 34 $ 235,581 $ 76,530 $ (2,610) $ (1,380) $ 308,155 ============================================================================================= See accompanying notes. F-5
HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, --------------------------------------- (in thousands) 2002 2003 2004 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 24,286 $ 36,631 $ 64,317 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation included in cost of products sold -- -- 3,497 Other depreciation and amortization 1,760 12,982 17,051 Non cash interest expense related to amortization of debt discount and debt issue costs 136 3,857 6,031 Deferred income taxes 11,540 (878) (1,283) Income tax benefit from exercise of stock options 2,990 2,050 4,070 Amortization of non-refundable license fees (1,471) (1,178) (1,179) Net loss (gain) on disposition of property, plant and equipment (1,249) (188) 1,254 Write-downs of notes receivable and investments 986 2,436 2,842 Other changes in operating assets and liabilities, net of effect of acquisitions: Short-term trading investments 141 2,986 (3,814) Trade receivables (7,742) (2,068) (10,620) Inventories 307 615 1,186 Other current assets 44 (1,078) (1,057) Accounts payable and accrued liabilities 11,175 860 9,671 Other, net (126) (636) (35) --------------------------------------- Net cash provided by operating activities 42,777 56,391 91,931 --------------------------------------- Cash flows from investing activities: Payments for acquisitions, net of cash acquired of $11,834 in 2004: VFL Technology Corporation -- -- (4,171) Eldorado Stone, LLC -- -- (209,770) Southwest Concrete Products, L.P. -- -- (24,691) Tapco Holdings, Inc. -- -- (713,683) Industrial Services Group, Inc. (205,900) -- -- Hydrocarbon Technologies, Inc. (419) -- -- Purchase of property, plant and equipment (796) (9,716) (13,967) Proceeds from disposition of property, plant and equipment 115 2,685 4,037 Collections on notes receivable 6,912 54 -- Net increase in investments and other assets (334) (594) (7,794) --------------------------------------- Net cash used in investing activities (200,422) (7,571) (970,039) --------------------------------------- Cash flows from financing activities: Net proceeds from issuance of long-term debt 165,806 -- 1,068,138 Payments on long-term debt (6,412) (40,224) (287,233) Net proceeds from issuance of common stock -- -- 90,258 Proceeds from exercise of options and warrants 5,384 2,140 8,120 Employee stock purchases 340 712 944 Purchase of common stock for the treasury (1,188) -- -- --------------------------------------- Net cash provided by (used in) financing activities 163,930 (37,372) 880,227 --------------------------------------- Net increase in cash and cash equivalents 6,285 11,448 2,119 Cash and cash equivalents, beginning of year 999 7,284 18,732 --------------------------------------- Cash and cash equivalents, end of year $ 7,284 $ 18,732 $ 20,851 ======================================= See accompanying notes. F-6 HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued Year ended September 30, --------------------------------------- (in thousands) 2002 2003 2004 - ------------------------------------------------------------------------------------------------------------------------------- Supplemental schedule of non-cash investing and financing activities: Purchase of variable interest in solid alternative fuel facility in exchange for commitment to make future payments $ -- $ -- $ 7,500 Issuance of restricted stock -- -- 1,432 Common stock issued in connection with acquisition of Industrial Services Group, Inc. 32,718 -- -- Common stock issued in connection with acquisition of Hydrocarbon Technologies, Inc. 2,823 -- -- Cancellation of treasury stock (1,087) -- -- Supplemental disclosure of cash flow information: Cash paid for interest $ 39 $ 10,054 $ 11,063 Cash paid for income taxes 322 19,356 35,622 See accompanying notes. F-7
HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 ___________ 1. Organization and Description of Business Headwaters Incorporated is incorporated in Delaware. Headwaters owns 100% of the following subsidiaries: Headwaters Resources, Inc. and Headwaters Construction Materials, Inc. (the two of which combined were formerly Industrial Services Group, Inc., a Utah-based company acquired by Headwaters in September 2002) ("ISG"); Headwaters Technology Innovation Group, Inc. (formerly Hydrocarbon Technologies, Inc., a New Jersey company acquired in August 2001) ("HTI"); VFL Technology Corporation, a Pennsylvania company acquired in April 2004 ("VFL"); Eldorado Stone, LLC, a Delaware company acquired in June 2004 ("Eldorado"); Southwest Concrete Products, L.P., a Texas company acquired in July 2004 ("SCP"); and Tapco Holdings, Inc., a Michigan company acquired in September 2004 ("Tapco") (see Note 3). Headwaters' fiscal year ends on September 30 and unless otherwise noted, future references to years refer to Headwaters' fiscal year rather than a calendar year. Headwaters' focus is on enhancing the value of energy resources in an environmentally responsible manner; promoting the expanded use of coal combustion products ("CCPs"); and expanding Headwaters' construction materials business, including opportunities to utilize products from other Headwaters operations in the production of construction materials. Headwaters currently generates revenue from licensing its chemical technologies to produce solid alternative fuel, from managing CCPs, and from the sale of construction materials. Headwaters intends to continue to expand its business through growth of existing operations, commercialization of technologies currently being developed, and strategic acquisitions of entities that operate in adjacent industries. Through its proprietary Covol Fuels process, Headwaters adds value to the production of coal-based solid alternative fuels primarily for use in electric power generation plants. Headwaters currently licenses its technologies to the owners of 28 of a company-estimated 75 coal-based solid alternative fuel facilities in the United States. Through its wholly-owned subsidiary HTI, Headwaters conducts research and development activities directed at catalyst technologies to convert coal and heavy oil into environmentally-friendly, high-value liquid fuels. In addition, HTI has developed a unique process to custom design nanocatalysts that could be used in multiple industrial applications. ISG's CCP operations and VFL (together referred to as Headwaters' Resources, Inc., or "Resources") represent the nation's largest provider of CCP management and marketing services to the electric utility industry, serving more than 100 coal-fired electric power generation plants nationwide. Through its distribution network of over 110 locations, Resources is the leading provider of high quality fly ash to the building products and ready mix concrete industries in the United States. Resources also develops and deploys technologies for maintaining and improving fly ash quality. Headwaters' construction materials segment develops, manufactures and distributes value-added bagged concrete, stucco, mortar and block products that utilize fly ash, and with the acquisitions of Eldorado and SCP, manufactured stone and expanded concrete block products. Tapco is a leading designer, manufacturer and marketer of building products used in exterior residential home improvement and construction. 2. Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Headwaters, all of its subsidiaries and other entities in which Headwaters has a controlling financial interest. In accordance with Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities," as revised, Headwaters will consolidate any variable interest entities for which it is the primary beneficiary; however as of September 30, 2004, there are none. For investments in companies in which Headwaters has a significant influence over operating and financial decisions (generally defined as owning a voting or economic interest of 20% to 50%), Headwaters applies the equity method of accounting. In instances where Headwaters' investment is less than 20% and significant influence does not exist, investments are carried at cost. All significant intercompany transactions and accounts are eliminated in consolidation. Headwaters acquired ISG on September 19, 2002 and accordingly, ISG's results of operations for the period from September 19, 2002 through September 30, 2004 have been consolidated with Headwaters' 2002 through 2004 results. ISG's results of operations up to September 18, 2002 have not been included F-8 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ in Headwaters' consolidated results for any period. Headwaters acquired VFL on April 9, 2004, Eldorado Stone on June 2, 2004, SCP on July 2, 2004, and Tapco on September 8, 2004. These entities' results of operations for the periods from the acquisition dates through September 30, 2004 have been consolidated with Headwaters' 2004 results and their operations up to the dates of acquisition have not been included in Headwaters' consolidated results for any period. Due to the time required to obtain accurate financial information related to HTI's foreign contracts, for financial reporting purposes HTI's financial statements have historically been consolidated with Headwaters' financial statements using a one-month lag. Effective October 1, 2003, Headwaters eliminated this one-month lag because of the decreased significance of HTI's foreign contracts. Accordingly, 13 months of HTI's results of operations have been included in the consolidated statement of income for 2004. Use of Estimates - The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. Segment Reporting, Major Customers and Other Concentrations of Risk - Until Headwaters acquired ISG in September 2002, Headwaters operated in and reported as a single industry segment, alternative energy. Since the acquisition of ISG, Headwaters has operated in three business segments, alternative energy, CCPs, and construction materials. VFL operates in the CCP segment and all of the other businesses acquired by Headwaters in 2004 operate in the construction materials segment. Additional information about segments is presented in Note 4. The following table presents revenues for all customers that accounted for over 10% of total revenue during 2002, 2003 or 2004. All of these revenues are attributable to the alternative energy segment.
(in thousands) 2002 2003 2004 -------------------------------------------------------------------------------------------- Pace Carbon Fuels, L.L.C. affiliates Less than 10% Less than 10% $57,602 DTE Energy Services, Inc. affiliates $19,660 $42,013 Less than 10% TECO Coal Corporation affiliates 20,292 Less than 10% Less than 10% Marriott International, Inc. affiliates 19,105 Less than 10% Less than 10% AIG Financial Products Corp. affiliates 16,900 Less than 10% Less than 10%
At September 30, 2004, Headwaters had trade receivable balances totaling approximately $2,873,000 from Pace Carbon Fuels, L.L.C. affiliates. Substantially all of Headwaters' revenues were generated from sales in the United States. Headwaters purchases all of the chemical reagent that is sold to licensees and other customers from a single large international chemical company and Tapco purchases all of the polypropylene used in its building products from a single supplier. Management believes that if necessary, the chemical reagent and polypropylene could be obtained from other suppliers. Headwaters has no other significant unusual credit risks or concentrations. Revenue Recognition - Alternative Energy Segment. Headwaters currently licenses its technologies to the owners of 28 coal-based solid alternative fuel facilities from which Headwaters earns license fees and/or profits from the sales of chemical reagents. Non-refundable advance license fees and royalty payments have been received from certain licensees under various terms and conditions. These non-refundable license fees and royalties have been deferred and are being recognized on a straight-line basis through December 31, 2007, the period covered by the related license and royalty agreements. Recurring license fees or royalty payments are recognized in the period when earned, which coincides with the sale of alternative fuel by Headwaters' licensees. In certain instances, Headwaters is required to pay to third parties a portion of license fees received or cash proceeds from the sale of chemical reagents. In such cases, Headwaters records the net proceeds as revenue. Revenues from the sales of chemical reagents are recognized upon delivery of product and assumption of the risk of loss by the licensee or non-licensee customer. HTI's revenue consists of license fees, contract services for businesses and U.S. government agencies and is included in the caption "Other revenues" in F-9 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ the consolidated statements of income. HTI's costs related to this revenue are included in "Other operating costs." In accounting for long-term contracts, HTI uses the percentage of completion method of accounting, on the basis of the relationship between effort expended and total estimated effort for the contract. If estimates of costs to complete a contract indicate a loss, a provision is made for the total anticipated loss at that time. CCP and Construction Materials Segments. Revenue from the sale of CCPs and construction materials is recognized upon passage of title to the customer, which coincides with physical delivery and assumption of the risk of loss by the customer. Estimated sales rebates, discounts and allowances are provided for at the time of sale and are based upon established policies and historical experience. Revenues include transportation charges and shipping and handling fees associated with delivering material and products to customers when the transportation or shipping and handling is contractually provided for between the customer and Headwaters. CCP service revenues include revenues earned under long-term contracts to dispose of residual materials created by coal-fired electric power generation and revenues earned in connection with certain construction-related projects that are incidental to Resources' primary business. Service revenues under long-term contracts are recognized concurrently with the removal of material and are based on the number of tons of material removed at an established price per ton. Construction-related projects are billed on a time and materials basis; therefore, the revenues and related costs are recognized when the time is incurred and the materials are consumed. The cost of CCPs sold primarily represents amounts paid to utility companies to purchase product together with storage and transportation costs to deliver the product to customers. In accordance with certain utility company contracts, the cost of CCPs purchased from those utilities is based on a percentage of the "net revenues" from the sale of the CCPs purchased. Cost of services sold includes landfill fees and transportation charges to deliver non-marketable CCPs to the landfill. Cost of construction materials sold includes shipping and handling fees. Cash and Cash Equivalents - Headwaters considers all short-term highly liquid investments with an original maturity of three months or less to be cash equivalents. Certain cash and cash equivalents are deposited with financial institutions, and at times such amounts may exceed insured depository limits. Short-term Investments - Short-term investments consist of mortgage- and other asset-backed securities, corporate bonds, U.S. government securities and equity securities. By policy, Headwaters invests primarily in U.S. government securities or securities backed by the U.S. government. All investments are defined as trading securities and are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Unrealized gains and losses are included in earnings. Approximately $285,000 of investment gains in 2002, $7,000 of investment losses in 2003, and $19,000 of investment gains in 2004 related to securities held at September 30, 2002, 2003, and 2004, respectively. Receivables - Allowances are provided for uncollectible accounts and notes when deemed necessary. Such allowances are based on an account-by-account analysis of collectibility or impairment plus a provision for non-customer specific defaults based upon historical collection experience. Collateral is not required for trade receivables, but Headwaters performs periodic credit evaluations of its customers. Collateral is generally required for notes receivable. Inventories - Inventories are stated at the lower of cost or market (net realizable value). Cost includes direct material, direct labor and allocations of manufacturing overhead costs and is determined primarily using the first-in, first-out method. Property, Plant and Equipment - Property, plant and equipment are recorded at cost. For significant self-constructed assets, cost includes direct labor and interest. Expenditures for major improvements are capitalized; expenditures for maintenance, repairs and minor improvements are charged to expense as incurred. Assets are depreciated using the straight-line method over their estimated useful lives, limited to the lease terms for improvements to leased assets. Upon the sale or retirement of property, plant and equipment, any gain or loss on disposition is reflected in results of operations, and the related asset cost and accumulated depreciation are removed from the respective accounts. F-10 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Intangible Assets and Goodwill - Intangible assets consist primarily of identifiable intangible assets obtained in connection with acquisitions (see Note 3). Intangible assets are amortized using the straight-line method over their estimated useful lives. Goodwill consists of the excess of the purchase price for businesses acquired over the fair value of identified assets acquired, net of liabilities assumed. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Intangible Assets," goodwill is not amortized, but is tested at least annually for impairment. Goodwill is normally tested as of June 30, using a two-step process that begins with an estimation of the fair value of the reporting unit giving rise to the goodwill (see Note 8). Valuation of Long-Lived Assets - Headwaters evaluates the carrying value of long-lived assets, including intangible assets and goodwill, as well as the related amortization periods, to determine whether adjustments to these amounts or to the useful lives are required based on current events and circumstances. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flow from that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. There were no impairment losses recorded for long-lived assets in any of the years presented. Debt Issue Costs - Debt issue costs represent direct costs incurred related to the issuance of long-term debt. These costs are amortized to interest expense over the lives of the respective debt issues using the effective interest method. When debt is repaid early, the portion of unamortized debt issue costs related to the early principal repayment is written off and included in interest expense in the consolidated statements of income. Financial Instruments - Derivatives are recorded in the consolidated balance sheets at fair value, as required by SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended ("SFAS No. 133"). For all periods presented, the fair value of derivatives is $0. Accounting for changes in the fair value of a derivative depends on the intended use of the derivative, which is established at inception. For derivatives designated as cash flow hedges and which meet the effectiveness guidelines of SFAS No. 133, changes in fair value, to the extent effective, are recognized in other comprehensive income until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value of a derivative resulting from ineffectiveness, or an excluded component of the gain or loss, is recognized immediately and is recorded with interest expense in the consolidated statements of income. Headwaters formally documents all hedge transactions at inception of the contract, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking the derivatives that are designated as hedges to specific assets, liabilities, firm commitments or forecasted transactions. Headwaters also formally assesses the effectiveness of its hedging relationships on an ongoing basis. As described in more detail in Note 9, Headwaters entered into hedge agreements in September 2004 to limit its exposure for interest rate movements, but has not entered into any other hedge transactions. Income Taxes - Headwaters accounts for income taxes using the asset and liability approach. Headwaters recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically based on changing events for recoverability and valuation allowances are provided as necessary. Headwaters files a consolidated federal income tax return with its subsidiaries. Research and Development Costs - Research and development costs consist primarily of personnel-related costs and are expensed as incurred. F-11 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Advertising Costs - Advertising costs are expensed as incurred, except for the cost of certain materials which are capitalized and amortized to expense as the materials are distributed. Warranty Costs - Provision is made for warranty costs at the time of sale, based upon established policies and historical experience. Contingencies - In accounting for legal matters and other contingencies, Headwaters follows the guidance in SFAS No. 5, "Accounting for Contingencies," under which loss contingencies are accounted for based upon the likelihood of an impairment of an asset or the incurrence of a liability. If a loss contingency is "probable" and the amount of loss can be reasonably estimated, it is accrued. If a loss contingency is "probable," but the amount of loss cannot be reasonably estimated, disclosure is made. If a loss contingency is "reasonably possible," an accrual is made for the most likely amount of loss, if determinable, and disclosure is made of the potential range of loss. Loss contingencies that are "remote" are neither accounted for nor disclosed. Gain contingencies are given no accounting recognition, but are disclosed if material. Common Stock Options and Restricted Stock Grants - Headwaters has elected to continue to apply the intrinsic value method as prescribed by APB 25 in accounting for options and restricted stock grants to employees, officers and directors and does not currently plan to change to the fair value method unless required by changes in accounting standards. The alternative fair value method of accounting prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the use of option valuation models that were developed for use in valuing traded stock options, as discussed below. Under APB 25, no compensation expense is recognized for stock options and restricted stock grants to employees, officers and directors when the exercise price of stock options or restricted stock equals or exceeds the market price of Headwaters' common stock on the date of grant. In years prior to 1998, certain options were granted with terms considered compensatory. In addition, in 2004, Headwaters issued restricted stock to certain officers and employees, also with terms considered compensatory, because the restricted stock was issued at no cost to the recipients. In such instances, compensation cost is amortized to expense over the applicable vesting period on a straight-line basis. If the fair value provision of SFAS No. 123 would have been applied to all options and restricted stock grants, net income and earnings per share would have been changed to the pro forma amounts shown in the following table.
(in thousands, except per-share data) 2002 2003 2004 ---------------------------------------------------------------------------------------------------------- Reported net income $24,286 $36,631 $64,317 Add actual amortization expense included in reported net income 93 91 289 Deduct expense determined under fair value provision of SFAS No. 123 (2,479) (4,097) (4,090) --------------------------------------- Pro forma net income $21,900 $32,625 $60,516 ======================================= Basic earnings per share - as reported $ 1.00 $ 1.35 $ 2.02 - pro forma $ 0.90 $ 1.20 $ 1.90 Diluted earnings per share - as reported $ 0.94 $ 1.30 $ 1.95 - pro forma $ 0.85 $ 1.16 $ 1.83
The fair values of stock option grants for the years presented were determined using the Black-Scholes option pricing model and the following assumptions: expected stock price volatility of 40% to 90%, risk-free interest rates ranging from 1.3% to 5.0%, weighted average expected option lives of 3 to 5 years, and no dividend yield. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because Headwaters' stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect their fair value, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of stock options and restricted stock. F-12 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Earnings per Share Calculation - Earnings per share ("EPS") has been computed based on the weighted-average number of common shares outstanding. Diluted EPS computations reflect the increase in weighted-average common shares outstanding that would result from the assumed exercise of outstanding stock options and warrants, calculated using the treasury stock method, and the assumed conversion of convertible securities, using the if-converted method, when such options, warrants, and convertible securities are dilutive. Recent Accounting Pronouncements - In September 2004, the Emerging Issues Task Force ("EITF") reached a consensus requiring the inclusion of contingently convertible instruments in diluted EPS calculations. This consensus (EITF Issue 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share") will be effective for periods ending after December 15, 2004 and will require Headwaters to include in its diluted EPS calculation, on an if-converted basis, the additional shares issuable under the terms of Headwaters' outstanding convertible senior subordinated notes described in Note 9. The EITF consensus, when implemented, must be applied to all applicable prior periods, which for Headwaters will be the quarters ended June 30, 2004 and September 30, 2004. See Note 13 for more information on the expected effect on Headwaters' EPS of implementing the EITF consensus. Headwaters has reviewed all other recently issued accounting standards, which have not yet been adopted in order to determine their potential effect, if any, on the results of operations or financial position of Headwaters. Based on that review, Headwaters does not currently believe that any of these recent accounting pronouncements will have a significant effect on its current or future financial position, results of operations, cash flows or disclosures. Reclassifications - Certain prior year amounts have been reclassified to conform to the current year's presentation. The reclassifications had no effect on net income or total assets. 3. Acquisitions As described in the following paragraphs, Headwaters acquired four companies in 2004 and one company in 2002. VFL - On April 9, 2004, Headwaters acquired 100% of the common stock of VFL and assumed all of VFL's outstanding debt. VFL is based in West Chester, Pennsylvania and manages approximately two million tons of CCPs annually. In addition, VFL has operating knowledge relating to the use of low value CCPs in value-added applications. The acquisition of VFL broadens the scope of services that Headwaters' CCP segment offers, as well as its client base, principally on the East coast of the United States and in the Ohio River Valley. VFL's results of operations have been included in Headwaters' consolidated statement of income since April 9, 2004. In connection with the VFL acquisition, Headwaters issued $19,000,000 of notes payable to the VFL stockholders, all of which were repaid in 2004. The following table sets forth the total consideration paid to acquire VFL, as preliminarily determined and previously reported, and as finally determined.
(in thousands) Preliminary Final ---------------------------------------------------------------------------- Cash paid to VFL stockholders $ 3,326 $ 3,982 Notes payable issued to VFL stockholders 19,000 19,000 VFL debt assumed by Headwaters 6,749 6,749 Costs directly related to acquisition 225 225 --------------- -------------- $29,300 $29,956 =============== ==============
The VFL acquisition was accounted for using the purchase method of accounting as required by SFAS No. 141, "Business Combinations." The consideration Headwaters paid for VFL was negotiated at arms length and assets acquired and liabilities assumed were recorded at their estimated fair values as of April 9, 2004. Approximately $11,290,000 of the purchase price was allocated to identifiable intangible assets consisting of contracts with utility companies, industrial clients and municipalities. This amount is being amortized over an estimated average useful life of eight years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, all of which F-13 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ is expected to be tax deductible. All of the intangible assets and goodwill have been allocated to Headwaters' CCP segment. The following table sets forth the preliminary and final allocations of the total consideration to the tangible and intangible assets acquired and liabilities assumed. (in thousands) Preliminary Final --------------------------------------------------------------------------- Cash $ 36 $ 36 Trade receivables, net 4,287 4,287 Other assets 860 860 Property, plant and equipment 8,443 8,808 Intangible assets acquired - contracts (8 years) 11,290 11,290 Goodwill 7,604 8,125 Accounts payable and accrued liabilities (3,220) (3,450) ------------- ------------ Net assets acquired $ 29,300 $ 29,956 ============= ============ Eldorado - On June 2, 2004, Headwaters acquired 100% of the ownership interests of Eldorado Stone LLC ("Eldorado") and paid off all of Eldorado's outstanding debt. Eldorado is based in San Marcos, California and is a leading manufacturer of architectural manufactured stone. With over 700 distributors, Eldorado provides Headwaters with a national platform for expanded marketing of "green" building products, such as mortar and stucco made with reclaimed fly ash from coal combustion. Headwaters expects Eldorado, which is included in its construction materials segment, to provide critical mass and improved margins in Headwaters' efforts to expand the use of fly ash in building products. Eldorado's results of operations have been included in Headwaters' consolidated statement of income since June 2, 2004. In connection with the Eldorado acquisition, Headwaters issued $172,500,000 of convertible senior subordinated debt and also borrowed funds under its senior secured revolving credit arrangement and an arrangement with an investment company, the latter two of which were repaid in 2004. Headwaters incurred approximately $6,200,000 of debt issue costs in connection with the issuance of the convertible senior subordinated debt, all of which is described in more detail in Note 9. The following table sets forth the total consideration paid to acquire Eldorado. (in thousands) -------------------------------------------------------------------------- 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 -------------- $210,432 ============== The Eldorado acquisition was accounted for using the purchase method of accounting. The consideration Headwaters paid for Eldorado was negotiated at arms length and assets acquired and liabilities assumed were recorded at their estimated fair values as of June 2, 2004. Eldorado has experienced significant growth over the last two years. Eldorado sells its products through an extensive distribution network. In addition, Eldorado employs a group of talented artists who create the molds used to produce the manufactured stone product. The quality of these molds adds significant value to the end product. Eldorado's manufacturing process, market presence and the quality of its product, including product design and product breadth, are major elements contributing to Eldorado's high value and related purchase price. These items, combined with Eldorado's high growth and extensive distribution network are not separable and, accordingly, contribute to a significant amount of goodwill. Approximately $9,034,000 of the purchase price was allocated to identifiable intangible assets, consisting primarily of non-compete agreements. The intangible assets are being amortized over estimated useful lives ranging from three to ten years, with a combined weighted average life of approximately four years. The remaining purchase price not attributable to the tangible and identifiable F-14 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ intangible assets was allocated to goodwill, most of which is expected to be tax deductible. All of the intangible assets and goodwill have been allocated to Headwaters' construction materials segment. The following table sets forth the preliminary and most recent allocations of the total consideration to the tangible and intangible assets acquired and liabilities assumed. (in thousands) Preliminary Most Recent ---------------------------------------------------------------------------- Cash $ 662 $ 662 Trade receivables, net 16,051 16,650 Inventories 17,209 16,610 Other assets 3,069 2,553 Property, plant and equipment 23,040 23,367 Intangible assets acquired: Non-competition agreements (3 - 3 1/2 years) 6,252 6,252 Other (5 - 10 years) 1,901 2,782 Goodwill 160,921 160,263 Accounts payable and accrued liabilities (18,673) (18,707) ------------- ------------ Net assets acquired $210,432 $210,432 ============= ============ The determination of the final purchase price is subject to potential adjustments, including final agreement with the seller of the working capital acquired at closing. In addition, the purchase price allocation will likely differ from that reflected above after final asset valuation reports are received and a detailed review of all assets and liabilities, including income taxes, has been completed. Pre-acquisition contingencies, which are not material, are included in the value of liabilities assumed as of June 2, 2004 and any change from the recorded amounts is expected to be immaterial. The final purchase price allocation is expected to be completed by March 31, 2005. Any changes to the purchase price allocation are not expected to materially increase or decrease depreciation and amortization expense, but may have a material effect on the amount of recorded goodwill. SCP - On July 2, 2004, Headwaters acquired certain assets of SCP and assumed all of SCP's outstanding debt. SCP is based in Alleyton, Texas and is a leading manufacturer of concrete blocks in South Texas, complementing Headwaters' similar operations in Dallas and East Texas. SCP provides Headwaters with modern concrete-based manufacturing facilities and the opportunity to increase the use of CCPs in the manufacture of block and brick. SCP also has an experienced management team and the president of SCP subsequently assumed responsibility for all of Headwaters' construction materials operations other than for Eldorado and Tapco. SCP's results of operations have been included in Headwaters' consolidated statement of income since July 2, 2004. The following table sets forth the total consideration paid to acquire SCP. (in thousands) --------------------------------------------------------------------------- Cash paid to SCP owners $25,210 SCP debt assumed by Headwaters 9,787 Costs directly related to acquisition 300 -------------- $35,297 ============== Headwaters also agreed to pay an earn-out to the sellers if certain earnings targets are exceeded during the 12 months ending December 31, 2005 (the "earn-out period"). The additional earn-out consideration will be the product of 5.7 times the amount, if any, that earnings before interest, taxes, depreciation and amortization ("EBITDA") of SCP exceeds $5,500,000 during the earn-out period. If any earn-out consideration is paid, which will not occur until 2006, goodwill will be increased accordingly. The SCP acquisition was accounted for using the purchase method of accounting. The consideration Headwaters paid for SCP was negotiated at arms F-15 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ length and assets acquired and liabilities assumed were recorded at their estimated fair values as of July 2, 2004. Approximately $6,890,000 of the purchase price was allocated to identifiable intangible assets, consisting primarily of customer relationships. The intangible assets are being amortized over estimated useful lives ranging from two to ten years, with a combined weighted average life of approximately seven years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, substantially all of which is expected to be tax deductible. All of the intangible assets and goodwill have been allocated to Headwaters' construction materials segment. The following table sets forth the allocation of the total consideration to the tangible and intangible assets acquired and liabilities assumed. (in thousands) -------------------------------------------------------------------------- Cash $ 819 Trade receivables, net 4,247 Inventories and other assets 3,772 Property, plant and equipment 13,500 Intangible assets acquired: Customer relationships (7 1/2 years) 5,450 Other (2 - 10 years) 1,440 Goodwill 7,629 Accounts payable and accrued liabilities (1,560) -------------- Net assets acquired $35,297 ============== Tapco - On September 8, 2004, Headwaters acquired 100% of the ownership interests of 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 used in exterior residential home improvement and construction throughout the United States and Canada. Headwaters expects the Tapco acquisition to further diversify Headwaters' cash flow stream away from its historical reliance on alternative energy. Tapco brings economy of scale and manufacturing expertise that results in some of the lowest manufacturing costs in the siding accessory industry, which is expected to improve margins in Headwaters' construction materials segment. Headwaters may also be able to leverage Tapco's distribution networks to accelerate sales of Headwaters' diverse construction materials product portfolio. Tapco's results of operations have been included in Headwaters' consolidated statement of income beginning September 8, 2004. In order to obtain the cash necessary to acquire Tapco, retire the Tapco debt and preferred stock, and repay Headwaters' existing senior debt, Headwaters borrowed $790,000,000 of debt consisting of $640,000,000 of senior secured debt under a first lien with a six and one-half-year term and a floating interest rate, and $150,000,000 of senior secured debt under a second lien with an eight-year term, also with a floating interest rate. The senior secured first lien credit arrangement also includes a $60,000,000 revolver available to Headwaters which carries a 0.75% commitment fee on unused amounts and a floating interest rate on actual borrowings. Headwaters incurred approximately $18,000,000 of debt issue costs in connection with the issuance of the new senior debt, all of which is described in more detail in Note 9. The following table sets forth the consideration paid to acquire Tapco. (in thousands) --------------------------------------------------------------------------- Cash paid to Tapco stockholders $388,297 Cash paid to retire Tapco debt, preferred stock and related accrued interest 326,703 Costs directly related to acquisition 9,000 ------------- $724,000 ============= The Tapco acquisition was accounted for using the purchase method of accounting. The consideration Headwaters paid for Tapco was negotiated at arms length and assets acquired and liabilities assumed were recorded at F-16 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ their estimated fair values as of September 8, 2004. Tapco has a leading market share in most of its product lines with some lines having a market share greater than 75%. Tapco has the ability to deliver its products within a few days of receiving the order which is appealing to architects, contractors and end users of the product. Tapco also offers wide-ranging product choices delivered through an extensive distribution network throughout the United States. Tapco's products, manufacturing process and distributors are currently substantially different than those utilized by Headwaters' other business units and a substantial amount of sales relate to the remodeling industry. As such, Tapco may further mitigate the cyclical nature of Headwaters' construction materials business in the future. Tapco's primary value, therefore, is due to its significant market presence and manufacturing efficiencies. These values are largely the result of Tapco's manufacturing and distribution capacities, product breadth and workforce which are not separable and, accordingly, contribute to a significant amount of goodwill. Approximately $167,300,000 of the estimated purchase price was allocated to estimated identifiable intangible assets consisting primarily of customer relationships, trade names, and patents. The estimated intangible assets have estimated average useful lives ranging from two to twenty years, with a combined weighted average life of approximately 15 years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, which is not expected to be tax deductible. All of the intangible assets and goodwill have been allocated to Headwaters' construction materials segment. The following table sets forth a preliminary allocation of the total consideration to the tangible and intangible assets acquired and liabilities assumed. (in thousands) ---------------------------------------------------------------------------- Cash $ 10,317 Trade receivables, net 41,696 Inventories 16,835 Other assets 1,232 Net property, plant and equipment 61,376 Intangible assets acquired: Customer relationships (15 years) 62,000 Trade names (20 years) 62,000 Patents (10 years) 40,000 Non-competition agreements (2 years) 3,300 Goodwill 527,248 Accounts payable and accrued liabilities (33,237) Net deferred income tax liabilities (68,767) ------------- Net assets acquired $724,000 ============= The final purchase price and the allocation thereof will differ from that reflected above after final fixed asset and intangible asset valuation reports are received and a detailed review of all assets and liabilities, including income taxes, has been completed. The final purchase price allocation is expected to be completed by June 30, 2005. The final purchase price allocation is not expected to materially increase or decrease depreciation and amortization expense from the amounts recorded in 2004 and the amounts expected to be recorded in future periods, nor is it expected to have a material effect on the identified assets or liabilities, including goodwill. Pro Forma Information for 2004 Acquisitions - The following unaudited pro forma financial information for 2003 and 2004 assumes the 2004 acquisitions occurred as of the beginning of the respective years. The pro forma combined results for 2003 combine Headwaters' historical results for the year ended September 30, 2003 with VFL's, Eldorado's, and SCP's historical results for their respective fiscal years ended December 31, 2003 and Tapco's historical results for its fiscal year ended October 31, 2003, after giving effect to certain adjustments, including interest expense and the amortization of intangible assets. The pro forma combined results for 2004 combine Headwaters' historical results for the year ended September 30, 2004 with VFL's, Eldorado's, SCP's and Tapco's historical results from October 1, 2003 to their respective F-17 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ acquisition dates, after giving effect to necessary adjustments. Accordingly, VFL's, Eldorado's and SCP's historical results for the three-month period from October 1, 2003 to December 31, 2003 and Tapco's historical results for the one-month period from October 1, 2003 to October 31, 2003 are included in both the pro forma combined results for the year ended September 30, 2003 and the pro forma combined results for the year ended September 30, 2004. Revenues and net income for VFL, Eldorado, SCP and Tapco which are included in both the 2003 and 2004 pro forma results were approximately $67,021,000 and $850,000, respectively. Unaudited Pro Forma Results ------------------------------ (in thousands, except per-share data) 2003 2004 ---------------------------------------------------------------------------- Total revenue $764,316 $892,140 Net income 38,818 72,876 Basic earnings per share 1.43 2.29 Diluted earnings per share 1.38 2.21 The pro forma results have been prepared for illustrative purposes only. Such information does not purport to be indicative of the results of operations which 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. Deferred Acquisition Costs - In 2004, Headwaters expensed approximately $848,000 of deferred acquisition costs related to acquisition projects that were abandoned. ISG Acquisition - On September 19, 2002, Headwaters acquired 100% of the common stock of ISG, assumed or paid off all of ISG's outstanding debt and redeemed all of ISG's outstanding preferred stock. ISG is the leading provider of high quality fly ash to the building products and ready mix concrete industries in the United States. ISG also develops, manufactures and distributes value-added bagged concrete, stucco, mortar and block products that utilize fly ash through its construction materials segment. Headwaters' historical focus has been on using technology to add value to fossil fuels, particularly coal. The acquisition of ISG provided Headwaters with a significant position in the last phase of the coal value chain due to ISG's competencies in managing CCPs. The acquisition of ISG also brought to Headwaters substantial management depth, comprehensive corporate infrastructure and critical mass in revenues and operating income. In order to obtain the cash necessary to acquire ISG and retire the ISG debt, Headwaters issued $175,000,000 of new debt consisting of $155,000,000 of senior secured debt with a five-year term and a variable interest rate and $20,000,000 of subordinated debt with an approximate five-year term and a fixed interest rate. ISG management participated in one-half, or $10,000,000, of the subordinated debt. Total cash proceeds from the issuance of new debt, net of debt discounts, was $169,950,000. Headwaters also incurred approximately $6,200,000 of debt issue costs to place the new debt, which had an initial combined effective weighted-average interest rate of approximately 9.0%. The following table sets forth the total consideration paid to acquire ISG. (in thousands, except per-share amount) ------------------------------------------------------------------------- Fair value of Headwaters stock (2,100 shares at $15.58 per share) $ 32,718 Cash paid to ISG stockholders 32,700 Cash paid to retire ISG debt and related accrued interest 184,638 Costs directly related to acquisition 7,800 ------------ $257,856 ============ The value of Headwaters' 2,100,000 shares of common stock issued was determined using the average market price of Headwaters' stock over a five-day period, consisting of the day the terms of acquisition were agreed to and announced and two days prior to and two days subsequent to that day. F-18 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ The ISG acquisition was accounted for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their estimated fair values as of September 19, 2002. An adjusted allocation of the purchase price, which was not materially different from the preliminary allocation, was completed in 2003. The adjustments made related primarily to the completion of property, plant and equipment valuations, income tax returns for ISG for the period ended September 18, 2002 and certain valuations of other liabilities acquired. Approximately $109,164,000 of the purchase price was allocated to identifiable intangible assets consisting primarily of contracts with coal-fired electric power generation plants and patents. This amount is being amortized over the estimated combined useful life of approximately 20 years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, none of which is tax deductible. All of the intangible assets and all of the goodwill were allocated to the CCP segment. The following table sets forth the allocation of the total consideration to the tangible and intangible assets acquired and liabilities assumed. (in thousands) ------------------------------------------------------------------------- Cash $ 19,238 Trade receivables, net 33,820 Inventories and other assets 11,794 Property, plant and equipment 48,981 Intangible assets acquired: Contracts (20 years) 106,400 Patents (7 1/2 years) 2,764 Goodwill 107,873 Accounts payable and accrued liabilities (24,294) Net deferred income tax liabilities (48,720) ------------ Net assets acquired $257,856 ============ 4. Segment Reporting Until Headwaters acquired ISG in September 2002, Headwaters operated in and reported as a single industry segment, alternative energy. Since the acquisition of ISG, Headwaters has operated in three business segments, alternative energy, CCPs, and construction materials. VFL operates in the CCP segment and all of the other businesses acquired by Headwaters in 2004 operate in the construction materials segment. These segments are managed and evaluated separately by management based on fundamental differences in their operations, products and services. The alternative energy segment includes Headwaters' traditional coal-based solid alternative fuels business and HTI's business of developing catalyst technologies to convert coal and heavy oil into environmentally-friendly, higher-value liquid fuels, as well as nanocatalyst processes and applications. Revenues for this segment primarily include sales of chemical reagents and license fees. The CCP segment markets coal combustion products such as fly ash and bottom ash, known as CCPs, to the building products and ready mix concrete industries. Headwaters markets CCPs to replace manufactured or mined materials, such as portland cement, lime, agricultural gypsum, fired lightweight aggregate, granite aggregate and limestone. Headwaters has long-term contracts, primarily with coal-fired electric power generation plants pursuant to which it manages the post-combustion operations for the utilities. CCP revenues consist primarily of product sales with a smaller amount of service revenue. Prior to 2004, the businesses in the construction materials segment manufactured and distributed value-added bagged concrete, stucco, mortar and block products. The acquisition of SCP expanded Headwaters' concrete block business and the acquisition of Eldorado added manufactured architectural stone to the construction materials product line. Tapco is a leading designer, manufacturer and marketer of building products used in exterior residential home improvement and construction. Revenues for the construction materials segment consist of product sales to wholesale and retail distributors, contractors and other users of building products and construction materials. F-19 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ The following segment information for has been prepared in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The accounting policies of the segments are the same as those described in Note 2. Performance of the segments is evaluated primarily on operating income. Intersegment sales are immaterial. Segment costs and expenses considered in deriving segment operating income include cost of revenues, depreciation and amortization, research and development, and segment-specific selling, general and administrative expenses. Amounts included in the "Corporate" column represent expenses not specifically attributable to any segment and include administrative departmental costs and general corporate overhead. Segment assets reflect those specifically attributable to individual segments and primarily include accounts receivable, inventories, property, plant and equipment, intangible assets and goodwill. Other assets are included in the "Corporate" column. Segment information for CCPs and construction materials for 2002 represents ISG's results for 12 days. Segment information for CCPs for 2004 includes VFL's results for six months. Segment information for construction materials for 2004 includes Eldorado's results for four months, SCP's results for three months and Tapco's results for 23 days.
2002 -------------------------------------------------------------------- Alternative Construction (in thousands) Energy CCPs Materials Corporate Totals - ---------------------------------------------------------------------------------------------------------------- Segment revenue $ 110,753 $ 6,818 $ 1,774 $ -- $ 119,345 ==================================================================== Depreciation and amortization $ (1,265) $ (380) $ (32) $ (83) $ (1,760) ==================================================================== Operating income (loss) $ 48,348 $ 1,514 $ 118 $ (8,946) $ 41,034 ======================================================= Net interest income 447 Other income (expense), net (1,245) Income tax provision (15,950) ------------ Net income $ 24,286 ============ Capital expenditures $ 546 $ 236 $ -- $ 14 $ 796 ==================================================================== Segment assets $ 36,060 $ 286,002 $ 21,869 $ 28,926 $ 372,857 ==================================================================== 2003 -------------------------------------------------------------------- Alternative Construction (in thousands) Energy CCPs Materials Corporate Totals - ---------------------------------------------------------------------------------------------------------------- Segment revenue $ 168,342 $ 169,938 $ 49,350 $ -- $ 387,630 ==================================================================== Depreciation and amortization $ (1,254) $ (10,822) $ (624) $ (282) $ (12,982) ==================================================================== Operating income (loss) $ 65,002 $ 21,521 $ 4,734 $ (14,138) $ 77,119 ======================================================= Net interest expense (15,377) Other income (expense), net (1,661) Income tax provision (23,450) ------------ Net income $ 36,631 ============ Capital expenditures $ 166 $ 8,297 $ 732 $ 521 $ 9,716 ==================================================================== Segment assets $ 34,959 $ 283,916 $ 22,341 $ 32,059 $ 373,275 ==================================================================== F-20
HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ 2004 -------------------------------------------------------------------- Alternative Construction (in thousands) Energy CCPs Materials Corporate Totals - ---------------------------------------------------------------------------------------------------------------- Segment revenue $ 209,773 $ 210,155 $ 134,027 $ -- $ 553,955 ==================================================================== Depreciation and amortization $ (1,373) $ (12,617) $ (6,227) $ (331) $ (20,548) ==================================================================== Operating income (loss) $ 98,995 $ 30,386 $ 17,261 $ (18,885) $ 127,757 ======================================================= Net interest expense (18,509) Other income (expense), net (4,141) Income tax provision (40,790) ------------ Net income $ 64,317 ============ Capital expenditures $ 745 $ 6,037 $ 7,036 $ 149 $ 13,967 ==================================================================== Segment assets $ 44,156 $ 316,982 $1,104,980 $ 74,661 $1,540,779 ==================================================================== 5. Receivables Activity in the trade receivables allowance account was as follows. Balance at Charged to Additions Balance at beginning expense or from Accounts end of (in thousands) of period revenue acquisitions written off period ------------------------------------------- ------------- ------------ ------------- ------------- ------------ Fiscal year ended September 30, 2002 $ 0 $ -- $ 412 $ -- $ 412 Fiscal year ended September 30, 2003 412 516 -- (351) 577 Fiscal year ended September 30, 2004 577 2,393 3,131 (998) 5,103
Notes receivable generally relate to nonoperating activities and accordingly, losses are included in other expense in the consolidated statements of income. Net losses recognized on notes receivable were approximately $743,000 in 2002, $2,142,000 in 2003 and $2,622,000 in 2004. 6. Inventories Inventories consisted of the following at September 30: (in thousands) 2003 2004 ---------------------------------------------------------------------------- Raw materials $ 1,059 $ 8,517 Work in process -- 187 Finished goods 6,768 35,108 ----------------------- $ 7,827 $ 43,812 ======================= 7. Property, Plant and Equipment Property, plant and equipment consisted of the following at September 30:
Estimated useful (in thousands) lives 2003 2004 --------------------------------------------------------------------------------------- Land and improvements 8 - 30 years $ 10,428 $ 14,041 Buildings and improvements 3 - 40 years 10,128 34,269 Equipment and vehicles 2 - 30 years 31,090 88,791 Dies and molds 1 1/2 - 10 years -- 28,986 Construction in progress 7,793 8,052 ------------------------ 59,439 174,139 Less accumulated depreciation (6,696) (16,528) ------------------------ Net property, plant and equipment $ 52,743 $ 157,611 ========================
F-21 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Depreciation expense was approximately $669,000 in 2002, $6,387,000 in 2003 and $11,035,000 in 2004. 8. Intangible Assets and Goodwill Intangible Assets - With the exception of certain disclosures that were not permitted to be early implemented, Headwaters implemented SFAS No. 142 effective with the acquisitions of HTI in August 2001 and ISG in September 2002. Effective October 1, 2002, Headwaters fully implemented SFAS No. 142, which mandates the following disclosures. Headwaters has no identified intangible assets that are not being amortized. The following table summarizes the gross carrying amounts and the related accumulated amortization of all amortizable intangible assets as of September 30:
2003 2004 ------------------------------------------------------------------ Gross Gross Estimated Carrying Accumulated Carrying Accumulated (in thousands) useful lives Amount Amortization Amount Amortization --------------------------------------------------------------------------------------------------------------- CCP contracts 8 - 20 years $106,400 $5,499 $117,690 $11,524 Customer relationships 7 1/2 - 15 years -- -- 68,331 452 Trade names 5 - 20 years -- -- 63,657 268 Patents and patented technologies 7 1/2 - 15 years 12,464 1,666 52,464 2,969 Non-competition agreements 2 - 3 1/2 years -- -- 10,422 867 Other 9 - 17 1/4 years 1,522 807 3,382 1,063 ----------------------------------------------------------------- $120,386 $7,972 $315,946 $17,143 =================================================================
Total amortization expense related to intangible assets was approximately $998,000 in 2002, $6,504,000 in 2003 and $9,171,000 in 2004. Total estimated annual amortization expense for fiscal years 2005 through 2009 is shown in the following table. Year ending September 30: (in thousands) --------------------------------------------- 2005 $24,449 2006 24,244 2007 21,899 2008 20,350 2009 20,138 Goodwill - The changes in the carrying amount of goodwill, by segment, are as follows.
Alternative Construction (in thousands) Energy CCPs Materials Total ----------------------------------------------------------------------------------------------------- Balances as of September 30, 2002 $4,258 $109,109 $ -- $113,367 Adjustment to previously recorded purchase price -- (1,236) -- (1,236) ----------------------------------------------------------------- Balances as of September 30, 2003 4,258 107,873 -- 112,131 Goodwill acquired during the year -- 8,125 695,140 703,265 ----------------------------------------------------------------- Balances as of September 30, 2004 $4,258 $115,998 $695,140 $815,396 =================================================================
In accordance with the requirements of SFAS No. 142, Headwaters does not amortize goodwill, all of which relates to acquisitions that occurred from 2001 through 2004. SFAS No. 142 requires Headwaters to periodically perform tests for goodwill impairment. Step 1 of the initial impairment test was required to be performed no later than March 31, 2003; thereafter impairment testing is required to be performed no less often than annually, or sooner if evidence of possible impairment arises. Impairment testing is performed at the reporting unit level and Headwaters has identified four reporting units: (i) Headwaters Energy Services (formerly Covol Fuels division) and F-22 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ (ii) HTI (which together comprise the alternative energy segment), (iii) CCPs and (iv) construction materials. Currently, goodwill exists in the HTI, CCPs and construction materials reporting units. Step 1 of impairment testing consists of determining and comparing the fair values of the reporting units to the carrying values of those reporting units. If step 1 were to be failed for any of the reporting units, indicating a potential impairment, Headwaters would be required to complete step 2, which is a more detailed test to calculate the implied fair value of goodwill, and compare that value to the carrying value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is required to be recorded. Headwaters performed step 1 impairment tests of the recorded goodwill in the HTI and CCPs reporting units as of October 1, 2002, the beginning of fiscal year 2003. Headwaters performed its annual, recurring tests for potential impairment using the dates of June 30, 2003 and 2004. The tests indicated that the fair values of the reporting units exceeded their carrying values at October 1, 2002, June 30, 2003 and June 30, 2004. Accordingly, step 2 of the impairment tests was not required to be performed, and no impairment charge was necessary. 9. Liabilities Other Accrued Liabilities - Other accrued liabilities consisted of the following at September 30:
(in thousands) 2003 2004 ----------------------------------------------------------------------------------------------- Acquisition-related accruals $ -- $24,676 Cost of product not yet invoiced 5,520 10,763 Unamortized non-refundable license fees 3,865 7,227 Other 11,002 30,186 ------------------------------- $20,387 $72,852 =============================== Long-term Debt - Long-term debt consisted of the following at September 30: (in thousands) 2003 2004 ----------------------------------------------------------------------------------------------- Senior secured debt $ -- $790,000 Convertible senior subordinated notes -- 172,500 Notes payable to a bank -- 9,787 Senior secured debt with a face amount totaling $114,851 111,766 -- Senior subordinated debentures with a face amount totaling $20,000 19,682 -- Other 71 227 ------------------------------- 131,519 972,514 Less: current portion (27,475) (57,873) ------------------------------- Total long-term debt $104,044 $914,641 ===============================
New 2004 Senior Secured Credit Agreements - In September 2004 and as amended in October 2004, Headwaters entered into two credit agreements with a syndication of lenders under which a total of $790,000,000 was borrowed under term loan arrangements and which provide for $60,000,000 to be borrowed under a revolving credit arrangement. The proceeds were used to acquire Tapco and repay in full the remaining balance due under Headwaters' former 2004 senior secured credit agreement obtained in March 2004 (see below). The $790,000,000 of term loan borrowings consisted of a first lien term loan in the amount of $640,000,000 and a second lien term loan in the amount of $150,000,000. Both term loans are secured by all assets of Headwaters and are senior in priority to all other debt. The first lien term loan bears interest, at Headwaters' option, at either i) the London Interbank Offered Rate ("LIBOR") plus 3.0%, if the "total leverage ratio," as defined, is less than or equal to 3.75:1.0, and if not, at LIBOR plus 3.25%, or ii) the "base rate" plus 2.0%, if the total leverage ratio is less than or equal to 3.75:1.0, and if not, at the base rate plus 2.25%. Base rate is defined as the higher of the rate announced by Morgan F-23 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Stanley Senior Funding and the overnight rate charged by the Federal Reserve Bank of New York plus 0.5%. The initial interest rate on the first lien debt was set at 6.5%, but was subsequently reduced to approximately 5.4% in October 2004 pursuant to the terms of the agreement. The second lien term loan bears interest, also at Headwaters' option, at either LIBOR plus 5.5%, or the "base rate" plus 4.5%. The initial interest rate on the second lien debt was set at 9.75%, but was subsequently reduced to approximately 8.15% in October 2004 pursuant to the terms of the agreement. Headwaters can lock in new rates for both the first lien and second lien loans for one, two, three or six months. The next rate change will occur in January 2005. The first lien term loan is repayable in quarterly installments of principal and interest, with minimum required quarterly principal repayments of $12,000,000 commencing in November 2004 through August 2007, then $4,000,000 through August 2010, with three repayments of approximately $149,333,000 through April 2011, the termination date of the first lien loan agreement. The second lien term loan is due September 2012, with no required principal repayments prior to that time. Interest is generally due on a quarterly basis. There are mandatory prepayments of the first lien term loan in the event of certain asset sales and debt and equity issuances and from "excess cash flow," as defined. Optional prepayments of the first lien term loan are permitted without penalty or premium. Optional prepayments of the second lien term loan are permissible only to the extent Headwaters issues new equity securities and then are further limited to a maximum of $50,000,000, so long as the first lien term loan remains outstanding. Any optional prepayments of the second lien term loan bear a penalty of 3% of prepayments made in the first year, 2% of prepayments made in the second year, and 1% of prepayments made in the third year. Once repaid in full or in part, no further reborrowings under either of the term loan arrangements can be made. In October 2004, Headwaters repaid a total of $24,000,000 of the first lien term loan, which amount otherwise would have been due in November 2004 and February 2005. Borrowings under the revolving credit arrangement are generally subject to the terms of the first lien loan agreement and bear interest at either LIBOR plus 1.75% to 2.5%, or the base rate plus 0.75% to 1.5%. Borrowings and reborrowings of any available portion of the $60,000,000 revolver can be made at any time through September 2009, at which time all loans must be repaid and the revolving credit arrangement terminates. The fees for the unused portion of the revolving credit arrangement range from 0.5% to 0.75%. Finally, the credit agreement allows for the issuance of letters of credit, provided there is capacity under the revolving credit arrangement. As of September 30, 2004, three letters of credit totaling $2,070,000 were outstanding, with expiration dates ranging from October 2004 to June 2005. The credit agreements contain restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt, investments, merger and acquisition activity, asset sales and liens, capital expenditures in excess of $50,000,000 in any fiscal year (increasing to $60,000,000 in 2011) and the payment of dividends, among others. In addition, Headwaters must maintain certain leverage and fixed charge coverage ratios, as those terms are defined in the agreements. Under the most restrictive covenants, contained in the first lien agreement, Headwaters must maintain i) a total leverage ratio of 5.0:1.0 or less, declining periodically to 3.5:1.0 in 2010; ii) a maximum ratio of consolidated senior funded indebtedness minus subordinated indebtedness to EBITDA of 4.0:1.0, declining periodically to 2.5:1.0 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 1.10:1.0 through September 30, 2006, and 1.25:1.0 thereafter. Headwaters is in compliance with all debt covenants as of September 30, 2004. As required by the new senior secured credit facility, Headwaters entered into certain other agreements to limit its exposure to interest rate increases. The first set of agreements established the maximum LIBOR rate for $300,000,000 of the senior secured debt at 5.0% through September 8, 2005. The second set of agreements sets the LIBOR rate at 3.71% for $300,000,000 of this debt for the period commencing September 8, 2005 through September 8, 2007. Headwaters accounts for these agreements as cash flow hedges, and accordingly, the fair market value of the hedges is reflected in the consolidated balance sheet as either other assets or other liabilities. The hedges had a fair market value of $0 at September 30, 2004. Former 2004 Senior Secured Credit Agreement - In March 2004, Headwaters entered into a credit agreement with a group of banks under which a total of $50,000,000 was borrowed under a term loan arrangement and which, as amended in June 2004, provided for an additional $75,000,000 to be borrowed under a revolving credit arrangement. The initial $50,000,000 of proceeds were used F-24 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ to repay in full the remaining balance due under Headwaters' former 2002 senior secured credit agreement (see below). Debt issuance costs of approximately $1,300,000 were incurred in issuing this debt, all of which was expensed in 2004. The term loan was secured by all assets of Headwaters, bore interest at a variable rate linked to the Eurodollar rate or the lenders' base rate, both as defined in the agreement, and was repayable in quarterly installments of $1,250,000 through September 2007, with a final payment of $32,500,000 due November 2007. In connection with the purchase of Eldorado in June 2004, a total of $44,000,000 was borrowed under the revolving credit arrangement, all of which was repaid in June 2004. In connection with the purchase of SCP in July 2004, a total of $20,000,000 was borrowed under the revolving credit arrangement, all of which was repaid in September 2004. Also in September 2004, the remaining balance outstanding under the term loan was repaid in full using proceeds from the new 2004 senior secured credit facility described above. Convertible Senior Subordinated Notes - In connection with the Eldorado acquisition, Headwaters issued $172,500,000 of 2 7/8% convertible senior subordinated notes due 2016. These notes are subordinate to the new 2004 senior secured debt described above. Holders of the notes may convert the notes into shares of Headwaters' common stock at a conversion rate of 33.3333 shares per $1,000 principal amount ($30 conversion price), or approximately 5,750,000 aggregate shares of common stock, contingent upon certain events. The conversion rate adjusts for events related to Headwaters' common stock, including common stock issued as a dividend, rights or warrants to purchase common stock issued to all holders of Headwaters' common stock, and other similar rights or events that apply to all holders of common stock. The notes are convertible if any of the following five criteria are met: 1) satisfaction of a market price condition which becomes operative if the common stock trading price reaches $39 per share for a certain period of time prior to June 1, 2011 and at any time after that date; 2) a credit rating, if any, assigned to the notes is three or more rating subcategories below the initial rating, if any; 3) the notes trade at 98% of the product of the common stock trading price and the number of shares of common stock issuable upon conversion of $1,000 principal amount of the notes, except this provision is not available if the closing common stock price is between 100% and 130% of the current conversion price of the notes; 4) Headwaters calls the notes for redemption; and 5) certain corporate transactions occur, including distribution of rights or warrants to all common stockholders entitling them to purchase common stock at less than the current market price or distribution of common stock, cash or other assets, debt securities or certain rights to purchase securities where the distribution has a per share value exceeding 5% of the closing common stock price on the day immediately preceding the declaration date for such distribution. In addition, the notes are convertible if Headwaters enters into an agreement pursuant to which Headwaters' common stock would be converted into cash, securities or other property. Headwaters may call the notes for redemption at any time on or after June 1, 2007 and prior to June 4, 2011 if the closing common stock price exceeds 130% of the conversion price for 20 trading days in any consecutive 30-day trading period (in which case Headwaters must provide a "make whole" payment of the present value of all remaining interest payments on the redeemed notes through June 1, 2011). In addition, the holder of the notes has the right to require Headwaters to repurchase all or a portion of the notes on June 1, 2011 or if a fundamental change in common stock has occurred, including termination of trading. Subsequent to June 1, 2011, the notes require an additional interest payment equal to 0.40% of the average trading price of the notes if the trading price equals 120% or more of the principal amount of the notes. Headwaters has not included the additional shares of common stock contingently issuable under the notes in its 2004 diluted EPS as none of the contingencies have been met. However, as explained in more detail in Note 13, implementation of EITF 04-08 in December 2004 will require Headwaters to include in its diluted EPS calculation, on an if-converted basis, the additional shares issuable under the notes. Former 2002 Senior Secured Credit Agreement - In connection with the ISG acquisition in 2002, Headwaters entered into a $175,000,000 senior secured credit agreement with a syndication of lenders, under which a total of $155,000,000 was borrowed as a term loan on the acquisition date. The credit agreement also allowed up to $20,000,000 to be borrowed under a revolving F-25 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ credit arrangement. The debt was issued at a 3% discount and Headwaters received net cash proceeds of $150,350,000. The original issue discount was accreted using the effective interest method and the accretion was recorded as interest expense. The debt was secured by all assets of Headwaters, bore interest at a variable rate linked to the Eurodollar rate or the lenders' base rate, both as defined in the agreement (approximately 5.4% at September 30, 2003) and was repayable in quarterly installments through August 30, 2007. During the December 2003 quarter, principal repayments totaling $39,714,000 were made, including $33,471,000 of optional prepayments. During the March 2004 quarter, the remaining balance was repaid in full using available cash and $50,000,000 of proceeds from the former 2004 senior secured credit facility described above. In connection with the full repayment of this debt, non cash interest expense totaling approximately $5,023,000 was recognized in the March 2004 quarter, representing amortization of all of the remaining debt discount and debt issue costs related to this debt. Senior Subordinated Debentures - In connection with the ISG acquisition, Headwaters also entered into a $20,000,000 subordinated loan agreement, under which senior subordinated debentures were issued at a 2% discount, with Headwaters receiving net cash proceeds of $19,600,000. The original issue discount was accreted using the effective interest method and the accretion was recorded as interest expense. ISG management participated in one-half, or $10,000,000, of the $20,000,000 of debt issued. The other half was issued to a corporation. The debentures bore interest at 18% and were due in 2007; however, in December 2003, the debentures were repaid in full, including a 4%, or $400,000, prepayment charge paid to the corporation holding $10,000,000 of the debentures. This charge, along with all remaining unamortized debt discount and debt issue costs, is included in interest expense in the consolidated statement of income. Notes Payable to a Bank - In connection with the acquisition of SCP, Headwaters assumed SCP's obligations under its notes payable to a bank. The notes require monthly interest and quarterly principal payments and are repayable from April 2007 through April 2015. Two of the notes bear interest at LIBOR plus 0.5%, subject to an interest rate floor of 4.5% (4.5% at September 30, 2004), and the remaining note (in the amount of $1,100,000) bears interest at 0.5% below the bank's base rate (4.25% at September 30, 2004). Because the notes are callable by the bank, Headwaters has included the outstanding balance in current portion of long-term debt in the consolidated balance sheet. The notes are collateralized by certain assets of SCP and contain financial covenants, the most restrictive of which specifies a minimum fixed charge coverage ratio. Headwaters was in compliance with all debt covenants at September 30, 2004. Notes Payable to Former VFL Stockholders - In connection with the VFL acquisition, Headwaters issued $19,000,000 of notes payable to the VFL stockholders, $13,000,000 of which was repaid in June 2004 and $6,000,000 of which was repaid in July 2004. The interest rate on $16,000,000 of the notes was 9% and the interest rate on the remaining $3,000,000 of notes was variable. Short-term Borrowings with an Investment Bank - Headwaters had an arrangement with an investment bank under which Headwaters could borrow up to 90% of the value of the portfolio of Headwaters' short-term investments with the investment bank, limited to a maximum amount of $20,000,000. Headwaters borrowed $10,000,000 under this arrangement during June 2004, all of which was repaid in June 2004. In July 2004, Headwaters borrowed $6,000,000 under this arrangement, all of which was repaid in July 2004. This arrangement is no longer active. Interest Rates and Debt Maturities - The weighted-average interest rate on the face amount of outstanding long-term debt, disregarding amortization of debt issue costs and debt discount, was approximately 7.2% at September 30, 2003 and 6.3% at September 30, 2004. Future maturities of long-term debt as of September 30, 2004 were as follows: (in Year ending September 30, thousands) ------------------------------------------------ 2005 $ 57,873 2006 48,089 2007 48,051 2008 16,001 2009 16,000 Thereafter 786,500 ------------- Total long-term debt $972,514 ============= F-26 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Interest Costs - During 2002, Headwaters incurred total interest costs of approximately $553,000, including approximately $136,000 of non-cash interest expense. No interest costs were capitalized in 2002. During 2003, Headwaters incurred total interest costs of approximately $15,917,000, including approximately $3,857,000 of non-cash interest expense and approximately $230,000 of interest costs that were capitalized. During 2004, Headwaters incurred total interest costs of approximately $19,888,000, including approximately $6,031,000 of non-cash interest expense and approximately $435,000 of interest costs that were capitalized. 10. Fair Value of Financial Instruments Headwaters' financial instruments consist primarily of cash and cash equivalents, short-term trading investments, trade and notes receivable, accounts payable and long-term debt. All of these financial instruments except long-term debt are either carried at fair value in the balance sheet or are of a short-term nature. Accordingly, the carrying values for those financial instruments as reflected in the consolidated balance sheets closely approximated their fair values. If all of Headwaters' debt outstanding as of September 30, 2003 carried an average interest rate of 7%, management's estimate of the market interest rate as of September 30, 2003, the fair value of Headwaters' total long-term debt at September 30, 2003 would be approximately $131,500,000. With the exception of the 2 7/8% convertible senior subordinated notes due 2016, substantially all of Headwaters' debt outstanding as of September 30, 2004 consisted of variable-rate debt. Using a market interest rate for the convertible senior subordinated notes of approximately 2.3%, the fair value of all outstanding long-term debt as of September 30, 2004 would be approximately $978,892,000. The market interest rate for the convertible senior subordinated notes decreased to approximately 2.3% during the period June 2004 to September 2004 due primarily to the increase in Headwaters' common stock price during the period. 11. Income Taxes Headwaters recorded income tax provisions with an effective tax rate of approximately 40%, 39% and 39% in 2002, 2003 and 2004, respectively. The income tax provision consisted of the following for the years ended September 30:
(in thousands) 2002 2003 2004 --------------------------------------------------------------------------------------------------- Current tax provision: Federal $ 3,490 $20,726 $38,374 State 920 3,602 3,699 ----------------------------------------- Total current tax provision 4,410 24,328 42,073 Deferred tax provision (benefit): Federal 9,720 (774) (1,273) State 1,820 (104) (10) ----------------------------------------- Total deferred tax provision (benefit) 11,540 (878) (1,283) ----------------------------------------- Total income tax provision $15,950 $23,450 $40,790 =========================================
As of September 30, 2003, Headwaters had deferred tax assets related to federal and state net operating loss ("NOL") carryforwards of approximately $424,000. During 2004, Headwaters utilized its remaining federal NOL carryforwards and as of September 30, 2004, has a deferred tax asset related to state NOL carryforwards of approximately $40,000. The provision for income taxes differs from the statutory federal income tax rate due to the following.
(in thousands) 2002 2003 2004 --------------------------------------------------------------------------------------------------- Tax provision at U.S. statutory rate $14,083 $21,028 $36,787 State income taxes, net of federal tax effect 1,780 2,352 2,901 Nondeductible expenses 59 302 764 Other 28 (232) 338 ----------------------------------------- Income tax provision $15,950 $23,450 $40,790 =========================================
F-27 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Headwaters' deferred income tax assets and liabilities, in particular deferred tax liabilities related to intangible assets and property, plant and equipment, changed significantly during 2004 due to the 2004 acquisitions. The components of Headwaters' deferred income tax assets and liabilities were as follows as of September 30:
(in thousands) 2003 2004 --------------------------------------------------------------------------------------------------- Deferred tax assets: Estimated liabilities $ 1,430 $ 3,933 Unamortized non-refundable license fees 1,885 3,672 Write-down of notes receivable 1,606 2,124 Trade receivable allowances 224 1,136 Federal and state net operating loss carryforwards 424 40 Other 225 453 --------------------------- Total deferred tax assets 5,794 11,358 --------------------------- Deferred tax liabilities: Intangible asset basis differences (44,439) (101,042) Property, plant and equipment basis differences (7,679) (21,387) Interest on convertible senior subordinated notes -- (1,081) Other (3,628) (5,284) --------------------------- Total deferred tax liabilities (55,746) (128,794) --------------------------- Net deferred tax liability $(49,952) $(117,436) ===========================
12. Stockholders' Equity Preferred Stock - Headwaters has 10,000,000 shares of authorized preferred stock, none of which was issued or outstanding as of September 30, 2003 or 2004. Issuance of Common Stock - Headwaters has an effective universal shelf registration statement on file with the SEC that can be used for the sale of common stock, preferred stock, convertible debt and other securities. In December 2003, Headwaters filed a prospectus supplement to the shelf registration statement and issued 4,750,000 shares of common stock under this shelf registration statement in an underwritten public offering. In January 2004, an additional 208,457 shares of common stock were issued upon exercise of the underwriters' over-allotment option. In total, proceeds of $90,258,000 were received, net of offering costs of $6,432,000. Following these issuances of common stock, approximately $53,000,000 remains available for future offerings of securities under the shelf registration statement. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering would commence under the registration statement. Restricted Stock Awards - In 2004, Headwaters issued approximately 61,000 shares of restricted common stock to officers and employees, all under terms of the 2003 Stock Incentive Plan. The restricted stock was issued at no cost to the recipients and vests over five years. The weighted average grant date fair value of the restricted stock awards was $23.57 per share. Headwaters amortizes the expense related to the restricted stock awards over the vesting period using the straight-line method, which expense totaled approximately $136,000 in 2004. Stock Incentive Plans - In March 2004, Headwaters' stockholders approved an increase in the number of shares available for award grants under Headwaters' 2003 Stock Incentive Plan by 1,500,000. As of September 30, 2004, Headwaters had three stock incentive plans (the "Incentive Plans") under which a total of 5,750,000 shares of common stock were reserved for ultimate issuance. As of September 30, 2004, options or other awards for approximately 1,163,000 shares of common stock could be granted under the Plans. F-28 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ A committee of Headwaters' Board of Directors, or in its absence, the Board (the "Committee"), administers and interprets the Incentive Plans. This Committee is authorized to grant options and other awards both under the Incentive Plans and outside of any Incentive Plan to eligible employees, officers, directors, and consultants of Headwaters. Two of the Incentive Plans provide for the granting of both incentive stock options and non-statutory stock options, as well as other stock awards; the other Incentive Plan provides only for the granting of non-statutory stock options. Terms of options and other awards granted under the Incentive Plans, including vesting requirements, are determined by the Committee. Options granted under the Incentive Plans vest over periods ranging up to ten years, expire ten years from the date of grant and are not transferable other than by will or by the laws of descent and distribution. Incentive stock option grants must meet the requirements of the Internal Revenue Code. Stock Options - The following table is a summary of activity for all of Headwaters' stock options, including options not granted under the Incentive Plans, for the years ended September 30:
2002 2003 2004 ---------------------------------------------------------------------- Weighted- Weighted- Weighted- average average average exercise exercise exercise (in thousands) Shares price Shares price Shares price --------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 3,283 $ 5.80 2,990 $ 7.56 3,615 $10.88 Granted 611 13.38 1,188 16.45 1,162 26.07 Exercised (852) 5.02 (514) 4.05 (826) 9.70 Canceled (52) 6.60 (49) 14.48 (153) 15.80 ---------------------------------------------------------------------- Outstanding at end of year 2,990 $ 7.56 3,615 $10.88 3,798 $15.53 ====================================================================== Exercisable at end of year 1,898 $ 6.08 1,992 $ 7.51 1,821 $ 8.90 ====================================================================== Weighted-average fair value of options granted during the year below market none none none Weighted-average fair value of options granted during the year at market $ 7.35 $ 7.16 $11.21 Weighted-average fair value of options granted during the year above market none none none The following table summarizes information about all stock options outstanding at September 30, 2004. (in thousands) Outstanding options Exercisable options ---------------------------------------------------------------------------------------------------- Weighted-average Number remaining Weighted- Number Weighted- outstanding at contractual life average exercisable at average Range of exercise September 30, in years exercise September 30, exercise prices 2004 price 2004 price ---------------------------------------------------------------------------------------------------- $0.01 to $5.88 873 2.7 $ 3.90 858 $ 3.94 $8.25 to $13.85 838 6.2 12.33 668 12.07 $14.05 to $16.97 963 8.4 16.35 295 16.17 $21.29 to $25.76 502 9.6 23.55 -- -- $28.31 to $28.49 622 10.0 28.40 -- -- ----------------- --------------- 3,798 1,821 ================= ===============
F-29 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Stockholder Approval of Options - The following table presents information related to stockholder approval of equity compensation plans, which information currently represents only stock options, as of September 30, 2004.
(in thousands) ------------------------------------------------------------------------------------------------------------ Shares to be Weighted-average Shares remaining available issued upon exercise price of for future issuance under Plan Category exercise of options outstanding options existing equity compensation plans ------------------------------------------------------------------------------------------------------------ Plans approved by stockholders 2,559 $14.96 1,048 Plans not approved by stockholders 1,239 16.70 115 ------------------------------------------------------------------------ Total 3,798 $15.53 1,163 ========================================================================
As discussed above, Headwaters has three Incentive Plans under which options have been granted. Headwaters has also issued options not covered by any Plan. Stockholders have approved two of the three Incentive Plans. The amounts included in the caption "not approved by stockholders" in the above table represent amounts applicable under the Incentive Plan not approved by stockholders plus all stock options granted outside of any Incentive Plan. Common Stock Warrants - As of September 30, 2003, there were warrants outstanding for the purchase of approximately 56,000 shares of common stock at a price of $1.56 per share. The warrants were exercised in 2004 and as of September 30, 2004, there were no warrants outstanding. 13. Earnings per Share The following table sets forth the computation of basic and diluted EPS for the years ended September 30:
(in thousands, except per-share data) 2002 2003 2004 ------------------------------------------------------------------------------------------------------- Numerator - net income $24,286 $36,631 $64,317 ==================================== Denominator: Denominator for basic earnings per share - weighted-average shares outstanding 24,234 27,083 31,774 Effect of dilutive securities - shares issuable upon exercise of options and warrants 1,491 1,112 1,245 ------------------------------------ Denominator for diluted earnings per share - weighted-average shares outstanding after assumed exercises 25,725 28,195 33,019 ==================================== Basic earnings per share $ 1.00 $ 1.35 $ 2.02 ==================================== Diluted earnings per share $ 0.94 $ 1.30 $ 1.95 ====================================
During all periods presented, Headwaters' potentially dilutive securities consisted of options and warrants for the purchase of common stock. Anti-dilutive securities not considered in the diluted EPS calculation totaled approximately 210,000 shares in 2002, 655,000 shares in 2003 and 30,000 shares in 2004. In addition, for 2004, 5,750,000 shares issuable upon conversion of Headwaters' convertible senior subordinated notes represent potentially dilutive securities; however, these shares were not included in the diluted calculation for 2004. F-30 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ In September 2004, the EITF reached a consensus requiring the inclusion in diluted EPS calculations of contingently convertible instruments (EITF Issue 04-08). This consensus will be effective for periods ending after December 15, 2004 and will require Headwaters to include in its diluted EPS calculation, on an if-converted basis, the additional shares issuable under terms of Headwaters' outstanding convertible senior subordinated notes described in Note 9. The EITF consensus, when implemented, must be applied to all applicable prior periods, which for Headwaters will be the quarters ended June 30, 2004 and September 30, 2004. Had Headwaters included the shares issuable upon conversion of the convertible senior subordinated notes in the 2004 EPS calculation using the if-converted method, for the period the notes were outstanding, diluted EPS would have been reduced by $0.07 per share to $1.88 per share. The implementation of EITF Issue 04-08 is expected to have a more significant effect on 2005 and future years' diluted EPS calculations than for 2004 because the convertible senior subordinated notes were outstanding for only four months in 2004. 14. Commitments and Contingencies Commitments and contingencies as of September 30, 2004 not disclosed elsewhere, are as follows. Leases - Rental expense was approximately $720,000 in 2002, $11,999,000 in 2003 and $14,618,000 in 2004. Headwaters has noncancellable operating leases for certain facilities and equipment. Most of these leases have renewal terms and expire in various years through 2017. As of September 30, 2004, minimum rental payments due under these leases are as follows. (in Year ending September 30: thousands) -------------------------------------------- 2005 $14,787 2006 11,210 2007 9,284 2008 5,507 2009 2,904 Thereafter 4,092 ------------- $47,784 ============= Sale, Purchase and Royalty Commitments - Certain CCP contracts with its customers require Headwaters to make minimum sales. Certain other CCP contracts with suppliers require Headwaters to make minimum purchases. Actual sales and purchases under contracts with minimum requirements were $895,000 and $11,446,000, respectively, for 2003 and $1,021,000 and $12,498,000, respectively, for 2004. As of September 30, 2004, these minimum requirements are as follows. (in thousands) ---------------------------- Minimum Minimum Year ending September 30: sales purchases ----------------------------------------------------------- 2005 $ 615 $13,459 2006 515 11,790 2007 375 8,981 2008 375 7,427 2009 375 7,211 Thereafter 63 14,650 ---------------------------- $2,318 $63,518 ============================ Headwaters currently pays a minimum royalty totaling $500,000 per year on certain net sales. If Headwaters terminates the royalty agreement, a one-time payment of $500,000 is required. Eldorado entered into an agreement with an entity which provides for that entity to manufacture and sell product to Eldorado. The agreement contains minimum purchase requirements during the initial term, which runs through October 2007, which aggregate approximately $1,918,000 at September 30, 2004. Amounts purchased under this agreement for the four months ended September 30, 2004 totaled approximately $105,000. The agreement includes both a buy-out option and a put option which become operable under certain conditions. F-31 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Employee Benefit Plans - Headwaters' Board of Directors has approved three employee benefit plans that were operative during 2002, 2003 and 2004: the Headwaters Incorporated 401(k) Profit Sharing Plan, the 2000 Employee Stock Purchase Plan, and the Headwaters Incorporated Incentive Bonus Plan. Headwaters' Board of Directors also approved a General Employee Bonus Plan that was in place for 2004. Substantially all employees of Headwaters are eligible to participate in the 401(k) and Stock Purchase Plans after meeting length of employment requirements. Only designated employees are eligible to participate in the Incentive Bonus Plan. The General Employee Bonus Plan covers substantially all employees not otherwise eligible to participate in any other performance-based bonus compensation arrangement (including the Incentive Bonus Plan and sales commission arrangements). Subsequent to September 30, 2004, Headwaters' Board of Directors also approved a Deferred Compensation Plan for certain designated employees, which plan will be effective as of January 1, 2005. 401(k) Plan. Under the terms of the 401(k) Plan, eligible employees may elect to make tax-deferred contributions of up to 50% of their compensation, subject to statutory limitations. Headwaters matches employee contributions up to a designated maximum rate and these matching contributions vest after a three-year period. Headwaters is not required to be profitable to make matching contributions. Stock Purchase Plan. The 2000 Employee Stock Purchase Plan provides eligible employees with an opportunity to increase their proprietary interest in Headwaters by purchasing Headwaters common stock on favorable terms and to pay for such purchases through payroll deductions. A total of 500,000 shares of common stock were initially reserved for issuance under the Plan, and approximately 307,000 shares are available for future issuance as of September 30, 2004. Under the Plan, employees purchase shares of stock directly from Headwaters, which shares are made available from treasury shares repurchased on the open market. The Plan is intended to comply with Section 423 of the Internal Revenue Code, but is not subject to the requirements of ERISA. Employees purchase stock through payroll deductions of 1% to 10% of cash compensation, subject to certain limitations. The stock is purchased in a series of quarterly offerings. The cost per share to the employee is 85% of the lesser of the fair market value at the beginning or the end of the offering period. Incentive Bonus Plan. The Incentive Bonus Plan, approved annually by the Compensation Committee of the Board of Directors, provides for annual cash bonuses to be paid if Headwaters accomplishes certain financial goals and if participating employees meet individual goals. A participant's cash bonus is based on Headwaters' success in meeting specified financial performance targets approved by the Compensation Committee of the Board of Directors, the employee's base pay, and individual performance during the year. Headwaters' financial goals are based upon an economic value added concept ("EVA") that purports to more closely align with a company's share price performance than other measurements of performance. General Bonus Plan. Under terms of the General Employee Bonus Plan, a participant's cash bonus is based on the employee's base pay, individual performance during the year and / or the performance of the employee's work unit. Acquired Subsidiaries' Benefit Plans. In addition to the plans described above, certain of the subsidiaries acquired by Headwaters in 2004 have or had employee benefit plan obligations. With the exception of Tapco's 401(k) Profit Sharing Plan, which will continue to operate through calendar 2005, all of these acquired subsidiaries' employee benefit plans have been or will be discontinued in the near future. Under the terms of Tapco's Profit Sharing Plan, Tapco has agreed to pay a certain percentage of most employees' salary into the Profit Sharing Plan on behalf of those employees. Total expense for all of Headwaters' benefit plans combined was approximately $3,300,000 in 2002, $5,768,000 in 2003 and $14,862,000 in 2004. Medical Insurance - Effective January 1, 2003, Headwaters adopted a self-insured medical insurance plan for its employees and the employees of all of its subsidiaries existing at that time. For the plan year ending December 31, 2004, there is stop-loss coverage for amounts in excess of $100,000 per individual and approximately $7,500,000 in the aggregate. Headwaters has contracted with a third-party administrator to assist in the payment and administration of claims. Insurance claims are recognized as expenses when incurred and include an estimate of costs for claims incurred F-32 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ but not reported at the balance sheet date. As of September 30, 2004, approximately $900,000 is accrued for claims incurred from January through September 30, 2004 that have not been paid or reported. Tapco also has a self-insured medical insurance plan covering substantially all of its employees. This plan is administered by a third party and has stop-loss coverage for amounts in excess of $125,000 per individual per year. As of September 30, 2004, approximately $662,000 is accrued for claims incurred that have not been paid or reported. Employment Agreements - Headwaters and its subsidiaries have entered into long-term employment agreements with its Chief Executive Officer and 24 other officers and employees. The agreements have original terms ranging from two to five years and are generally renewable by Headwaters, usually for one-year terms. They provide for annual salaries currently ranging from approximately $67,000 to $400,000 annually per person. The annual commitment under all agreements combined is currently approximately $3,715,000. Generally, the agreements provide for termination benefits, ranging from six months' salary up to a maximum period equal to the remaining term of the agreement. Incentive Agreements with ISG Principals - In January 2003, Headwaters executed incentive agreements with three of the former stockholders and officers of ISG, all of whom were officers of either Headwaters or ISG following the ISG acquisition. The agreements called for contingent payments totaling up to $5,000,000 in the event of (i) a change in control, as defined, or (ii) continuing employment through September 2004 and an average stock price for Headwaters' common stock for any calendar quarter exceeding $20 per share. The maximum payments would have been required if there had been a change in control prior to October 2004, or if the officers remained employed through September 2004 and the average stock price for any calendar quarter reached $25 per share or more. During 2004, two of the three officers resigned their positions and Headwaters recorded an expense for $1,500,000 related to the obligation to the remaining officer. Property, Plant and Equipment - As of September 30, 2004, Headwaters was committed to spend approximately $11,000,000 to complete capital projects that were in various stages of completion. Solid Alternative Fuel Facility - In September 2004, Headwaters purchased a 9% variable interest in an entity that owns and operates a coal-based solid alternative fuel production facility, where Headwaters is not the primary beneficiary. Headwaters' minority interest was acquired in exchange for an initial cash payment of $250,000 and an obligation to pay $7,500,000 in monthly installments from October 2004 through December 2007. This obligation, recorded in other accrued liabilities and other long-term liabilities in the consolidated balance sheet, bears interest at an 8% rate. Headwaters also has agreed to make additional payments to the seller based on a pro-rata allocation of the tax credits generated by the facility, and its pro-rata share of operating expenses, also through December 2007. The alternative fuel produced at the facility through December 2007 qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code, and Headwaters is entitled to receive its pro-rata share of such tax credits generated. Headwaters has also agreed to purchase an additional 10% interest in the entity upon the earlier of receipt of a private letter ruling for the facility from the IRS, or June 17, 2005. At such time, Headwaters will be required to make an additional cash payment of $250,000 and pay an additional $7,500,000, plus interest, through December 2007, along with other related payments, all as described above. At the time Headwaters purchases the additional 10% interest, Headwaters' pro-rata share of the tax credits will also increase. Headwaters has the ability, under certain conditions, to limit its liability under the fixed payment obligations of $7,500,000 (increasing to $15,000,000); therefore, Headwaters' obligation to support the facility's future operations and make all of the above-described payments is effectively limited to the tax benefits Headwaters receives. Joint Venture Obligations - In September 2004, Headwaters entered into an agreement with an international chemical company, based in Germany, to jointly develop and commercialize a process for the direct synthesis of hydrogen peroxide. Under terms of the joint venture agreement, Headwaters paid $1,245,000 for its investment in the joint venture and is further obligated to pay an additional $1,000,000 in 2005 and $1,000,000 in 2006. Headwaters has also committed to fund 50% of the joint venture's research and development expenditures, currently limited to (euro)3,000,000 (approximately $3,700,000 at September 30, 2004), through September 2007. F-33 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Although there is no legal obligation to do so, the joint venture partners currently have long-range plans to eventually invest in large-scale hydrogen peroxide plants using the process for direct synthesis of hydrogen peroxide. Legal or Contractual Matters - Headwaters has ongoing litigation and claims incurred during the normal course of business, including the items discussed below. Headwaters intends to vigorously defend or resolve these matters by settlement, as appropriate. Management does not currently believe that the outcome of these matters will have a material adverse effect on Headwaters' operations, cash flows or financial position. In 2004, Headwaters accrued approximately $1,400,000 of reserves for legal matters because it concluded that claims and damages sought by claimants in excess of that amount were not probable. Our outside counsel believe that unfavorable outcomes are neither probable nor remote and declined to express opinions concerning the likely outcomes or liability of Headwaters. The reserves represent the amounts Headwaters would be willing to pay to reach a settlement. However, these cases raise difficult and complex legal and factual issues, and the resolution of these issues is subject to many uncertainties, including the facts and circumstances of each case, the jurisdiction in which each case is brought, and the future decisions of juries, judges, and arbitrators. Therefore, although management believes that the claims asserted against Headwaters in the named cases lack merit, there is a possibility of material losses in excess of the amounts accrued if one or more of the cases were to be determined adversely against Headwaters for a substantial amount of the damages asserted. Headwaters believes the range of potential loss is from $1,400,000 up to the amounts sought by claimants. It is possible that a change in the estimates of probable liability could occur, and the changes could be significant. Additionally, as with any litigation, these proceedings require that Headwaters incur substantial costs, including attorneys' fees, managerial time, and other personnel resources and costs in pursuing resolution. Costs paid to outside legal counsel for litigation, which comprise the majority of Headwaters' litigation-related costs, totaled approximately $1,700,000 in 2002, $3,000,000 in 2003, and $3,800,000 in 2004. It is not possible to estimate what these costs will be in future periods. Boynton. In October 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to a synthetic fuel technology invented by Davidson. (This technology is distinct from the technology developed by Headwaters.) This action is factually related to an earlier action brought by certain purported officers and directors of Adtech, Inc. That action was dismissed by the United States District Court for the Western District of Tennessee and the District Court's order of dismissal was affirmed on appeal. In the current action, the allegations arise from the same facts, but the claims are asserted by certain purported stockholders of Adtech. In June 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee alleging, among other things, fraud, conspiracy, constructive trust, conversion, patent infringement and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. The plaintiffs seek declaratory relief and compensatory damages in the approximate amount of between $15,000,000 and $25,000,000 and punitive damages. The District Court has dismissed all claims against Headwaters except conspiracy and constructive trust. The Court has scheduled trial for April 2005. Because the resolution of the litigation is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters' liability. AGTC. In March 1996, Headwaters entered into an agreement with AGTC and its associates for certain services related to the identification and selection of synthetic fuel projects. In March 2002, AGTC filed an arbitration demand in Salt Lake City, Utah claiming that it is owed commissions under the 1996 agreement for 8% of the revenues received by Headwaters from the Port Hodder project. AGTC is seeking approximate damages in the arbitration between $520,000 and $14,300,000. Headwaters asserts that AGTC did not perform under the agreement and that the agreement was terminated and the disputes were settled in July 1996. Headwaters filed an answer in the arbitration, denying AGTC's claims and asserting counterclaims against AGTC. The arbitrator conducted hearings during July and August of 2004 and has received a post-arbitration briefing but has not yet issued a decision. Because the resolution of the arbitration is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters' liability. AJG. In December 1996, Headwaters entered into a technology license and proprietary chemical reagent sale agreement with AJG Financial Services, Inc. The agreement called for AJG to pay royalties and to purchase F-34 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ proprietary chemical reagent material from Headwaters. In October 2000, Headwaters filed a complaint in the Fourth District Court for the State of Utah against AJG alleging that it had failed to make payments and to perform other obligations under the agreement. Headwaters asserts claims including breach of contract, declaratory judgment, unjust enrichment and accounting and seeks money damages as well as other relief. AJG's answer to the complaint denied Headwaters' claims and asserted counter-claims based upon allegations of misrepresentation and breach of contract. AJG seeks compensatory damages in the approximate amount of $71,000,000 and punitive damages. Headwaters has denied the allegations of AJG's counter-claims. The court has scheduled trial for January 2005. Because the resolution of the litigation is uncertain, legal counsel cannot express an opinion as to the ultimate amount of recovery or liability. McEwan. In 1995, Headwaters granted stock options to a member of its board of directors, Lloyd McEwan. The director resigned from the board in 1996. Headwaters has declined McEwan's attempts to exercise most of the options on grounds that the options terminated. In June 2004, McEwan filed a complaint in the Fourth District Court for the State of Utah against Headwaters alleging breach of contract, breach of implied covenant of good faith and fair dealing, fraud, and misrepresentation. McEwan seeks declaratory relief as well as compensatory damages in the approximate amount of $2,750,000 and punitive damages. Headwaters has filed an answer denying McEwan's claims and has asserted counterclaims against McEwan. Because resolution of the litigation is uncertain, legal counsel cannot express an opinion as to the ultimate amount of liability or recovery. Headwaters Construction Materials Matters. There are litigation and pending and threatened claims made against certain subsidiaries of Headwaters Construction Materials with respect to several types of exterior finish systems manufactured and sold by its subsidiaries for application by contractors on residential and commercial buildings. Typically, litigation and these claims are controlled by such subsidiaries' insurance carriers. The plaintiffs or claimants in these matters have alleged that the structures have suffered damage from latent or progressive water penetration due to some alleged failure of the building product or wall system. The most prevalent type of claim involves alleged defects associated with components of an Exterior Insulation and Finish System ("EIFS") which was produced for a limited time (through 1997) by Best Masonry & Tool Supply and Don's Building Supply. There is a 10-year projected claim period following discontinuation of the product. Typically, the claims cite damages for alleged personal injuries and punitive damages for alleged unfair business practices in addition to asserting more conventional damage claims for alleged economic loss and damage to property. To date, claims made against such subsidiaries have been paid by their insurers, with the exception of minor deductibles, although such insurance carriers typically have issued "reservation of rights" letters to Headwaters Resources. None of the cases has gone to trial, and while two such cases involve 100 and 800 homes, respectively, none of the cases includes any claims formally asserted on behalf of a class. While, to date, none of these proceedings have required that Headwaters Resources incur substantial costs, there is no guarantee of insurance coverage or continuing coverage. These and future proceedings may result in substantial costs to Headwaters Resources, including attorneys' fees, managerial time and other personnel resources and costs. Adverse resolution of these proceedings could have a materially negative effect on Headwaters Resources' business, financial condition, and results of operation, and its ability to meet its financial obligations. Although Headwaters Resources carries general and product liability insurance, Headwaters Resources cannot assure that such insurance coverage will remain available, that Headwaters Resources' insurance carrier will remain viable, or that the insured amounts will cover all future claims in excess of Headwaters Resources' uninsured retention. Future rate increases may also make such insurance uneconomical for Headwaters Resources to maintain. In addition, the insurance policies maintained by Headwaters Resources exclude claims for damages resulting from exterior insulating finish systems, or EIFS, that have manifested after March 2003. Because resolution of the litigation and claims is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters Resources' liability. Other. Headwaters and its subsidiaries are also involved in other legal proceedings that have arisen in the normal course of business. Section 29 Matters (Unaudited)- Headwaters Energy Services' license fees and revenues from sales of chemical reagents depend on the ability of licensees and customers to manufacture and sell qualified synthetic fuels that generate tax credits under Section 29 of the Internal Revenue Code. From time to time, issues arise as to the availability of tax credits, including the items discussed below. F-35 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ Legislation. Under current law, Section 29 tax credits for synthetic fuel produced from coal expire on December 31, 2007. In addition, there have been initiatives from time to time to consider the early repeal or modification of Section 29. For example, during 2004, a bill was introduced in the United States House of Representatives that would repeal the Section 29 credit for synthetic fuel produced from coal. Although it is unlikely that the bill will pass Congress in 2004, the bill could be reintroduced in 2005. If Section 29 expires at the end of 2007 or if it is repealed or adversely modified, synthetic fuel facilities would probably either close or substantially curtail production. At this time, given current prices of coal and costs of synthetic fuel production, Headwaters does not believe that production of synthetic fuel will be profitable absent the tax credits. In addition, if Headwaters' licensees close their facilities or materially reduce production activities (whether after 2007, upon earlier repeal or adverse modification of Section 29 or for any other reason), it would have a material adverse effect on the revenues and net income of Headwaters. Phase-Out. Section 29 tax credits are subject to phase-out after the average annual wellhead domestic oil price ("reference price") reaches a beginning phase-out threshold price, and is eliminated entirely if the reference price reaches the full phase-out price. For 2003, the reference price was $27.56 per barrel and the phase-out range began at $50.14 and would have fully phased out tax credits at $62.94 per barrel. For 2004, an estimated partial year reference price (through September) is $40.48 per barrel, and an estimate of the phase-out range (using 2% inflation) begins at $51.14 and completes phase-out at $64.20 per barrel. The NYMEX one-day futures trading price on December 1, 2004 was $45.49 per barrel. IRS Audits. Licensees are subject to audit by the IRS. The IRS may challenge whether Headwaters Energy Services' licensees satisfy the requirements of Section 29, or applicable Private Letter Rulings, including placed-in-service requirements, or may attempt to disallow Section 29 tax credits for some other reason. The IRS has initiated audits of certain licensee-taxpayers who claimed Section 29 tax credits, and the outcome of any such audit is uncertain. In 2004, a licensee announced that IRS field auditors had issued a notice of proposed adjustment challenging the placed-in-service date of three of its synthetic fuel facilities. The licensee believes that the facilities meet the placed-in-service requirement, however, the timing and final results of the audit are unknown. The inability of a licensee to claim Section 29 tax credits would reduce Headwaters' future income from the licensee. Senate Permanent Subcommittee on Investigations. On October 29, 2003, the Permanent Subcommittee on Investigations of the Government Affairs Committee of the United States Senate issued a notification of pending investigations. The notification listed the synthetic fuel tax credit as a new item. In March 2004, the Subcommittee described its investigation as follows: "The Subcommittee is continuing its investigation [of] tax credits claimed under Section 29 of the Internal Revenue Code for the sale of coal-based synthetic fuels. This investigation is examining the utilization of these tax credits, the nature of the technologies and fuels created, the use of these fuels, and others [sic] aspects of Section 29. The investigation will also address the IRS' administration of Section 29 tax credits." The Subcommittee conducted numerous interviews and received large volumes of data between December 2003 and March 2004. Since that time, to Headwaters' knowledge, there has been little activity regarding the investigation. Headwaters cannot make any assurances as to the timing or ultimate outcome of the Subcommittee investigation, nor can Headwaters predict whether Congress or others may conduct investigations of Section 29 tax credits in the future. The Subcommittee investigation may have a material adverse effect on the willingness of buyers to engage in transactions to purchase synthetic fuel facilities or on the willingness of current owners to operate their facilities, and may materially adversely affect Headwaters' revenues and net income. License Fees - Pursuant to the contractual terms of an agreement with a certain licensee, the license fees owed to Headwaters, which accumulated during a period of approximately two and a half years, were placed in escrow for the benefit of Headwaters, pending resolution of an audit of the licensee by the IRS. Prior to December 31, 2003, certain accounting rules governing revenue recognition, requiring that the seller's price to the buyer be "fixed or determinable" as well as reasonably certain of collection, appeared to preclude revenue recognition for the amounts placed in escrow because they were potentially subject to adjustment based on the outcome of the IRS audit. Accordingly, none of the escrowed amounts were recognized as revenue in the consolidated statements of income through December 31, 2003. During F-36 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ the March 2004 quarter, the fieldwork for the tax audit of the licensee was completed and there were no proposed adjustments to the tax credits claimed by the licensee. As a result, in March 2004 Headwaters recognized revenue, net of the amount Headwaters was required to pay to a third party, relating to the funds deposited in the escrow account totaling approximately $27,900,000. Approximately $3,000,000 of this amount related to revenue recorded in the March 2004 quarter and approximately $25,000,000 was recorded as revenue related to prior periods. Interest income of approximately $164,000 was also recognized. During the June 2004 quarter, the IRS completed its administrative review of the licensee's tax audit and the escrowed amounts were disbursed from the escrow account and paid to Headwaters. In addition to the escrowed amounts, this same licensee has also set aside substantial amounts for working capital and other operational contingencies as provided for in the contractual agreements. These amounts may eventually be paid out to various parties having an interest in the cash flows from the licensee's operations, including Headwaters, if they are not used for working capital and other operational contingencies. As a result, Headwaters currently expects to receive at some future date a portion of those reserves, the amount of which is not currently determinable and therefore, not recognizable. 15. Related Party Transactions In addition to transactions disclosed elsewhere, Headwaters was involved in the following related party transactions during 2002, 2003 and 2004. Headwaters purchases certain insurance benefits for its employees from various insurance companies for which a director of Headwaters acts as a broker or agent. Gross payments to those insurance companies totaled approximately $532,000 in 2002, $510,000 in 2003 and $1,215,000 in 2004. Eldorado purchases product from an entity located in Mexico in which an officer of Eldorado has a minority ownership interest. Costs incurred for materials purchased from this entity were approximately $2,712,000 in 2004. A majority of SCP's transportation costs are paid to a company, two of the principals of which are related to an officer of SCP. Costs incurred in 2004 totaled approximately $970,000. 16. Quarterly Financial Data (unaudited) Summarized unaudited quarterly financial data for 2003 and 2004 is as follows.
2003 ----------------------------------------------------------------- First Second Third Fourth (in thousands, except per-share data) quarter quarter quarter quarter (2) Full year --------------------------------------------------------------------------------------------------------------- Net revenue $ 88,709 $ 86,053 $106,396 $106,472 $387,630 Gross profit (1) 30,733 29,394 34,974 34,284 129,385 Net income (2) 8,052 6,789 10,544 11,246 36,631 Basic earnings per share 0.30 0.25 0.39 0.41 1.35 Diluted earnings per share 0.29 0.24 0.37 0.40 1.30 2004 ----------------------------------------------------------------- First Second Third Fourth (in thousands, except per-share data) quarter quarter (3) quarter (3) quarter (3) Full year --------------------------------------------------------------------------------------------------------------- Net revenue $101,469 $119,521 $134,318 $198,647 $553,955 Gross profit (1) 37,098 57,706 46,446 70,498 211,748 Net income (3) 10,092 18,627 16,060 19,538 64,317 Basic earnings per share 0.36 0.57 0.48 0.59 2.02 Diluted earnings per share 0.35 0.55 0.47 0.57 1.95 - -----------------
(1) Gross profit is derived by subtracting cost of revenues and industry segment depreciation expense from total revenue. F-37 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued September 30, 2004 ___________ (2) In the fourth quarter of 2003, revenue and net income were negatively affected by IRS actions which caused certain licensees to temporarily reduce or stop solid alternative fuel production, which caused a decline in license fees and sales of chemical reagents. Also in the fourth quarter of 2003, Headwaters recorded income tax expense at an effective income tax rate of approximately 37%, compared to an effective income tax rate of approximately 40% for the first nine months of the year. The lower rate for the fourth quarter was required to reduce the effective income tax rate for the year to approximately 39%. This reduction was primarily a result of lower expected state income tax expense. (3) In the second quarter of 2004 Headwaters recognized revenue relating to funds deposited in an escrow account totaling approximately $27,900,000, most of which related to prior periods (see Note 14). In addition, revenue and net income for the third and fourth quarters of 2004 were materially affected by the 2004 acquisitions (see Note 3). F-38 EX-10.60.4 2 ex10604k093004.txt AMENDMENT OF EMPLOYMENT AGREEMENT WITH RAUL DEJU Exhibit 10.60.4 August 2, 2004 Dr. Raul Deju 5 Hastings Court Moraga, CA 94556 Re: Amendment of Employment Agreement and Agreement for Further Employment Dear Raul: This letter agreement (the "Agreement") constitutes an agreement to amend the employment agreement dated October 14, 1997 and amended October 1, 2001 both attached hereto ("Employment Agreement") between Dr. Raul Deju ("you" or "Employee") and JTM Industries, Inc., a company merged into ISG Resources, Inc. (JTM industries, Inc. and ISG Resources, Inc. interchangeably referred to in this Agreement as "ISG"), a subsidiary as of September 2002 of Headwaters Incorporated ("Headwaters") and provides for your future services to Headwaters and ISG. Capitalized terms used herein and not otherwise defined have the same meaning as in the Employment Agreement. The terms of our Agreement are as follows: 1. Amendment of Employment Agreement. Employee and Employer agree to amend the Employment Agreement so that the Term as defined therein shall end effective August 2, 2004. 2. New Employment Term. The parties agree that Employee will continue his status as an employee of Employer under the terms of this Agreement effective August 3, 2004 ("Effective Date") and continuing through October 3, 2006 ("Period of Employment"). 3. Reassignment. Employee shall resign from his executive positions with Headwaters, as President of ISG, and as a member of the board of directors of ISG and subsidiaries of Headwaters and ISG as of the Effective Date. Employee will however, continue as an employee of Headwaters with a designated title of Vice President until the end of the Period of Employment. The parties anticipate that Employee's duties during the Period of Employment will not require efforts in excess of twenty hours per month. Employee will be free during the Period of Employment to seek and hold other employment provided it does not conflict with his duties hereunder or with his non-competition obligations under Section 8 of the Employment Agreement. 4. Services to be Rendered. During the Period of Employment, and subject to mutually agreed upon scheduling, Employee agrees to perform such assignments as may reasonably be assigned by Headwaters' CEO including (i) representing Headwaters in selected trade organizations such as ACAA and EPRI; (ii) supporting Headwaters' Vice President of Marketing and Government Relations; (iii) supporting the senior officers of the Coal Combustion Products business unit with client relationships, Dr. Raul Deju August 2, 2004 Page 2 of 7 planning, and consulting on an as needed basis; (iv) identifying new opportunities for Headwaters in the areas of post-combustion fly ash and building products; (v) assisting Headwaters on a transition of responsibilities regarding Flexcrete L.C.; and (vi) delivering a monthly report to the CEO of pertinent activities during the past month and activities planned for the succeeding month. 5. Employment Benefits. Employee and Headwaters agree to the following benefits through the Period of Employment: A. Compensation. From the Effective Date through October 3, 2004, Headwaters will pay you a gross salary of $28,333 per month, and the same benefits as you are currently receiving, and from October 4, 2004 through the Period of Employment, Headwaters will pay you a gross salary of $10,000 per month, subject to withholdings, to be paid at regular payroll periods in accordance with Headwaters' customary payroll practices in effect at the time such is due. In addition, you will have the opportunity to earn a bonus equal to one percent of the actual gross revenue from the trailing twelve months at the time of acquisition or merger from a new business proposal or acquisition presented by you to the CEO during the Employment Period, and adopted or acquired by Headwaters during the Employment Period, or at any time up to 12 months following the Employment Period, up to $200,000, to be paid within sixty (60) days after each such transaction is consummated. Compensation for any larger proposed transactions will be subject to further negotiation and agreement between the parties. B. Business Expenses. Upon presentation of an itemized account and supporting documentation to Headwaters, you will be reimbursed in a timely manner within thirty (30) days for necessary and reasonable travel, meals, lodging, communications and other business expenses in the course of performing your employment duties. C. Health and Dental Benefits. You shall continue to receive health and dental benefits in accordance with such benefits as generally available from time-to-time to other company employees. You may choose from the available health and dental plans, and Headwaters shall continue to contribute to the health and dental insurance premiums on your behalf as it does for other employees through the Period of Employment. After October 3, 2006, you may continue COBRA health insurance coverage at your own expense as permitted by law. D. Stock Options and Restricted Stock. Your Headwaters stock options and restricted stock will continue to vest through the Period of Employment and thereafter cease vesting. Your Headwaters stock options vested as of the end of the Period of Employment will remain exercisable until January 4, 2007, and any unexercised options thereafter will expire. Your restricted stock will be transferred to you as it vests throughout the Period of Employment. The foregoing remains subject in all respects to the terms and conditions of grant and the 2002 Stock Incentive Plan and the 2003 Stock Incentive Plan. E. EVA Bonus. You will receive a bonus under Headwaters' Incentive Bonus Plan for the full 2004 fiscal year, subject to the generally applicable terms and conditions of the plan, and subject to the determinations of Headwaters' Board of Directors or its Compensation Committee. You will not participate in the EVA bonus program after the 2004 fiscal year and will therefore not be entitled to the banked portion of the 2004 award or any banked portion from past years' awards, except for the banked portion from the 2003 fiscal Dr. Raul Deju August 2, 2004 Page 3 of 7 year payable in 2004 in addition to unbanked portion of the fiscal year 2004 award. This Agreement does not change your fiscal year 2004 EVA bonus, which shall be calculated using an individual business goal multiplier of not less than 95 percent, based on the non-financial business targets (items 3-7 of the attached Individual Business Objective Plan) being no less than 65 percent, and the financial objectives (items 1 and 2 of the attached Individual Business Objective Plan) being no less than 30 percent. F. Incentive Agreement. This Agreement and your change in employment status as of the Effective Date do not affect or change in any manner the Incentive Agreement between you and Headwaters, dated November 12, 2002, a copy of which is attached hereto G. Other Benefits. During the Period of Employment, you will not be eligible for benefits that are available to regular employees such as new incentive stock awards, bonuses, or benefits, except as provided Section 5 of this Agreement. Ownership and title to the automobile currently assigned to you will be transferred to you upon your payment to us of $1,000 prior to September 30, 2004. 6. Non-Disclosure; Headwaters Property. You agree not to disclose the terms of this Agreement, the benefits being paid under it or the facts of these payments to anyone, except that you may disclose this information to your spouse and those individuals who have a need to know in order for them to render professional, legal, or financial services to you, or as may be required by court order, law, rule or regulation. At the end of the Period of Employment, you also agree to return all property that belongs to Headwaters. You reaffirm the covenants you made in Sections 5, 6, and 7of your existing Employment Agreement. 7. Release of Claims. You fully discharge and release, and agree that this Agreement is in full satisfaction of, any claims, liabilities, demands or causes of action, known or unknown, that you ever had, now have, or may claim to have had against Headwaters or any parents, subsidiaries, directors, officers, employees or agents of Headwaters for any reason as of the Effective Date, except (i) as specifically provided in this Agreement, (ii) claims for vested benefits based on your employment and claims for workers' compensation insurance and unemployment insurance benefits; and (iii) claims for defense and indemnity as an officer or director of ISG, Headwaters, or any subsidiaries of same. Any such claims whether for discrimination, including claims under the Fair Employment and Housing Act, Title VII of the Civil Rights Act of 1964 or the Age Discrimination in Employment Act, wrongful termination, breach of contract, breach of public policy, physical or mental harm or distress or any other claims are hereby released and you agree and promise that you will not file any lawsuit asserting any such claims. Except as otherwise specifically provided in this Agreement, Headwaters, ISG, and their subsidiaries ("Headwaters Parties") fully discharge and release you from, and agree that this Agreement is in full satisfaction of, any claims, liabilities, demands or causes of action, known or unknown, that the Headwaters Parties and/or their predecessor companies ever had, now have, or may claim to have had against you for any reason as of the Effective Date, including without limitation any issues connected with the ISG merger transactions and your involvement with ISG as an officer or director. The Parties each acknowledge that he or it have had the benefit of counsel, and have been advised of, understands and knowingly and specifically waives his or its rights under California Civil Code Section 1542 which provides Dr. Raul Deju August 2, 2004 Page 4 of 7 as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. 8. Acknowledgment of Waiver of Claims under ADEA; EEOC. You acknowledge that you are waiving and releasing any rights you may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and that the waiver and release is knowing and voluntary. You and Headwaters agree that the waiver and release does not apply to any rights or claims that may arise under ADEA after the Effective Date. You acknowledge that the consideration given for the waiver and release of claims under this Agreement is in addition to anything of value to which you were already entitled. You also acknowledge that you have been advised by this writing that (a) you should consult with an attorney prior to executing the Agreement; (b) you have at least twenty one (21) days within which to consider the Agreement; (c) you have at least seven (7) days following your execution of the Agreement to revoke the Agreement; and (d) the Agreement shall not be effective until the revocation period has expired. This Agreement recognizes the rights and responsibilities of the Equal Employment Opportunity Commission ("EEOC") to enforce the statutes which come under its jurisdiction and is not intended to prevent you from filing a charge or participating in any investigation or proceeding conducted by the EEOC; provided, however, that nothing in this Section limits or affects the finality or the scope of the release provided under Section 7 or the agreement to submit claims to final and binding arbitration under Section 11. 9. Confidential Information; Inventions; Non-Competition. You agree to abide by all Headwaters' policies, including its policy with respect to Headwaters confidential information and inventions both during and after your employment. The non-competition provisions of Section 8 of the existing Employment Agreement are reaffirmed with the Restricted Period thereof ending on October 3, 2008 and the Restricted Business amended to include all lines of business of ISG or its subsidiaries as of the Effective Date. 10. No Cooperation; Non-Disparagement. The parties agree that they will not act in any manner that might damage the business or reputation of the other party. The parties agree that they will not counsel or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against the other party and/or any officer, director, employee, agent, representative, shareholder, family member, or attorney of the other party, unless under a subpoena or other court order to do so. The parties also agree to refrain from any defamation, libel or slander of the other party and where applicable the other party's respective officers, directors, employees, investors, shareholders, family members, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, and to refrain from any tortious interference with the contracts and relationships of the other party and where applicable the other party's respective officers, directors, employees, investors, shareholders, family members, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns. Dr. Raul Deju August 2, 2004 Page 5 of 7 11. Dispute Resolution. You agree that any future disputes between you and Headwaters, including but not limited to disputes arising out of or related to this Agreement shall be resolved by using the following procedures, except that the procedures in Sections 11(c) and 11(d) will not be followed in cases where the law specifically forbids the use of arbitration as a final and binding remedy, or where Section 11(d) below specifically allows a different remedy. A. The party claiming to be aggrieved shall furnish to the other party a written statement of the grievance identifying any witnesses or documents that support the grievance and the relief requested or proposed. B. If the other party does not agree to furnish the relief requested or proposed, or otherwise does not satisfy the demand of the party claiming to be aggrieved, the parties shall submit the dispute to nonbinding mediation before a mediator to be jointly selected by the parties. Headwaters will pay the cost of the mediation. C. If the mediation does not produce a resolution of the dispute, the parties agree that the dispute shall be resolved by final and binding arbitration. The parties will attempt to agree to the identity of an arbitrator, and, if they are unable to do so, they will obtain a list of arbitrators from the Federal Mediation and Conciliation Service and select an arbitrator by striking names from that list. The arbitrator shall have the authority to determine whether the conduct complained of in Section 11(a) violates the rights of the complaining party and, if so, to grant any relief authorized by law, subject to the exclusions of Section 11(d) below. The arbitrator shall not have the authority to modify, change or refuse to enforce the terms of this Agreement. The hearing shall be transcribed. Headwaters shall bear the costs of the arbitration if you prevail. If Headwaters prevails, you will pay half the cost of the arbitration. Each party shall be responsible for paying its own attorneys' fees, unless the arbitrator orders otherwise, pursuant to applicable law. D. Arbitration shall be the exclusive final remedy for any dispute between the parties, and the parties agree that no dispute shall be submitted to arbitration where the party claiming to be aggrieved has not complied with the preliminary steps provided for above. The parties agree that the arbitration award shall be enforceable in any court having jurisdiction to enforce this Agreement, so long as the arbitrator's findings of fact are supported by substantial evidence on the whole and the arbitrator has not made errors of law; provided however, that either party may bring an action, including, but not limited to an action for injunctive relief, in a court of competent jurisdiction, regarding or related to matters involving Headwaters' confidential, proprietary or trade secret information, or regarding or related to inventions that you may claim to have developed prior to joining Headwaters or after joining Headwaters, or regarding or relating to your engaging in activities that directly or indirectly compete with Headwaters. 12. Severability. If any term of this Agreement is held to be invalid, void or unenforceable, the remainder of this Agreement shall remain in full Dr. Raul Deju August 2, 2004 Page 6 of 7 force and effect and shall in no way be affected, and the parties shall use their best efforts to find an alternative way to achieve the same result. 13. Entire Agreement. The provisions of this Agreement set forth the entire agreement between you and Headwaters concerning your changes in employment as of the Effective Date. Any other promises, written or oral, are replaced by the provisions of this Agreement and are no longer effective unless they are contained in this Agreement. 14. Choice of Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the provisions of Section 17 of the existing Employment Agreement as if incorporated herein. 15. Indemnity. Headwaters, on behalf of itself, and its affiliates, divisions, subsidiaries, predecessor and successor corporations, and their directors, officers, employees, representatives, or agents, hereby ratifies, adopts, and confirms the indemnification obligations to Employee as set out in Section 18 of the Employment Agreement. Further to this obligation, Headwaters shall maintain directors and officers liability insurance in full force and effect covering you unless Headwaters determines in good faith that such insurance is not reasonably available, in which case, Headwaters shall promptly notify you. Headwaters' indemnity obligation hereunder shall survive the termination of this Agreement and the end of the Employment Period. 16. Ratification. Subject to the terms and conditions of grant and to the 2002 Stock Incentive Plan and the 2003 Stock Incentive Plan, the parties agree that the attached list of stock options granted to Employee to date and the attached list of restricted stock granted to Employee to date, all remain in full force and effect, and are hereby ratified and confirmed. 17. Counterparts. This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned. Dr. Raul Deju August 2, 2004 Page 7 of 7 18. Voluntary Execution of Agreement. By signing below, you acknowledge that you are entering into this Agreement knowingly and voluntarily. In addition, you acknowledge by your signature that you have carefully read and fully understand all the provisions of this Agreement and you have been represented by legal counsel in the preparation and negotiation of this Agreement or you have voluntarily declined to seek such counsel. Sincerely, /s/ Kirk A. Benson --------------------------- Kirk A. Benson Chief Executive Officer By your signature, you agree to the terms set forth above, and you agree to this Agreement. Date: August 2, 2004 /s/ Raul Deju - ------------------- Raul Deju EX-10.91 3 ex1091k093004.txt CREDIT AGREEMENT Exhibit 10.91 EXECUTION COPY CREDIT AGREEMENT DATED AS OF SEPTEMBER 8, 2004 AMONG HEADWATERS INCORPORATED THE LENDERS FROM TIME TO TIME PARTIES HERETO MORGAN STANLEY SENIOR FUNDING, INC., AS ADMINISTRATIVE AGENT MORGAN STANLEY & CO. INCORPORATED, AS COLLATERAL AGENT JPMORGAN CHASE BANK, AS SYNDICATION AGENT ___________________________________________________________________________ MORGAN STANLEY SENIOR FUNDING INC. AND J.P. MORGAN SECURITIES INC., AS JOINT LEAD ARRANGERS AND JOINT BOOK RUNNERS _____________________________________________________________________________ TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS..........................................................1 1.1. Certain Defined Terms.................................................1 1.2. Plural Forms.........................................................27 ARTICLE II THE CREDITS........................................................27 2.1. Revolving Loan Commitments and Term Loan B Commitments...............27 2.2. Required Payments; Termination.......................................28 2.3. Ratable Loans; Types of Advances.....................................30 2.4. Swing Line Loans.....................................................30 2.5. Commitment Fee; Aggregate Revolving Loan Commitment; Letter of Credit Facility.................................................32 2.6. Minimum Amount of Each Advance.......................................33 2.7. Optional Principal Payments..........................................33 2.8. Method of Selecting Types and Interest Periods for New Advances......33 2.9. Conversion and Continuation of Outstanding Advances; No Conversion or Continuation of Eurodollar Advances After Default......................................................34 2.10. Changes in Interest Rate, Etc........................................35 2.11. Rates Applicable After Default.......................................35 2.12. Method of Payment....................................................35 2.13. Noteless Agreement; Evidence of Indebtedness.........................36 2.14. Telephonic Notices...................................................36 2.15. Interest Payment Dates; Interest and Fee Basis.......................37 2.16. Notification of Advances, Interest Rates, Prepayments and Revolving Loan Commitment Reductions; Availability of Loans........37 2.17. Lending Installations................................................37 -i- 2.18. Non-Receipt of Funds by the Administrative Agent.....................38 2.19. Replacement of Lender................................................38 2.20. Facility LCs.........................................................39 2.21. Defaulting Lenders...................................................43 ARTICLE III YIELD PROTECTION; TAXES...........................................46 3.1. Yield Protection.....................................................46 3.2. Changes in Capital Adequacy Regulations..............................47 3.3. Availability of Types of Advances....................................48 3.4. Funding Indemnification..............................................48 3.5. Taxes................................................................48 3.6. Lender Statements; Survival of Indemnity.............................50 3.7. Alternative Lending Installation.....................................51 ARTICLE IV CONDITIONS PRECEDENT...............................................51 4.1. Initial Credit Extension.............................................51 4.2. Each Credit Extension................................................54 ARTICLE V REPRESENTATIONS AND WARRANTIES......................................55 5.1. Existence and Standing...............................................55 5.2. Authorization and Validity...........................................55 5.3. No Conflict; Government Consent......................................55 5.4. Financial Statements.................................................56 5.5. Material Adverse Change..............................................56 5.6. Taxes................................................................56 5.7. Litigation and Contingent Obligations................................57 5.8. Subsidiaries.........................................................57 -ii- 5.9. ERISA................................................................57 5.10. Accuracy of Information..............................................57 5.11. Regulation U.........................................................58 5.12. Material Agreements..................................................58 5.13. Compliance with Laws.................................................58 5.14. Ownership of Properties..............................................58 5.15. Plan Assets; Prohibited Transactions.................................59 5.16. Environmental Matters................................................59 5.17. Investment Company Act...............................................59 5.18. Public Utility Holding Company Act...................................59 5.19. Insurance............................................................59 5.20. No Default or Unmatured Default......................................59 5.21. SDN List Designation.................................................59 5.22. Solvency.............................................................59 5.23. Senior Indebtedness..................................................59 ARTICLE VI COVENANTS..........................................................60 6.1. Financial Reporting..................................................60 6.2. Use of Proceeds......................................................62 6.3. Notice of Default....................................................62 6.4. Conduct of Business..................................................62 6.5. Taxes................................................................63 6.6. Insurance............................................................63 6.7. Compliance with Laws.................................................63 6.8. Maintenance of Properties............................................64 6.9. Inspection; Keeping of Books and Records.............................64 6.10. Restricted Payments..................................................64 -iii- 6.11. Merger or Dissolution................................................65 6.12. Sale of Assets.......................................................65 6.13. Investments and Acquisitions.........................................66 6.14. Indebtedness.........................................................67 6.15. Liens................................................................69 6.16. Affiliates...........................................................71 6.17. Financial Contracts..................................................71 6.18. Subsidiary Covenants.................................................71 6.19. Contingent Obligations...............................................71 6.20. Subordinated Indebtedness and Amendments to Subordinated Indebtedness Documents.............................................71 6.21. Leverage Ratios......................................................72 6.22. Fixed Charge Coverage Ratio..........................................73 6.23. Capital Expenditures.................................................74 6.24. Rentals..............................................................74 6.25. Guarantors...........................................................74 6.26. Collateral; Environmental Reports....................................75 6.27. Sale and Leaseback Transactions......................................78 6.28. Sale of Receivables..................................................78 6.29. Insurance and Condemnation Proceeds..................................78 6.30. Amendments of Constitutive Documents.................................78 6.31. Partnership, Etc.....................................................78 6.32. Negative Pledge......................................................78 ARTICLE VII DEFAULTS..........................................................79 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES...................82 8.1. Acceleration.........................................................82 -iv- 8.2. Amendments...........................................................83 8.3. Preservation of Rights...............................................84 ARTICLE IX GENERAL PROVISIONS.................................................85 9.1. Survival of Representations..........................................85 9.2. Governmental Regulation..............................................85 9.3. Headings.............................................................85 9.4. Entire Agreement.....................................................85 9.5. Several Obligations; Benefits of This Agreement......................85 9.6. Expenses; Indemnification............................................85 9.7. Numbers of Documents.................................................86 9.8. Accounting...........................................................86 9.9. Severability of Provisions...........................................87 9.10. Nonliability of Lenders..............................................87 9.11. Confidentiality......................................................87 9.12. Nonreliance..........................................................88 9.13. Disclosure...........................................................88 9.14. Performance of Obligations...........................................88 9.15. USA Patriot Act Notification.........................................89 ARTICLE X THE AGENTS..........................................................89 10.1. Appointment; Nature of Relationship..................................89 10.2. Powers...............................................................90 10.3. General Immunity.....................................................90 10.4. No Responsibility for Loans, Recitals, Etc...........................90 10.5. Action on Instructions of Lenders....................................90 10.6. Employment of Agents and Counsel.....................................91 -v- 10.7. Reliance on Documents; Counsel.......................................91 10.8. Administrative Agent's Reimbursement and Indemnification.............91 10.9. Notice of Default....................................................92 10.10. Rights as a Lender...................................................92 10.11. Lender Credit Decision...............................................92 10.12. Successor Agents.....................................................92 10.13. Administrative Agent and Lead Arrangers Fees.........................94 10.14. Delegation to Affiliates.............................................94 10.15. Co-Agents, Documentation Agent, Syndication Agent, Etc...............94 10.16. Collateral Documents.................................................94 10.17. Supplemental Collateral Agent........................................95 ARTICLE XI SETOFF; RATABLE PAYMENTS...........................................96 11.1. Setoff...............................................................96 11.2. Ratable Payments.....................................................96 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS.................96 12.1. Successors and Assigns...............................................96 12.2. Participations.......................................................97 12.3. Assignments..........................................................98 12.4. Dissemination of Information........................................100 12.5. Tax Treatment.......................................................100 ARTICLE XIII NOTICES.........................................................100 13.1. Notices; Effectiveness; Electronic Communication....................100 13.2. Change of Address, Etc..............................................102 -vi- ARTICLE XIV COUNTERPARTS; INTEGRATION; EFFECTIVENESS; ELECTRONIC EXECUTION.............................................102 14.1. Counterparts; Effectiveness.........................................102 14.2. Electronic Execution of Assignments.................................102 ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL......102 15.1. CHOICE OF LAW.......................................................102 15.2. CONSENT TO JURISDICTION.............................................102 15.3. WAIVER OF JURY TRIAL................................................103 -vii- SCHEDULES Commitment Schedule Pricing Schedule Schedule I Intentionally Omitted Schedule II Southwest Concrete Escrow and Deposit Accounts Schedule III Permitted Alternative Fuel Acquisition Schedule 2.20 - Existing Letters of Credit Schedule 5.7 - Litigation Schedule 5.8 - Subsidiaries Schedule 5.14(a)(i) - Owned Real Property Schedule 5.14(a)(ii) - Real Property Leases Schedule 5.14(a)(iii) - Tenant Leases Schedule 5.14(b)(iii) - Real Property Collateral Schedule 6.10 - Permitted Restricted Payments Schedule 6.13(A) - Existing Investments Schedule 6.13(B) - Non-Subsidiary Investments Schedule 6.14(A) - Existing Indebtedness Schedule 6.14(B) - Subordination Terms re. Intercompany Indebtedness Schedule 6.15 - Existing Liens Schedule 6.23 Excepted Capital Expenditures -i- EXHIBITS Exhibit A-1 - Form of Borrower's Counsel's Opinion Exhibit A-2 - Form of Opinion of Local Counsel Exhibit A-3 - Form of Corporate Formalities Opinion Exhibit B - Form of Compliance Certificate Exhibit C - Form of Assignment and Assumption Agreement Exhibit D - Form of Loan/Credit Related Money Transfer Instruction Exhibit E-1 - Form of Promissory Note for Revolving Loan (if requested) Exhibit E-2 - Form of Promissory Note for Term B Loan (if requested) Exhibit F - Form of Officer's Certificate Exhibit G - List of Closing Documents Exhibit H - Form of Mortgage -ii- CREDIT AGREEMENT This Credit Agreement, dated as of September 8, 2004, is entered into by and among Headwaters Incorporated, a Delaware corporation, the Lenders, the Initial LC Issuers, Morgan Stanley Senior Funding Inc., as joint lead arranger and joint bookrunner and as Administrative Agent, J.P. Morgan Securities Inc., as joint lead arranger and joint bookrunner and JPMorgan Chase Bank as syndication agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1. Certain Defined Terms. As used in this Agreement: "Accounting Changes" is defined in Section 9.8 hereof. "ACM Block & Brick" means ACM Block & Brick, LP. "Acquisition" means any transaction, or any series of related transactions, consummated on or after the Closing Date, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or limited liability company, or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage of voting power) of the outstanding ownership interests of a partnership or limited liability company of any Person. "Administrative Agent" means MSSF in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, as Administrative Agent, and any successor Administrative Agent appointed pursuant to Article X. "Advance" means a borrowing hereunder consisting of the aggregate amount of several Revolving Loans or Term B Loans, as the case may be (i) made by some or all of the Lenders on the same Borrowing Date, or (ii) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Loans of the same Type and, in the case of Eurodollar Loans, for the same Interest Period. The term "Advance" shall include Swing Line Loans unless otherwise expressly provided. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person is the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting securities, by contract or otherwise; provided that neither any Agent nor any Lender shall be deemed to be an Affiliate of any Credit Party or any Subsidiary of Affiliate of any Credit Party solely by virtue of such Agent's or Lender's being an Agent or Lender, as the case may be, hereunder. "Agents" means the Administrative Agent and the Collateral Agent. "Aggregate Outstanding Revolving Credit Exposure" means, at any time, the aggregate of the Outstanding Revolving Credit Exposure of all the Lenders. "Aggregate Revolving Loan Commitment" means the aggregate of the Revolving Loan Commitments of all the Lenders, as may be increased or reduced from time to time pursuant to the terms hereof. The initial Aggregate Revolving Loan Commitment is Sixty Million and 00/100 Dollars ($60,000,000). "Aggregate Term Loan B Commitment" means the aggregate of the Term Loan B Commitments of all the Lenders, as may be reduced from time to time pursuant hereto. The initial Aggregate Term Loan B Commitment is Six-Hundred Forty Million and 00/100 Dollars ($640,000,000). "Agreement" means this Credit Agreement, as it may be amended, restated, supplemented or otherwise modified and as in effect from time to time. "Agreement Accounting Principles" means generally accepted accounting principles as in effect in the United States, applied in a manner consistent with that used in preparing the financial statements of the Borrower referred to in Section 5.4, except as amended from time to time to incorporate Accounting Changes pursuant to Section 9.8 hereof. "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Base Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum. "Applicable Fee Rate" means, with respect to the Commitment Fee at any time, the percentage rate per annum which is applicable at such time with respect to such fee as set forth in the Pricing Schedule. "Applicable Margin" means, (i) with respect to Term B Loans of any Type at any time, the percentage rate per annum which is applicable at such time with respect to Term B Loans of such Type as set forth in the Pricing Schedule and (ii) with respect to Revolving Loans of any Type at any time, the percentage rate per annum which is applicable at such time with respect to Revolving Loans of such Type as set forth in the Pricing Schedule. "Applicable Pledge Percentage" means 100%, but 65% in the case of a pledge of Equity Interests of a Foreign Subsidiary to the extent a 100% pledge would cause a Deemed Dividend Problem or a Financial Assistance Problem. "Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. 2 "Article" means an article of this Agreement unless another document is specifically referenced. "Asset Sale" means, with respect to the Borrower or any Subsidiary, the sale, lease, conveyance, disposition or other transfer by such Person of any of its assets (including by way of a sale-leaseback transaction, and including the sale or other transfer of any of the capital stock or other equity interests of such Person or any Subsidiary of such Person) to any Person other than the Borrower or any of its wholly-owned Subsidiaries other than (i) the sale of Property in the ordinary course of business, including, without limitation, the sale or other disposition of any obsolete, excess, damaged or worn-out Property, (ii) leases of assets in the ordinary course of business reasonably determined by the Borrower or its Subsidiaries to be in the best interests of the Borrower or its Subsidiaries, as applicable, (iii) sales or dispositions of Property with an aggregate fair market value not to exceed, during any fiscal year of the Borrower, one percent (1%) of Consolidated Total Assets, (iv) to the extent consummated as Tax-Free Exchange Transactions, sales or dispositions of real Property with an aggregate fair market value not to exceed, in any fiscal year of the Borrower, one percent (1%) of Consolidated Total Assets, and (v) any transactions among the Borrower and its Subsidiaries, so long as the transferee of the Property has granted the Administrative Agent a first-priority, fully-perfected Lien for the benefit of the Holders of Secured Obligations on all of the transferee's Property as security for the Secured Obligations. "Assignment Agreement" is defined in Section 12.3.1. "Authorized Officer" means any of the Chief Executive Officer, Chief Financial Officer, Treasurer or General Counsel of the Borrower, or such other officer of the Borrower as may be designated by the Borrower in writing to the Administrative Agent from time to time, acting singly. "Available Aggregate Revolving Loan Commitment" means, at any time, the Aggregate Revolving Loan Commitment then in effect minus the Aggregate Outstanding Revolving Credit Exposure at such time. "Bank One" means Bank One, NA, a national banking association having its principal office in Chicago, Illinois, and its successors. "Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of: (a) the rate of interest published by the Wall Street Journal, from time to time, as the prime rate; and (b) 1/2 of 1% per annum above the Federal Funds Effective Rate. "BBH Debt" means the existing indebtedness of ACM Block & Brick owing to Brown Brothers Harriman. "Borrower" means Headwaters Incorporated, a Delaware corporation, and its permitted successors and assigns (including, without limitation, a debtor in possession on its behalf). "Borrower Incentive Plans" means the Borrower's 1995 Stock Option Plan, the 2000 Employee Stock Purchase Plan, the 2002 Stock Incentive Plan, the 2003 3 Stock Incentive Plan and any similar or successor incentive plans as shall from time to time be in effect with respect to the Borrower or any Subsidiary. "Borrowing Date" means a date on which an Advance is made hereunder. "Borrowing Notice" is defined in Section 2.8. "Brown Brothers Harriman" means Brown Brothers Harriman & Co. "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in New York City for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in Dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in New York City for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system. "Capital Expenditures" means, without duplication, any expenditures for any purchase or other acquisition of any asset which would be classified as a fixed or capital asset on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with Agreement Accounting Principles, but excluding, solely for the fiscal year in which each Acquisition is consummated, any such expenditures of any Person or business acquired pursuant to such Acquisition. For the purpose of this definition, the purchase price of Property which is acquired simultaneously with the trade-in of existing Property owned by such Person or any of its Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such Property being traded in at such time or the amount of such proceeds, as the case may be. "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Cash Equivalent Investments" means (i) short-term obligations of, or fully guaranteed by, the United States of America, (ii) commercial paper rated A-1 or better by S&P or P-1 or better by Moody's, (iii) demand deposit accounts maintained in the ordinary course of business, and (iv) certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000; provided in each case that the same provides for payment of both principal and interest (and not principal alone or interest alone) and is not subject to any contingency regarding the payment of principal or interest. "Change of Control" means (i) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities 4 Exchange Act of 1934) of 35% or more of the outstanding shares of voting stock of the Borrower; (ii) other than pursuant to a transaction permitted hereunder, the Borrower shall cease to own, directly or indirectly and free and clear of all Liens or other encumbrances, a majority of the outstanding shares of voting stock of the Guarantors on a fully diluted basis; or (iii) the majority of the Board of Directors of the Borrower fails to consist of Continuing Directors. "Closing Date" means September 8, 2004. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time, and any rule or regulation issued thereunder. "Collateral" means all Property and interests in Property now owned or hereafter acquired by the Borrower or any of its Subsidiaries in or upon which a security interest, lien, mortgage, leasehold mortgage, deed of trust, leasehold deed of trust or trust deed is granted to the Administrative Agent, for the benefit of the Holders of Secured Obligations, whether under the Pledge and Security Agreement, under any of the other Collateral Documents or under any of the other Loan Documents. "Collateral Agent" means Morgan Stanley & Co. Incorporated in its capacity as Collateral Agent for the Lenders, and any successor Collateral Agent appointed pursuant to Article X. "Collateral Documents" means all agreements, instruments and documents executed in connection with this Agreement that are intended to create or evidence Liens to secure the Secured Obligations, including, without limitation, the Pledge and Security Agreement, the Intellectual Property Security Agreements, the Mortgages and all other security agreements, mortgages, leasehold mortgages, deeds of trust, leasehold deeds of trust, trust deeds, loan agreements, notes, guarantees, subordination agreements, pledges, powers of attorney, consents, assignments, contracts, fee letters, notices, leases, financing statements and all other written matter whether heretofore, now, or hereafter executed by the Borrower or any of its Subsidiaries and delivered to the Administrative Agent. "Collateral Shortfall Amount" is defined in Section 8.1. "Commitment Fee" is defined in Section 2.5.1. "Commitment Schedule" means the Schedule identifying each Lender's Revolving Loan Commitment, LC Commitment and Term Loan B Commitment as of the Closing Date attached hereto and identified as such. "Consolidated Capital Expenditures" means, with reference to any period, the Capital Expenditures of the Borrower and its Subsidiaries calculated on a consolidated basis for such period; provided, that for the fiscal quarter ended September 30, 2004, Consolidated Capital Expenditures of the Borrower and its Subsidiaries shall be deemed to be $7,300,000. "Consolidated EBITDA" means Consolidated Net Income plus, to the extent deducted from revenues in determining Consolidated Net Income, (i) Consolidated Interest Expense, (ii) expense for taxes paid or accrued, (iii) depreciation, 5 (iv) amortization, (v) non-cash charges for impairments of goodwill and intangible assets and (vi) an amount equal to the tax credits under Section 29 of the Code during such period as a result of the Permitted Alternative Fuel Acquisition up to an amount not to exceed $20,000,000 in any fiscal year thereafter minus, to the extent included in Consolidated Net Income, (i) interest income, all calculated for the Borrower and its Subsidiaries on a consolidated basis and (ii) deferred license fees recognized in the fiscal quarter ending March 31, 2004 in an amount equal to $24,755,000.00; provided that (w) for the twelve months ended June 30, 2004, Consolidated EBITDA shall be deemed to be $202,828,000.00, (x) for the fiscal quarter ended December 31, 2003, Consolidated EBITDA shall be deemed to be $53,485,000.00, (y) for the fiscal quarter ended March 31, 2004, Consolidated EBITDA shall be deemed to be $39,677,000.00 and (z) for the fiscal quarter ended June 30, 2004, Consolidated EBITDA shall be deemed to be $58,341,000.00. Notwithstanding anything herein, in any financial statements of the Borrower or in Agreement Accounting Principles to the contrary, for purposes of calculating and determining Consolidated EBITDA, any Acquisition made by the Borrower or any of its Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the period for which such Consolidated EBITDA was calculated shall be deemed to have occurred on the first day of the relevant period for which such Consolidated EBITDA was calculated on a pro forma basis reasonably acceptable to the Administrative Agent, but without giving effect to any projected synergies resulting from such Acquisition. "Consolidated EBITDAR" means Consolidated EBITDA plus Rentals. "Consolidated Funded Indebtedness" means, at any time, with respect to any Person, the sum of, without duplication, (i) the aggregate Dollar amount of Consolidated Indebtedness owing by such Person or for which such Person is liable which has actually been funded and is outstanding at such time, whether or not such amount is due or payable at such time, plus (ii) the aggregate stated or face amount of all standby Letters of Credit at such time for which such Person is the account party or is otherwise liable, plus (iii) the aggregate amount of Capitalized Lease Obligations owing by such Person or for which such Person is otherwise liable, plus (iv) the aggregate amount of Off-Balance Sheet Liabilities of such Person, plus (v) Contingent Obligations of any of the Indebtedness described in the foregoing clauses (i), (ii), (iii) and (iv). "Consolidated Future Maturities" means, with reference to any period, all scheduled payments of principal to be paid within the four fiscal quarters immediately following the last day of such period (other than prepayments of Loans pursuant to Section 2.2(d) of this Agreement) with respect to all Consolidated Indebtedness of the Borrower and its Subsidiaries. "Consolidated Indebtedness" means at any time, with respect to any Person, the Indebtedness of such Person and its Subsidiaries calculated on a consolidated basis as of such time. "Consolidated Interest Expense" means, with reference to any period, the interest expense of the Borrower and its Subsidiaries calculated on a consolidated basis for such period, in accordance with Agreement Accounting Principles, including without limitation, any Off-Balance Sheet Liability that would constitute interest if the transaction giving rise to such Off-Balance Sheet Liability were re-characterized as a loan transaction; provided, that for 6 the fiscal quarter ended September 30, 2004, Consolidated Interest Expenses shall be deemed to be $12,000,000. "Consolidated Net Income" means, with reference to any period, the net income (or loss) of the Borrower and its Subsidiaries calculated on a consolidated basis for such period in accordance with Agreement Accounting Principles. "Consolidated Rentals" means, with reference to any period, the Rentals of the Borrower and its Subsidiaries calculated on a consolidated basis for such period in accordance with Agreement Accounting Principles. "Consolidated Tangible Assets" means Consolidated Total Assets minus any assets treated as intangible assets under Agreement Accounting Principles. "Consolidated Total Assets" means the total assets of the Borrower and its Subsidiaries calculated on a consolidated basis in accordance with Agreement Accounting Principles. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses (other than for collection or deposit in the ordinary course of business), contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or the obligations of any such Person as general partner of a partnership with respect to the liabilities of the partnership, other than indemnity obligations that do not relate to Indebtedness of third parties. "Continuing Director" means, with respect to any Person as of any date of determination, any member of the board of directors of such Person who (i) was a member of such board of directors on the Closing Date, or (ii) was nominated for election or elected to such board of directors with the approval of the required majority of the Continuing Directors who were members of such board at the time of such nomination or election; provided that any individual who is so elected or nominated in connection with a merger, consolidation, acquisition or similar transaction shall not be a Continuing Director unless such individual was a Continuing Director prior thereto. "Controlled Group" means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Conversion/Continuation Notice" is defined in Section 2.9. "Convertible Notes Indenture" means the Indenture dated as of June 1, 2004 between the Borrower, as Issuer and Wells Fargo Bank, National Association, as Trustee for the holders of the Borrower's 2-7/8% Convertible Senior Subordinated Notes due 2016. 7 "Credit Extension" means the making of an Advance or the issuance of a Facility LC hereunder. "Credit Extension Date" means the Borrowing Date for an Advance or the issuance date for a Facility LC. "Credit Party" means, at any time, any of the Borrower and any Person which is a Guarantor at such time. "Deemed Dividend Problem" means, with respect to any Foreign Subsidiary, such Foreign Subsidiary's accumulated and undistributed earnings and profits being deemed to be repatriated to the Borrower or the applicable parent Domestic Subsidiary for U.S. federal income tax purposes and the effect of such repatriation causing adverse tax consequences to the Borrower or such parent Domestic Subsidiary, in each case as determined by the Borrower in its commercially reasonable judgment acting in good faith and in consultation with its legal and tax advisors. "Default" means an event described in Article VII. "Defaulted Amount" means, with respect to any Lender at any time, any amount required to be paid by such Lender to any Agent or any other Lender hereunder or under any other Loan Document at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Lender to (a) the Swing Line Lender pursuant to Section 2.4.4 to purchase a portion of a Swing Line Loan made by the Swing Line Lender, (b) any LC Issuer pursuant to Section 2.20.2 to purchase a participation in a Facility LC issued by such LC Issuer, (c) the Administrative Agent pursuant to Section 2.18 to reimburse the Administrative Agent for the amount of any Loan made by the Administrative Agent for the account of such Lender, (d) any other Lender pursuant to Section 11.2 to purchase any participation in Loans owing to such other Lender and (e) any Agent or any LC Issuer pursuant to Section 10.8 to reimburse such Agent or such LC Issuer for such Lender's ratable share of any amount required to be paid by the Lenders to such Agent or such LC Issuer as provided therein. In the event that a portion of a Defaulted Amount shall be deemed paid pursuant to Section 2.21(b), the remaining portion of such Defaulted Amount shall be considered a Defaulted Amount originally required to be paid hereunder or under any other Loan Document on the same date as the Defaulted Amount so deemed paid in part. "Defaulting Lender" means, at any time, any Lender that, at such time, (a) owes a Defaulted Loan or a Defaulted Amount or (b) shall take any action or be the subject of any action or proceeding of a type described in Section 7.6. "Defaulted Loan" means, with respect to any Lender at any time, the portion of any Loan required to be made by such Lender to the Borrower pursuant to Section 2.1 at or prior to such time that has not been made by such Lender or by the Administrative Agent for the account of such Lender pursuant to Section 2.18 as of such time. In the event that a portion of a Defaulted Loan shall be deemed made pursuant to Section 2.21(a), the remaining portion of such Defaulted Loan shall be considered a Defaulted Loan originally required to be made pursuant to Section 2.1 on the same date as the Defaulted Loan so deemed made in part. 8 "Disqualified Stock" means any capital stock or other equity interest that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the later of the (i) the Revolving Loan Termination Date, and (ii) the Term Loan B Maturity Date. "Dollar", "dollar" and "$" means the lawful currency of the United States of America. "Domestic Subsidiary" means any Subsidiary of any Person organized under the laws of a jurisdiction located in the United States of America. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, injunctions, permits, concessions, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof. "Environmental Permit" means any permit, approval, identification number, license or other authorization required under any Environmental Law. "Equipment" means all of the Borrower's and each Subsidiary's present and future (i) equipment, including, without limitation, machinery, manufacturing, distribution, data processing and office equipment, assembly systems, tools, molds, dies, fixtures, appliances, furniture, furnishings, vehicles, vessels, aircraft, aircraft engines, and trade fixtures, (ii) other tangible personal property (other than inventory), and (iii) any and all accessions, parts and appurtenances attached to any of the foregoing or used in connection therewith, and any substitutions therefor and replacements, products and proceeds thereof. "Equity Interests" means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or non-voting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rules or regulations promulgated thereunder. "Eurodollar Advance" means an Advance which, except as otherwise provided in Section 2.11, bears interest at the applicable Eurodollar Rate. "Eurodollar Base Rate" means, for any Interest Period, an interest rate per annum equal to the rate per annum obtained by dividing (a) the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on 9 the page of the Telerate screen (or any successor page) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 A.M. (London time) two Business Days before the first day of such Interest Period (provided that, if for any reason such rate does not appear on such page or service or such page or service shall not be available, the term "Eurodollar Base Rate" shall mean the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the rate determined by the Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period) by (b) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period. "Eurodollar Loan" means a Revolving Loan which, except as otherwise provided in Section 2.11, bears interest at the applicable Eurodollar Rate. "Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the sum of the Eurodollar Base Rate applicable to such Interest Period, plus the Applicable Margin then in effect, changing as and when the Applicable Margin changes. "Eurodollar Rate Reserve Percentage" for any Interest Period for all Eurodollar Loans comprising part of the same Advance means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Loans is determined) having a term equal to such Interest Period. "Event of Loss" means, with respect to any Property, any of the following: (i) any loss, destruction or damage of such Property or (ii) any condemnation, seizure, or taking, by exercise of the power of eminent domain or otherwise, of such Property, or confiscation of such Property or the requisition of the use of such Property by any Governmental Authority. "Excess Cash Flow" means, without duplication, for any fiscal year, an amount equal to: (i) Consolidated EBITDA for such period (less any extraordinary, unusual or other non-recurring gains or other income, non-cash income, all calculated for the Borrower and its Subsidiaries on a consolidated basis); Minus (ii) taxes paid in cash during such period; 10 Minus(Plus) (iii) the net increase (decrease), if any, in Working Capital during such period; Minus (iv) Consolidated Capital Expenditures and Permitted Acquisitions during such period in each case to the extent made in cash and permitted pursuant to the terms hereof; Minus (v) payments of principal on the Term B Loans pursuant to Section 2.1.2, Net Revolver Payments (but solely to the extent that in the immediately preceding fiscal year no Excess Cash Flow Payments were made by the Borrower) and payments of principal on all other Indebtedness of the Borrower and its Subsidiaries during such period. Minus (vi) Consolidated Interest Expense paid in cash during such period. "Excluded Taxes" means, in the case of each Lender or applicable Lending Installation and the Administrative Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Lender or the Administrative Agent is incorporated or organized or any political combination or subdivision or taxing authority thereof or (ii) the jurisdiction in which the Administrative Agent's or such Lender's principal executive office or such Lender's applicable Lending Installation is located. "Exempt Property" means (i) in the case of the Real Property, all such Real Property other than the Real Property Collateral (ii) all vehicles and other Collateral subject to state certificate of title statutes (iii) all Deposit Accounts (as defined in the Security Agreement) which are not maintained with the Collateral Agent and that with respect to which Account Control Agreements (as defined in the Pledge and Security Agreement) are not required to be entered into pursuant to the terms of the Pledge and Security Agreement and (iv) the escrow and deposit accounts established in connection with Permitted Acquisitions or set forth on Schedule II hereto. "Exhibit" refers to an exhibit to this Agreement, unless another document is specifically referenced. "Existing Credit Agreement" means that certain Credit Agreement dated as of March 31, 2004 between the Borrower, certain of its subsidiaries, the lenders party thereto and Bank One, NA (Main Office Chicago) as administrative agent, as the same has been amended or supplemented prior to the Closing Date. "Existing Letters of Credit" means those Letters of Credit identified in Schedule 2.20. "Facility LC" is defined in Section 2.20.1. "Facility LC Application" is defined in Section 2.20.3. "Facility LC Collateral Account" means a special collateral account maintained pursuant to arrangements satisfactory to the Administrative Agent; 11 such account to be in the name of the Borrower but under the sole dominion and control of the Administrative Agent, for the benefit of the Lenders, and in which the Borrower shall have no control other than as set forth in Section 8.1. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (New York City time) on such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent in its sole discretion. "Financial Contract" of a Person means (i) any exchange-traded or over-the-counter futures, forward, swap or option contract or other financial instrument with similar characteristics or (ii) any Rate Management Transaction. "Financial Assistance Problem" means, with respect to any Foreign Subsidiary, the inability of such Foreign Subsidiary to become a Subsidiary Guarantor or to permit its Capital Stock from being pledged pursuant to a pledge agreement on account of legal or financial limitations imposed by the jurisdiction of organization of such Foreign Subsidiary or other relevant jurisdictions having authority over such Foreign Subsidiary, in each case as determined by the Borrower in its commercially reasonable judgment acting in good faith and in consultation with its legal and tax advisors "Financing" means, with respect to any Person, (i) the issuance or sale by such Person of any Equity Interests in such Person for cash, other than the issuance of Equity Interests to then current officers, directors, employees and consultants pursuant to any of the Borrower Incentive Plans or (ii) the issuance or sale by such Person of any Permitted Indebtedness. "First Tier Foreign Subsidiary" means each Foreign Subsidiary with respect to which any one or more of the Borrower and its Domestic Subsidiaries directly owns or controls more than 50% of such Foreign Subsidiary's issued and outstanding equity interests. "Fixed Charge Coverage Ratio" is defined in Section 6.22. "Floating Rate" means, for any day, a rate per annum equal to the sum of (i) the Alternate Base Rate for such day, changing when and as the Alternate Base Rate changes plus (ii) the Applicable Margin then in effect, changing as and when the Applicable Margin changes. "Floating Rate Advance" means an Advance which, except as otherwise provided in Section 2.11, bears interest at the Floating Rate. "Floating Rate Loan" means a Loan which, except as otherwise provided in Section 2.11, bears interest at the Floating Rate. "Foreign Subsidiary" means any Subsidiary of any which is not a Domestic Subsidiary of such Person. 12 "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "Governmental Authority" means any nation or government, any foreign, federal, state, local or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor" means each Subsidiary of the Borrower which is a party to the Guaranty Agreement, including each Subsidiary of the Borrower which becomes a party to the Guaranty Agreement pursuant to a joinder or other supplement thereto. "Guaranty Agreement" means the Guaranty Agreement, dated as of the Closing Date, made by the Guarantors in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Hazardous Materials" means (a) petroleum or petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law. "Holders of Secured Obligations" means the holders of the Secured Obligations from time to time and shall refer to (i) each Lender in respect of its Loans, (ii) each LC Issuer in respect of Reimbursement Obligations, (iii) the Administrative Agent, the Lenders and each LC Issuer in respect of all other present and future obligations and liabilities of the Borrower or any of the Guarantors of every type and description arising under or in connection with this Agreement or any other Loan Document, (iv) each Lender (or affiliate thereof), in respect of all Rate Management Obligations of the Borrower and any Subsidiary to such Lender (or such affiliate) as exchange party or counterparty under any Rate Management Transaction, (v) each Lender (or affiliate thereof), in respect of all Treasury Management Obligations of the Borrower and its Subsidiaries to such Lender (or such affiliate) as provider of treasury management or similar services and (vi) their respective successors, transferees and assigns. "Indebtedness" of a Person means, at any time, without duplication, such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (other than current accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), if the deferred purchase price is due more than six (6) months after the date the obligation is incurred or is evidenced by a note or similar written instrument, (iii) obligations which are evidenced by notes, bonds, debentures, acceptances, or other instruments representing extensions of credit (including, without limitation, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights, options for the purchase or other acquisition from such Person of such shares (or such other interests), (iv) obligations of such Person to purchase, redeem, retire, defease or otherwise acquire or make any payment in respect of any capital stock of any other Person 13 valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (v) Capitalized Lease Obligations, (vi) Contingent Obligations of such Person, (vii) reimbursement obligations under Letters of Credit, bankers' acceptances, surety bonds and similar instruments, (viii) Off-Balance Sheet Liabilities, (ix) obligations under Sale and Leaseback Transactions, (x) Net Mark-to-Market Exposure under Rate Management Transactions and other Financial Contracts, (xi) Rate Management Obligations and (xii) any other obligation for borrowed money which in accordance with Agreement Accounting Principles would be shown as a liability on the consolidated balance sheet of such Person. "Initial LC Issuers" means MSSF (or any subsidiary or affiliate of MSSF designated by MSSF) in its capacity as issuer of Facility LCs hereunder and Bank One in its capacity as issuer of Existing Letters of Credit, subject to the limitations contained in Section 2.20.1. "Intellectual Property Security Agreements" means the intellectual property security agreements as any Credit Party may from time to time make in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations, in each case as the same may be amended, restated, supplemented or otherwise modified from time to time. "Intercreditor Agreement" means the Intercreditor Agreement dated as of September 8, 2004 among the Borrower, the Administrative Agent, the Collateral Agent, MSSF, as Administrative Agent under the Second Lien Credit Agreement, and MS&Co., as Collateral Agent under the Second Lien Credit Agreement, as the same may be amended, amended and restated, supplemented or otherwise modified from time to time. "Interest Period" means, with respect to a Eurodollar Advance, a period of one, two, three or six months, commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on but exclude the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers, employees made in the ordinary course of business), extension of credit (other than Receivables arising in the ordinary course of business) or contribution of capital by such Person; stocks, bonds, mutual funds, partnership interests, notes, debentures or other securities owned by such Person; any deposit accounts and certificate of deposit owned by such Person; and structured notes, derivative financial instruments and other similar instruments or contracts owned by such Person. "LC Commitment" means, with respect to any LC Issuer at any time, the amount set forth opposite such LC Issuer's name on the Commitment Schedule or, if such LC Issuer has entered into one or more Assignment Agreements, the amount set forth for such LC Issuer in the Register maintained by the Administrative 14 Agent pursuant to Section 12.3.4 as such LC Issuer's "Letter of Credit Commitment", as such amount may be reduced at or prior to such time pursuant to Section 2.5.3. "LC Fee" is defined in Section 2.20.4. "LC Issuers" means the Initial LC Issuers and any other Lender with a Revolving Loan Commitment approved as an LC Issuer by the Administrative Agent and any Purchaser that is approved by the Administrative Agent to which an LC Commitment hereunder has been assigned pursuant to Section 12.3 so long as each such Revolving Credit Lender or Purchaser expressly agrees to perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as an LC Issuer and notifies the Administrative Agent of its Lending Installation and the amount of its LC Commitment (which information shall be recorded by the Administrative Agent in the Register), for so long as such Initial LC Issuer, Revolving Credit Lender or Purchaser, as the case may be, shall have an LC Commitment hereunder. "LC Obligations" means, at any time, the sum, without duplication, of (i) the aggregate undrawn stated amount under all Facility LCs outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations. "LC Payment Date" is defined in Section 2.20.5. "LC Sublimit" means, at any time, an amount equal to the lesser of (a) the aggregate amount of the LC Issuers' LC Commitments at such time and (b) $25,000,000, as such amount may be reduced at or prior to such time pursuant to Section 2.5.3. "Lead Arrangers" means Morgan Stanley Senior Funding, Inc. and J.P. Morgan Securities Inc. and their respective successors, in their respective capacities as Joint Lead Arrangers and Joint Book Runners. "Leased Real Property" means each parcel of real property leased or subleased by any Credit Party or any of its Subsidiaries pursuant to any Real Property Lease. "Lenders" means the lending institutions (other than Bank One) listed on the signature pages of this Agreement and their respective successors and assigns. Unless otherwise specified, the term "Lenders" includes the Swing Line Lender and each LC Issuer, but in no event shall the term "Lender" include Bank One. "Lending Installation" means, with respect to a Lender or the Administrative Agent, the office, branch, subsidiary or affiliate of such Lender or the Administrative Agent listed on the signature pages hereof or on the administrative information sheets provided to the Administrative Agent in connection herewith or on a Schedule or otherwise selected by such Lender or the Administrative Agent pursuant to Section 2.17. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. 15 "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, security interest, encumbrance, lien, charge or deposit arrangement or other arrangement having the practical effect of the foregoing and shall include the interest of a vendor or lessor under any conditional sale agreement, Capitalized Lease Obligation or other title retention agreement. "Loan" means, with respect to a Lender, such Lender's loan made pursuant to Article II (or any conversion or continuation thereof), whether constituting a Term B Loan, Revolving Loan or a Swing Line Loan. "Loan Documents" means this Agreement, the Facility LC Applications, the Collateral Documents, the Guaranty Agreement, the Intercreditor Agreement and all other documents, instruments, notes (including any Notes issued pursuant to Section 2.13 (if requested)) and agreements executed in connection herewith or therewith or contemplated hereby or thereby, as the same may be amended, restated or otherwise modified and in effect from time to time. "Material Adverse Change" means any material adverse change (i) in the business, condition (financial or otherwise), performance, operations or results of operations or properties of the Borrower and its Subsidiaries, taken as a whole, (ii) the rights and remedies of any Agent or any Lender under any Loan Document or (iii) in the ability of the Borrower and its Subsidiaries (taken as a whole) to repay the Obligations or to perform their obligations under the Loan Documents. "Material Indebtedness" means any Indebtedness in an outstanding principal amount of $5,000,000 or more in the aggregate (or the equivalent thereof in any currency other than Dollars). "Material Indebtedness Agreement" means any agreement under which any Material Indebtedness was created or is governed or which provides for the incurrence of Indebtedness in an amount which would constitute Material Indebtedness (whether or not an amount of Indebtedness constituting Material Indebtedness is outstanding thereunder). "Measurement Period" means, at any date of determination, the most recently completed four consecutive fiscal quarters of the Borrower ending on or prior to such date or, if less than four consecutive fiscal quarters of the Borrower have been completed since the date of the initial Credit Extension, the fiscal quarters of the Borrower that have been completed since the date of the initial Credit Extension; provided that, (a) for purposes of determining an amount of any item (other than Consolidated EBITDA) included in the calculation of a financial ratio or financial covenant for the fiscal quarter ended September 30, 2004, such amount for the Measurement Period then ended shall equal such item for such fiscal quarter multiplied by four; (b) for purposes of determining an amount of any item included in the calculation of a financial ratio or financial covenant for the fiscal quarter ended December 31, 2004, such amount for the Measurement Period then ended shall equal such item for two fiscal quarters then ended multiplied by two, and (c) for purposes of determining an amount of any item included in the calculation of a financial ratio or financial covenant for the fiscal quarter ended March 31, 2005, such amount for the Measurement Period then ended shall equal such item for the three fiscal quarters then ended multiplied by 4/3. 16 "Modify" and "Modification" are defined in Section 2.20.1. "Moody's" means Moody's Investors Services, Inc. and any successor thereto. "Mortgage" means deeds of trust, trust deeds, mortgages, leasehold mortgages and leasehold deeds of trust in substantially the form of Exhibit H hereto (with such changes as may be required to account for local law matters) and otherwise in form and substance reasonably satisfactory to the Administrative Agent and covering the Real Property Collateral, in each case as amended, restated, supplemented or otherwise modified from time to time. "Mortgage Instruments" is defined in Section 6.26. "Mortgage Policies" is defined in Section 6.26. "MS&Co." means Morgan Stanley and Co. Incorporated. "MSSF" means Morgan Stanley Senior Funding, Inc. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, which is covered by Title IV of ERISA and to which the Borrower or any member of the Controlled Group is obligated, or within any of the preceding five plan years has been obligated, to make contributions. "Multiple Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any member of the Controlled Group or (b) was so maintained and in respect of which the Borrower or any member of the Controlled Group could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Net Cash Proceeds" means, (1) with respect to any Asset Sale or any Financing by any Person, (a) cash (freely convertible into Dollars) received by such Person or any Subsidiary of such Person from such Asset Sale (including cash received as consideration for the assumption or incurrence of liabilities incurred in connection with or in anticipation of such Asset Sale) or such Financing, after (i) provision for all income or other taxes measured by or resulting from such sale of Property, (ii) payment of all commissions and other reasonable and customary transaction costs, fees and expenses properly attributable to such transaction and payable in connection therewith (including, without limitation, attorneys' fees, investment banking fees, underwriting fees, and accounting fees) which are on an arms-length basis, and (iii) all amounts used to repay Indebtedness secured by a Lien on any asset disposed of in such Asset Sale which is or may be required (by the express terms of the instrument governing such Indebtedness) to be repaid in connection with such Asset Sale (including payments made to obtain or avoid the need for the consent of any holder of such Indebtedness) or Financing and (2) with respect to an Event of Loss of a Person, cash (freely convertible in Dollars) received by or for such Person's account, net of (i) reasonable direct costs or expenses incurred in connection with such Event of Loss incurred in investigating or recovering such cash and reasonable reserves associated therewith in accordance with Agreement Accounting Principles and (ii) amounts required to repay principal of, premium if any, and interest on any Indebtedness or statutory or other obligations 17 secured by any Lien on the property (or portion thereof) so damaged or taken (other than the Secured Obligations) which is required to be and is repaid in connection with such Event of Loss. "Net Mark-to-Market Exposure" of a Person means, as of any date of determination, the excess (if any) of all unrealized losses over all unrealized profits of such Person arising from Rate Management Transactions. "Unrealized losses" means the fair market value of the cost to such Person of replacing such Rate Management Transaction as of the date of determination (assuming the Rate Management Transaction were to be terminated as of that date), and "unrealized profits" means the fair market value of the gain to such Person of replacing such Rate Management Transaction as of the date of determination (assuming such Rate Management Transaction were to be terminated as of that date). "Net Revolver Payments" means, for any fiscal year, the amount (if positive) equal to (i) the aggregate outstanding principal amount of Revolving Loans at the beginning of such year minus (ii) the aggregate outstanding principal amount of Revolving Loans at the end of such fiscal year. "Non-Consenting Lender" is defined in Section 8.2. "Non-U.S. Lender" is defined in Section 3.5(iv). "Note" is defined in Section 2.13. "Obligations" means all Loans, all Reimbursement Obligations, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Administrative Agent, any Lender, the Swing Line Lender, any LC Issuer, the Lead Arrangers, any affiliate of the Administrative Agent, any Lender, the Swing Line Lender, any LC Issuer or the Lead Arrangers, or any indemnitee under the provisions of Section 9.6 or any other provisions of the Loan Documents, in each case of any kind or nature, present or future, arising under this Agreement or any other Loan Document, whether or not evidenced by any note, guaranty or other instrument, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, foreign exchange risk, guaranty, indemnification, or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, reasonable attorney's and paralegals' fees and disbursements (in each case whether or not allowed), and any other sum chargeable to the Borrower or any of its Subsidiaries under this Agreement or any other Loan Document. "Off-Balance Sheet Liability" of a Person means the principal component of (i) any repurchase obligation or liability of such Person with respect to Receivables or notes receivable sold by such Person, (ii) any liability under any so-called "synthetic lease" or "tax ownership operating lease" transaction entered into by such Person, or (iii) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the consolidated balance sheets of such Person, but excluding from this clause (iii) all Operating Leases. 18 "Operating Lease" of a Person means any lease of Property (other than a Capitalized Lease) by such Person as lessee which has an original term (including any required renewals and any renewals effective at the option of the lessor) of one year or more. "Other Taxes" is defined in Section 3.5(ii). "Outstanding Revolving Credit Exposure" means, as to any Lender at any time, the sum of (i) the aggregate principal amount of its Revolving Loans outstanding at such time, plus (ii) an amount equal to its ratable obligation to purchase participations in the aggregate principal amount of Swing Line Loans outstanding at such time, plus (iii) an amount equal to its ratable obligation to purchase participations in the LC Obligations at such time. "Owned Real Property" means all real property owned by any Credit Party or any of its Subsidiaries from time to time. "Participants" is defined in Section 12.2.1. "Payment Date" means the last day of each February, May, August and November, the Revolving Loan Termination Date and the Term Loan B Maturity Date. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" is defined in Section 6.13.3. "Permitted Alternative Fuel Acquisition" means the Acquisition of membership interests listed on Schedule III hereto for an aggregate purchase price (excluding amounts accounted for as expenses on the financial statements of the Borrower) not to exceed $15 million. "Permitted Encumbrances" has the meaning specified in the Mortgages. "Permitted Indebtedness" means unsecured Indebtedness of the Borrower whether senior or subordinated provided that (i) both before and after the incurrence of such Indebtedness, the Borrower is in pro forma compliance with its financial covenants, (ii) in no event shall the terms of such Indebtedness require amortization prior to 6 months after the latest of the Revolving Loan Termination Date and the Term Loan B Maturity Date, (iii) a Subsidiary under the Loan Documents shall not guarantee such Indebtedness unless (x) such Subsidiary is also a Guarantor under the Guaranty Agreement and (y) such guarantee of such Indebtedness provides for the release and termination thereof, without action by any party, upon any release and termination of such Guaranty Agreement by the applicable Subsidiary (other than by reason of repayment and satisfaction of all of the Obligations), (iv) to the extent any such Indebtedness is subordinated, such Indebtedness shall be subordinated on terms and conditions reasonably acceptable to the Administrative Agent and (v) the Net Cash Proceeds from such Indebtedness shall be applied to make a mandatory prepayment of the Loans as required under Section 2.2(c) hereof. "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. 19 "Plan" means an employee pension benefit plan, excluding any Multiemployer Plan, which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "Pledge and Security Agreement" means that certain First Lien Pledge and Security Agreement, dated as of the Closing Date, by and between the Credit Parties and the Collateral Agent for the benefit of the Holders of Secured Obligations, as the same may be amended, restated, supplemented, or otherwise modified from time to time. "Pledge Subsidiary" means each Domestic Subsidiary and each First Tier Foreign Subsidiary. "Preferred Interests" means, with respect to any Person, equity interests issued by such Person that are entitled to a preference or priority over other equity interests issued by such Person upon any distribution of such Person's property and assets, whether by dividend or upon liquidation. "Pricing Schedule" means the Schedule identifying the Applicable Margin and Applicable Fee Rate attached hereto and identified as such. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Pro Rata Share" means, with respect to any Lender, the percentage obtained by dividing (i) the sum of such Lender's Revolving Loan Commitment and Term B Loans at such time by (ii) the sum of the Aggregate Revolving Loan Commitment and the aggregate amount of all of the Term B Loans at such time; provided, however, if all of the Revolving Loan Commitments and Term Loan B Commitments are terminated pursuant to the terms of this Agreement, then "Pro Rata Share" means the percentage obtained by dividing (a) the sum of such Lender's Outstanding Revolving Credit Exposure and outstanding Term B Loans at such time by (b) the sum of the Aggregate Outstanding Revolving Credit Exposure and the aggregate outstanding amount of all Term B Loans at such time. "Purchase Price" means the total consideration and other amounts payable in connection with any Acquisition, including, without limitation, any portion of the consideration payable in cash, the fair market value of non-cash consideration, all Indebtedness, liabilities and contingent obligations incurred or assumed in connection with such Acquisition and all transaction costs and expenses incurred in connection with such Acquisition. "Purchasers" is defined in Section 12.3.1. "Rate Management Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Rate Management Transactions, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Rate Management Transactions. 20 "Rate Management Transaction" means any transaction (including an agreement with respect thereto) now existing or hereafter entered by the Borrower or a Subsidiary which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. "Real Property" means the Leased Real Property and the Owned Real Property. "Real Property Collateral" means all Owned Real Property listed on Schedule 5.14(b)(iii), any Owned Real Property acquired after the Closing Date with a net book value in excess of $1,000,000 and any additional Owned Real Property to the extent that the aggregate net book value of all Owned Real Property that does not constitute Real Property Collateral exceeds $15,000,000. "Real Property Leases" means all leases of real property under which any Credit Party or any of its Subsidiaries is a lessee from time to time. "Receivable(s)" means and includes all of the Borrower's and each Subsidiary's presently existing and hereafter arising or acquired accounts, accounts receivable, and all present and future rights of the Borrower or such Subsidiary to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether or not they have been earned by performance, and all rights in any merchandise or goods which any of the same may represent, and all rights, title, security and guarantees with respect to each of the foregoing, including, without limitation, any right of stoppage in transit. "Redeemable" means, with respect to any equity interest, any Indebtedness or any other right or Obligation, any such equity interest, Indebtedness, right or Obligation that (a) the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer or (b) is redeemable at the option of the holder. "Refinancing" means the refinancing of all outstanding Indebtedness incurred under the Existing Credit Agreement. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks, non-banks and non-broker lenders for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. 21 "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by foreign lenders for the purpose of purchasing or carrying margin stock (as defined therein). "Reimbursement Obligations" means, at any time, the aggregate of all obligations of the Borrower then outstanding under Section 2.20 to reimburse any LC Issuer for amounts paid by such LC Issuer in respect of any one or more drawings under Facility LCs. "Rentals" of a Person means the aggregate fixed amounts payable by such Person under any Operating Lease; provided, that for the fiscal quarter ended September 30, 2004, Rentals of the Borrower and its Subsidiaries on a consolidated basis shall be deemed to be $4,000,000. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan subject to Title IV of ERISA, excluding, however, such events as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Reports" is defined in Section 9.6. "Required Lenders" means Lenders in the aggregate having more than 50% of the sum of the Aggregate Revolving Loan Commitment and the Aggregate Term Loan B Commitment (or, if all of the Revolving Loan Commitments and Term Loan B Commitments are terminated pursuant to the terms of this Agreement, the Aggregate Outstanding Revolving Credit Exposure and aggregate outstanding principal amount of Term B Loans at such time), provided, however, that if any Lender shall be a Defaulting Lender at such time, there shall be excluded from the determination of Required Lenders at such time (A) such Lender's Revolving Loan Commitment at such time and (B) such Lender's Term Loan B Commitment at such time (or, if all Revolving Loan Commitments and Term Loan B Commitments are terminated pursuant to the terms of this Agreement, the Outstanding Revolving Credit Exposure of such Lender at such time and outstanding aggregate principal amount of Term B Loans of such Lender at such time). "Restricted Payment" means (i) any dividend or other distribution, direct or indirect, on account of any equity interests of the Borrower now or hereafter outstanding, except a dividend payable solely in the Borrower's capital stock (other than Disqualified Stock) or in options, warrants or other rights to purchase such capital stock, (ii) any redemption, retirement, purchase or other acquisition for value, direct or indirect, of any equity interests of the Borrower or any of its Subsidiaries now or hereafter outstanding, other than in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Subsidiary of the Borrower) of other equity interests of the Borrower (other than Disqualified Stock), (iii) any redemption, purchase, retirement, defeasance, prepayment or other acquisition for value, direct or indirect, of any Indebtedness prior to the stated maturity thereof, other than the Obligations and (iv) any payment of a claim for the rescission of the purchase or sale of, or for material damages arising from the purchase or sale 22 of, any Indebtedness (other than the Secured Obligations) or any equity interests of the Borrower or any of the Borrower's Subsidiaries, or of a claim for reimbursement, indemnification or contribution arising out of or related to any such claim for damages or rescission. "Revolving Loan" means, with respect to a Lender, such Lender's loan made pursuant to its commitment to lend set forth in Section 2.1.1 (and any conversion or continuation thereof). "Revolving Loan Commitment" means, for each Lender, including without limitation, each LC Issuer, such Lender's obligation to make Revolving Loans to, and participate in Facility LCs issued upon the application of, the Borrower in an aggregate amount not exceeding the amount set forth for such Lender on the Commitment Schedule or in any Assignment Agreement delivered pursuant to Section 12.3, as such amount may be modified from time to time pursuant to the terms hereof. "Revolving Loan Pro Rata Share" means, with respect to any Lender, the percentage obtained by dividing (i) such Lender's Revolving Loan Commitment at such time by (ii) the Aggregate Revolving Loan Commitment at such time; provided, however, if all of the Revolving Loan Commitments are terminated pursuant to the terms of this Agreement, then "Revolving Loan Pro Rata Share" means the percentage obtained by dividing (a) such Lender's Outstanding Revolving Credit Exposure at such time by (b) the Aggregate Outstanding Revolving Credit Exposure at such time. "Revolving Loan Termination Date" means the earlier of (a) September 8, 2009, and (b) the date of termination in whole of the Aggregate Revolving Loan Commitment pursuant to Section 2.2 hereof or the Revolving Loan Commitments pursuant to Section 8.1 hereof. "S&P" means Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and any successor thereto. "Sale and Leaseback Transaction" means any sale or other transfer of Property by any Person with the intent to lease such Property as lessee. "Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced. "Second Lien Collateral Documents" means all agreements, instruments and documents executed in connection with the Second Lien Credit Agreement that are intended to create or evidence Liens to secure the obligations thereunder, including, without limitation, the Pledge and Security Agreement, the Second Lien Intellectual Property Security Agreements, the Mortgages (each as defined in the Second Lien Credit Agreement) and all other security agreements, mortgages, leasehold mortgages, deeds of trust, leasehold deeds of trust, trust deeds, loan agreements, notes, guarantees, subordination agreements, pledges, powers of attorney, consents, assignments, contracts, fee letters, notices, leases, financing statements and all other written matter whether heretofore, now, or hereafter executed by the Borrower or any of its Subsidiaries and delivered to the administrative agent under the Second Lien Credit Agreement in connection with the Liens granted thereunder. 23 "Second Lien Credit Agreement" means the Credit Agreement dated as of September 8, 2004 in connection with the Second Lien Financing by and among the Borrower, as the borrower, the lenders party thereto and MSSF, as administrative agent. "Second Lien Financing" means the $150 million senior secured second lien financing incurred by the Borrower pursuant to the Second Lien Credit Agreement. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Secured Obligations" means, collectively, (i) the Obligations, (ii) all Rate Management Obligations owing in connection with Rate Management Transactions to any Lender or any affiliate of any Lender and (iii) all Treasury Management Obligations owing to any Lender or any affiliate of any Lender. "Senior Leverage Ratio" is defined in Section 6.21.2. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group or with respect to which the Borrower or any member of the Controlled Group is reasonably expected to incur liability under Section 4064 or 4069 of ERISA. "Solvent" and "Solvency" mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Subordinated Indebtedness" of a Person means any Indebtedness of such Person the payment of which is subordinated to payment of the Secured Obligations to the written reasonable satisfaction of the Administrative Agent. "Subordinated Indebtedness Documents" means any document, agreement or instrument evidencing any Subordinated Indebtedness or entered into in connection with any Subordinated Indebtedness. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than 50% of the ownership interests having 24 ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Substantial Portion" means, with respect to the Property of the Borrower and its Subsidiaries, Property which represents more than 10% of Consolidated Tangible Assets or Property which is responsible for more than 10% of the consolidated net revenues of the Borrower and its Subsidiaries, in each case, as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as at the beginning of the twelve-month period ending with the month in which such determination is made (or if financial statements have not been delivered hereunder for that month which begins the twelve-month period, then the financial statements delivered hereunder for the quarter ending immediately prior to that month). "Supplemental Collateral Agent" is defined in Section 10.17. "Swing Line Borrowing Notice" is defined in Section 2.4.2. "Swing Line Commitment" means the obligation of the Swing Line Lender to make Swing Line Loans up to a maximum principal amount of $5,000,000 at any one time outstanding. "Swing Line Lender" means MSSF. "Swing Line Loan" means a Loan made available to the Borrower by the Swing Line Lender pursuant to Section 2.4. "Syndication Agent" means JPMorgan Chase Bank and its respective successors in their capacity as Syndication Agent. "Tapco Acquisition" means the acquisition by the Borrower of 100% of the ownership interests in Tapco Holdings, Inc., a Michigan corporation pursuant to the Tapco Acquisition Documents. "Tapco Acquisition Documents" means (a) the Agreement and Plan of Merger dated as of September 8, 2004 by and among the Borrower, and Headwaters T Acquisition Corp., a direct wholly owned Subsidiary of the Borrower and Tapco Holdings, Inc., (b) the certificate of merger of Headwaters T Acquisition Corp. into Tapco Holdings, Inc., duly filed with the State of Michigan and (c) the certificate of Articles of Merger/Share Exchange of Headwaters T Acquisition Corp. into Tapco Holdings, Inc., duly filed with the State of Utah Department of Commerce. "Tapco Real Property Collateral" means the Real Property Collateral marked with an asterisk on schedules 5.14(b)(iii) and 5.14(b)(iv). "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes and Other Taxes. 25 "Tax-Free Exchange Transactions" means any transaction involving the purchase or sale of Property which does not trigger capital gains or similar taxes for the Borrower or any Subsidiary thereof. "Tenant Leases" means all leases of real property under which any Credit Party or any of its Subsidiaries is the lessor or sublessor from time to time. "Term B Loan" is defined in Section 2.1.2. "Term Loan B Commitment" means, as to each Lender, its obligation to make Term B Loans to the Borrower pursuant to Section 2.1.2 in an aggregate principal amount set forth for such Lender on the Commitment Schedule. "Transferee" is defined in Section 12.4. "Term Loan B Maturity Date" means the earlier of (i) April 30, 2011 and (ii) the date of termination in whole of the Term Loan B Commitments pursuant to Section 2.2 or 8.1 hereof. "Term Loan Pro Rata Share" means, with respect to any Lender, the percentage obtained by dividing (a) such Lender's Term B Loans at such time by (b) the aggregate amount of all of the Term B Loans at such time. "Total Leverage Ratio" is defined in Section 6.21.1. "Transaction" means collectively the Tapco Acquisition, the Refinancing and the transactions contemplated under the Loan Documents. "Transaction Documents" means, collectively, the Loan Documents and the Acquisition Documents. "Treasury Management Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under any and all treasury management services agreements, any service terms or any service agreements, including electronic payments service terms and automated clearing house agreements, and all overdrafts on any account of such Person. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance or a Eurodollar Advance and with respect to any Loan, its nature as a Floating Rate Loan or a Eurodollar Loan. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested and unvested accrued benefits under each Single Employer Plan subject to Title IV of ERISA exceeds the fair market value of all such Plan's assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan for which a valuation report is available, using actuarial assumptions for funding purposes as set forth in such report. 26 "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, limited liability company, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. "Working Capital" means, as at any date of determination, the excess, if any, of (i) the Borrower's consolidated current assets, except cash and Cash Equivalent Investments, over (ii) the Borrower's consolidated current liabilities, other than current maturities of long-term Indebtedness, as of such date provided that, solely for the fiscal year in which each Acquisition is consummated, Working Capital shall exclude current assets and current liabilities of any Person or business acquired pursuant to such Acquisition. 1.2. Plural Forms. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II THE CREDITS 2.1. Revolving Loan Commitments and Term Loan B Commitments. 2.1.1 Revolving Loans. From (but not including) the Closing Date and prior to the Revolving Loan Termination Date, upon the satisfaction of the conditions precedent set forth in Section 4.1 and 4.2, as applicable, each Lender severally and not jointly agrees, on the terms and conditions set forth in this Agreement, to (i) make Revolving Loans to the Borrower from time to time and (ii) participate in Facility LCs issued upon the request of the Borrower, in each case in an amount not to exceed in the aggregate at any one time outstanding of its Revolving Loan Pro Rata Share of the Available Aggregate Revolving Loan Commitment; provided that at no time shall the Aggregate Outstanding Revolving Credit Exposure hereunder exceed the Aggregate Revolving Loan Commitment. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow Revolving Loans at any time prior to the Revolving Loan Termination Date. The commitment of each Lender to lend hereunder shall automatically expire on the Revolving Loan Termination Date. Each LC Issuer will issue Facility LCs hereunder on the terms and conditions set forth in Section 2.20. 2.1.2 Term B Loans. Each Lender severally and not jointly agrees to make a term loan, in Dollars, to the Borrower on the Closing Date in an amount equal to such Lender's Term B Loan Commitment (each such loan being referred to herein individually as a "Term B Loan" and collectively as the "Term B Loans"). The unpaid principal balance of the Term B Loans shall be repaid in twenty-seven (27) consecutive quarterly principal installments, payable on the last Business Day of each February, May, August and November, commencing on November 30, 27 2004, and continuing thereafter until the Term Loan B Maturity Date, and the Term B Loans shall be permanently reduced by the amount of each installment on the date payment thereof is made hereunder. The first twelve (12) installments shall be in an amount equal to $12,000,000.00, the next twelve (12) installments shall be in an amount equal to $4,000,000.00 and the last three (3) installments shall be in an amount equal to $149,333,333.33; provided that, notwithstanding the foregoing, the final installment shall be in the amount of the then outstanding principal balance of the Term B Loans. In addition, notwithstanding the immediately preceding sentence, the then outstanding principal balance of the Term B Loans, if any, shall be due and payable on the Term Loan B Maturity Date. No installment of any Term B Loan shall be reborrowed once repaid. In addition to the scheduled payments on the Term B Loans, the Borrower (a) may make the voluntary prepayments described in Section 2.7 for credit against the scheduled payments on the Term B Loans pursuant to Section 2.7 and (b) shall make the mandatory prepayments prescribed in Section 2.2 for credit against the scheduled payments on the Term B Loans pursuant to Section 2.2. 2.2. Required Payments; Termination. (a) Any outstanding Revolving Loans shall be paid in full by the Borrower on the Revolving Loan Termination Date and any outstanding Term B Loans shall be paid in full by the Borrower on the Term Loan B Maturity Date and all other unpaid Secured Obligations shall be paid in full by the Borrower on the later of the date when due or the Revolving Loan Termination Date and the Term Loan B Maturity Date, as applicable. In addition, if at any time the Aggregate Outstanding Revolving Credit Exposure hereunder exceeds the Aggregate Revolving Loan Commitment, the Borrower shall immediately (i) repay outstanding Revolving Loans and (ii) upon repayment in full of the Revolving Loans, cash collateralize the outstanding LC Obligations by depositing funds in the Facility LC Collateral Account, in an aggregate amount equal to such excess (it being understood and agreed that any such repayments or cash collateralizations shall not correspondingly reduce the Aggregate Revolving Loan Commitment). Notwithstanding the termination of the Revolving Loan Commitments under this Agreement on the Revolving Loan Termination Date, until all of the Obligations (other than contingent indemnity obligations) shall have been fully paid and satisfied and all financing arrangements among the Borrower and the Lenders hereunder and under the other Loan Documents shall have been terminated, all of the rights and remedies under this Agreement and the other Loan Documents shall survive. (b) Asset Sales and Casualty Events. Upon (1) the consummation of any Asset Sale (other than sales permitted under Section 6.12.1, 6.12.2, 6.12.3, or, solely with respect to Real Property which is not Real Property Collateral, 6.12.5) by the Borrower or any Subsidiary or (2) the Borrower or any Subsidiary suffering an Event of Loss, in each case within five (5) Business Days after the Borrower's or any of its Subsidiaries' receipt of any Net Cash Proceeds (or conversion to cash of non-cash proceeds (whether principal or interest and including securities, release of escrow arrangements)) received from any such Asset Sale or Event of Loss, the Borrower shall make a mandatory prepayment of the Loans, subject to the provisions governing the application of payments set forth in Section 2.2(e), in an amount equal to one hundred percent (100%) of such Net Cash Proceeds. Notwithstanding the foregoing, Net Cash Proceeds of Asset Sales or Events of Loss, with respect to which the Borrower shall have given the Administrative Agent written notice of its intention to repair or replace the Property subject to any such Asset Sale or Event of Loss or invest such Net Cash Proceeds in the purchase of assets (other than 28 securities, unless those securities represent equity interests in an entity that becomes a Guarantor) to be used by one or more of the Borrower or the Guarantors in their businesses within one year following such Event of Loss, shall not be subject to the provisions of the first sentence of this Section 2.2(b) unless and to the extent that such applicable period shall have expired without such repair or replacement having been made. (c) Financings. Upon the consummation of any Financing by the Borrower or any Subsidiary of the Borrower, within three (3) Business Days after the Borrower's or any of its Subsidiaries' receipt of any Net Cash Proceeds, the Borrower shall make a mandatory prepayment of the Loans, subject to the provisions governing the application of payments set forth in Section 2.2(e), (i) in an amount equal to one hundred percent (100%) of such Net Cash Proceeds, in the case of a debt Financing of the type described in clause (ii) of the definition thereof; provided that such percentage shall be reduced to 0% if the Total Leverage Ratio after giving effect to such transaction would be less than 3.50:1.00 (calculated on a pro forma basis after giving effect to such transaction), and (ii) in an amount equal to one hundred percent (100%) of such Net Cash Proceeds, in the case of an equity Financing of the type described in clause (i) of the definition thereof; provided that such percentage shall be reduced to 0% if the Total Leverage Ratio after giving effect to such transaction would be less than 3.50:1.00 (calculated on a pro forma basis after giving effect to such transaction); provided further that so long as no Default has occurred and is continuing, the Borrower may first apply any such Net Cash Proceeds to prepayment of the Second Lien Financing within 5 Business Days after receipt thereof, up to an amount not to exceed $50 million in the aggregate during the term of this Agreement. (d) Excess Cash Flow. On or before the date each fiscal year upon which the relevant financial statements are required to be delivered under Section 6.1.1 for the then most recently ended fiscal year, commencing with the fiscal year ending September 30, 2005, the Borrower shall make a mandatory prepayment of the Loans, subject to the provisions governing the application of payments set forth in Section 2.2(e), in an amount equal to the difference (if positive) between (x) a percent of the Excess Cash Flow, if positive, for such prior fiscal year, to be determined based on the Total Leverage Ratio on the last day of such fiscal year, as set forth in the following table and (y) the aggregate amount of all optional prepayments of principal made during such prior fiscal year pursuant to Section 2.7: Total Leverage Ratio Percentage of Excess Cash Flow -------------------- ------------------------------ Greater than or equal to 3.50:1.00 75% Less than 3.50:1.00 but greater than or equal to 2.50:1.00 50% Less than 2.50:1.00 0% (e) Application of Designated Prepayments. Each mandatory prepayment required by clauses (b), (c) and (d) of this Section 2.2 shall be referred to herein as a "Designated Prepayment." Designated Prepayments under 29 clauses (b), (c)(i) and (d) of this Section 2.2 shall be applied (i) first to repay the then remaining installments of the Term B Loans on a pro rata basis and (ii) second, upon repayment in full of the Term B Loans, to prepay the Revolving Loans then outstanding (with no corresponding reduction in the Aggregate Revolving Loan Commitment). Designated Prepayments under clause (c)(ii) of this Section 2.2 shall be applied (i) first to repay the then remaining installments of the Term B Loans on a pro rata basis across that portion of the first twelve (12) such installments that remains unpaid at such time until each such installment shall have been reduced from $12,000,000 to $4,000,000; (ii) second, to prepay all then remaining installments of the Term B Loans on a pro rata basis, and (iii) third, upon repayment in full of the Term B Loans, to repay the Revolving Loans then outstanding (with no corresponding reduction in the Aggregate Revolving Loan Commitment). Designated Prepayments of Loans shall first be applied to Floating Rate Loans and to any Eurodollar Rate Loans maturing on such date and then to subsequently maturing Eurodollar Rate Loans in order of maturity. Notwithstanding the foregoing, so long as no Default has occurred and is then continuing and at the Borrower's option, the Administrative Agent shall hold all Designated Prepayments to be applied to Eurodollar Rate Loans in escrow for the benefit of the Lenders and shall release such amounts upon the expiration of the Interest Periods applicable to any such Eurodollar Rate Loans being prepaid (it being understood and agreed that interest shall continue to accrue on the Obligations until such time as such prepayments are released from escrow and applied to reduce the Obligations); provided, however, that upon the occurrence and continuance of an Event of Default, such escrowed amounts may be applied to Eurodollar Rate Loans without regard to the expiration of any Interest Period and the Borrower shall make all payments under Section 3.4 resulting therefrom. 2.3. Ratable Loans; Types of Advances. (a) Each Advance hereunder (other than a Swing Line Loan) shall consist of Loans made from the several Lenders ratably in proportion to the ratio that their respective Revolving Loan Pro Rata Share or Term Loan Pro Rata Share, as applicable. (b) The Advances may be Floating Rate Advances or Eurodollar Advances, or a combination thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9, or Swing Line Loans selected by the Borrower in accordance with Section 2.4. 2.4. Swing Line Loans. 2.4.1 Amount of Swing Line Loans. Upon the satisfaction of the conditions precedent set forth in Section 4.2 and, if such Swing Line Loan is to be made on the date of the initial Credit Extension hereunder, the satisfaction of the conditions precedent set forth in Section 4.1 as well, from and including the date of this Agreement and prior to the Revolving Loan Termination Date, the Swing Line Lender agrees, on the terms and conditions set forth in this Agreement, to make Swing Line Loans to the Borrower from time to time in an aggregate principal amount not to exceed the Swing Line Commitment, provided that the Aggregate Outstanding Revolving Credit Exposure shall not at any time exceed the Aggregate Revolving Loan Commitment, and provided further that at no time shall the sum of (i) the Swing Line Lender's Pro Rata Share of the Swing Line Loans then outstanding, plus (ii) the outstanding Revolving Loans made by the Swing Line Lender pursuant to Section 2.1 (including its participation in any Facility LCs), exceed 30 the Swing Line Lender's Revolving Loan Commitment at such time. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow Swing Line Loans at any time prior to the Revolving Loan Termination Date. 2.4.2 Borrowing Notice. The Borrower shall give the Administrative Agent and the Swing Line Lender irrevocable notice by telephone, to be confirmed thereafter in writing (a "Swing Line Borrowing Notice") not later than 1:00pm (New York City time) on the Borrowing Date of each Swing Line Loan, specifying (i) the applicable Borrowing Date (which date shall be a Business Day), and (ii) the aggregate amount of the requested Swing Line Loan which shall be an amount not less than $100,000. The Swing Line Loans shall bear interest at the Floating Rate or at such other rate as is agreed upon by the Borrower and the Swing Line Lender. 2.4.3 Making of Swing Line Loans. Promptly after receipt of a Swing Line Borrowing Notice, the Administrative Agent shall notify each Lender by fax or other similar form of transmission, of the requested Swing Line Loan. Not later than 3:00 p.m. (New York City time) on the applicable Borrowing Date, the Swing Line Lender shall make available the Swing Line Loan, in funds immediately available in New York City, to the Administrative Agent at its address specified pursuant to Article XIII. The Administrative Agent will promptly make the funds so received from the Swing Line Lender available to the Borrower on the Borrowing Date at the Administrative Agent's aforesaid address. 2.4.4 Repayment of Swing Line Loans. Each Swing Line Loan shall be paid in full by the Borrower on or before the fifth (5th) Business Day after the Borrowing Date for such Swing Line Loan. In addition, the Swing Line Lender (i) may at any time in its sole discretion with respect to any outstanding Swing Line Loan, or (ii) shall, on the fifth (5th) Business Day after the Borrowing Date of any Swing Line Loan, require each Lender (including the Swing Line Lender) to make a Revolving Loan in the amount of such Lender's Pro Rata Share of such Swing Line Loan (including, without limitation, any interest accrued and unpaid thereon), for the purpose of repaying such Swing Line Loan. Not later than 2:00 p.m. (New York City time) on the date of any notice received pursuant to this Section 2.4.4 (or the immediately following Business Day if such notice is received after 11 a.m. (New York City time)), each Lender shall make available its required Revolving Loan, in funds immediately available in New York City to the Administrative Agent at its address specified pursuant to Article XIII. Revolving Loans made pursuant to this Section 2.4.4 shall initially be Floating Rate Loans and thereafter may be continued as Floating Rate Loans or converted into Eurodollar Loans in the manner provided in Section 2.9 and subject to the other conditions and limitations set forth in Article II. Unless a Lender shall have notified the Swing Line Lender, prior to its making any Swing Line Loan, that any applicable condition precedent set forth in Sections 4.1 or 4.2 had not been satisfied, such Lender's obligation to make Revolving Loans pursuant to this Section 2.4.4 to repay Swing Line Loans shall be unconditional, continuing, irrevocable and absolute and shall not be affected by any circumstances, including, without limitation, (a) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender or any other Person, (b) the occurrence or continuance of a Default or Unmatured Default, (c) any adverse change in the condition (financial or otherwise) of the Borrower, or (d) any other circumstances, happening or event whatsoever. In the event that any Lender fails to make payment to the Administrative Agent of any amount due under this Section 2.4.4, the Administrative Agent shall be entitled to receive, retain and apply against such obligation the principal and interest otherwise payable to such Lender hereunder until the Administrative Agent receives such payment from such Lender or such obligation is otherwise fully satisfied. In addition to the foregoing, if for any reason any Lender 31 fails to make payment to the Administrative Agent of any amount due under this Section 2.4.4, such Lender shall be deemed, at the option of the Administrative Agent, to have unconditionally and irrevocably purchased from the Swing Line Lender, without recourse or warranty, an undivided interest and participation in the applicable Swing Line Loan in the amount of such Revolving Loan, and such interest and participation may be recovered from such Lender together with interest thereon at the Federal Funds Effective Rate for each day during the period commencing on the date of demand and ending on the date such amount is received. On the Revolving Loan Termination Date, the Borrower shall repay in full the outstanding principal balance of the Swing Line Loans. 2.5. Commitment Fee; Aggregate Revolving Loan Commitment; Letter of Credit Facility. 2.5.1 Commitment Fee. The Borrower shall pay to the Administrative Agent, for the account of the Lenders in accordance with their Revolving Loan Pro Rata Shares, from and after the Closing Date until the date on which the Aggregate Revolving Loan Commitment shall be terminated in whole, a commitment fee (the "Commitment Fee") accruing at the rate of the then Applicable Fee Rate on the Available Aggregate Revolving Loan Commitment in effect from time to time; provided, however, that any Commitment Fee accrued with respect to any of the Revolving Loan Commitments of a Defaulting Lender during the period prior to the time such Lender became a Defaulting Lender and unpaid at such time shall not be payable by the Borrower so long as such Lender shall be a Defaulting Lender except to the extent that such Commitment Fee shall otherwise have been due and payable by the Borrower prior to such time; and provided further that no Commitment Fee shall accrue on any of the Commitments of a Defaulting Lender so long as such Lender shall be a Defaulting Lender. All such Commitment Fees payable hereunder shall be payable quarterly in arrears on each Payment Date; provided, that if any Lender continues to have Outstanding Revolving Credit Exposure after the termination of its Revolving Loan Commitment, then the Commitment Fee shall continue to accrue and be due and payable pursuant to the terms hereof until such Outstanding Revolving Credit Exposure is reduced to zero. 2.5.2 Reductions in Aggregate Revolving Loan Commitment. The Borrower may permanently reduce the Aggregate Revolving Loan Commitment in whole, or in part, ratably among the Lenders in the minimum amount of $5,000,000 (and in multiples of $1,000,000 in excess thereof), upon at least three (3) Business Days' written notice to the Administrative Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Revolving Loan Commitment may not be reduced below the Aggregate Outstanding Revolving Credit Exposure. All accrued Commitment Fees shall be payable on the 32 effective date of any termination of the obligations of the Lenders to make Credit Extensions hereunder and on the final date upon which all Loans are repaid. 2.5.3 Reductions in Letter of Credit Facility. (a) The Borrower may permanently reduce the LC Sublimit in whole, or in party, ratably among the LC Issuers in the minimum amount of $5,000,000 (and in multiples of $1,000,000), upon at least three (3) Business Days' written notice to the Administrative Agent, which notice shall specify the amount of any such reduction, provided however that the amount of the LC Sublimit may not be reduced below the aggregate amount of the LC Obligations. (b) The LC Commitment of Bank One will permanently reduce upon the cancellation, expiration or other termination or release of the liabilities of Bank One, NA with respect to the Existing Letters of Credit, to the extent of such cancellation, expiration or other termination or release of liabilities. 2.6. Minimum Amount of Each Advance. Each Eurodollar Advance shall be in the minimum amount of $1,000,000 (and in multiples of $500,000 if in excess thereof), and each Floating Rate Advance (other than an Advance to repay Swing Line Loans) shall be in the minimum amount of $1,000,000 (and in multiples of $500,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the Adjusted Available Aggregate Revolving Loan Commitment. 2.7. Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium, all outstanding Floating Rate Advances (other than Swing Line Loans), or any portion of the outstanding Floating Rate Advances (other than Swing Line Loans), in a minimum aggregate amount of $500,000 or any integral multiple of $100,000 in excess thereof, in each case upon two (2) Business Days' prior notice to the Administrative Agent. The Borrower may at any time pay, without penalty or premium, all outstanding Swing Line Loans, or, in a minimum amount of $100,000 and increments of $50,000 in excess thereof, any portion of the outstanding Swing Line Loans, with notice to the Administrative Agent and the Swing Line Lender by 2:00 p.m. (New York City time) on the date of repayment. The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 3.4 but without penalty or premium, all outstanding Eurodollar Advances, or, in a minimum aggregate amount of $1,000,000 or any integral multiple of $500,000 in excess thereof, any portion of the outstanding Eurodollar Advances upon three (3) Business Days' prior notice to the Administrative Agent. 2.8. Method of Selecting Types and Interest Periods for New Advances. The Borrower shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable thereto from time to time; provided that there shall be no more than 5 Interest Periods in effect with respect to all of the Loans at any time, unless such limit has been waived by the Administrative Agent in its sole discretion. The Borrower shall give the Administrative Agent irrevocable notice (a "Borrowing Notice") not later than 2:00 p.m. (New York City time) at least one Business Day before the Borrowing Date of each Floating Rate Advance (other than a Swing Line Loan) and three Business Days before the Borrowing Date for each Eurodollar Advance, specifying: 33 (i) the Borrowing Date, which shall be a Business Day, of such Advance, (ii) the aggregate amount of such Advance, (iii) the Type of Advance selected, and (iv) in the case of each Eurodollar Advance, the Interest Period applicable thereto. Not later than 1:00 p.m. (New York City time) on each Borrowing Date, each Lender shall make available its Loan or Loans in Federal or other funds immediately available in New York City to the Administrative Agent at its address specified pursuant to Article XIII. The Administrative Agent will promptly make the funds so received from the Lenders available to the Borrower at the Administrative Agent's aforesaid address. 2.9. Conversion and Continuation of Outstanding Advances; No Conversion or Continuation of Eurodollar Advances After Default. Floating Rate Advances (other than Swing Line Advances) shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Advances pursuant to this Section 2.9 or are repaid in accordance with Section 2.7. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.7 or (y) the Borrower shall have given the Administrative Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of an Advance of any Type (other than a Swing Line Advance) into any other Type or Types of Advances; provided that any conversion of any Eurodollar Advance shall be made on, and only on, the last day of the Interest Period applicable thereto. Notwithstanding anything to the contrary contained in this Section 2.9, during the continuance of a Default or an Unmatured Default, the Administrative Agent may (or shall at the direction of the Required Lenders), by notice to the Borrower, declare that no Advance may be made, converted or continued as a Eurodollar Advance. The Borrower shall give the Administrative Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an Advance or continuation of a Eurodollar Advance not later than 2:00 p.m. (New York City time) at least one (1) Business Day, in the case of a conversion into a Floating Rate Advance, or three (3) Business Days, in the case of a conversion into or continuation of a Eurodollar Advance, prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation, (ii) the aggregate amount and Type of the Advance which is to be converted or continued, and (iii) the amount of such Advance which is to be converted into or continued as a Eurodollar Advance and the duration of the Interest Period applicable thereto. 34 2.10. Changes in Interest Rate, Etc. Each Floating Rate Advance (other than a Swing Line Advance) shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is automatically converted from a Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.9, to but excluding the date it is paid or is converted into a Eurodollar Advance pursuant to Section 2.9 hereof, at a rate per annum equal to the Floating Rate for such day. Each Swing Line Loan shall bear interest on the outstanding principal amount thereof, for each day from and including the day such Swing Line Loan is made to but excluding the date it is fully paid at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Administrative Agent as applicable to such Eurodollar Advance based upon the Borrower's selections under Sections 2.8 and 2.9 and otherwise in accordance with the terms hereof. No Interest Period in respect of any Revolving Loan may end after the Revolving Loan Termination Date. No Interest Period in respect of any Term B Loan may end after the Term Loan B Maturity Date. 2.11. Rates Applicable After Default. During the continuance of a Default (including the Borrower's failure to pay any Loan at maturity) the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each Eurodollar Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum, (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Floating Rate in effect from time to time plus 2% per annum, and (iii) the LC Fee shall be increased by 2% per annum; provided that, during the continuance of a Default under Section 7.6 or 7.7, the interest rates set forth in clauses (i) and (ii) above and the increase in the LC Fee set forth in clause (iii) above shall be applicable to all Credit Extensions, Advances, fees and other Obligations hereunder without any election or action on the part of the Administrative Agent or any Lender. 2.12. Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Administrative Agent at the Administrative Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Administrative Agent specified in writing by the Administrative Agent to the Borrower, by 1:00 pm (New York City time) on the date when due and shall (except with respect to repayments of Swing Line Loans, and except in the case of Reimbursement Obligations for which any LC Issuer has not been fully indemnified by the Lenders, or as otherwise specifically required hereunder) be applied ratably by the Administrative Agent among the Lenders. Each payment delivered to the Administrative Agent for the account of any Lender shall be delivered promptly by the Administrative Agent to such Lender in the same type of funds that the Administrative Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Administrative Agent from such Lender. Each reference to the Administrative Agent in this Section 2.12 shall also be deemed to refer, and shall apply equally, to each LC Issuer in the case of payments required to be made by the Borrower to the LC Issuers pursuant to Section 2.20.6. 35 2.13. Noteless Agreement; Evidence of Indebtedness. (i) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (ii) The Administrative Agent shall also maintain accounts in which it will record (a) the date and the amount of each Loan made hereunder, the Type thereof and the Interest Period (in the case of a Eurodollar Advance) with respect thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder, (c) the original stated amount of each Facility LC and the amount of LC Obligations outstanding at any time, (d) the effective date and amount of each Assignment Agreement delivered to and accepted by it and the parties thereto pursuant to Section 12.3, (e) the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof, and (f) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. (iii) The entries maintained in the accounts maintained pursuant to paragraphs (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of the Administrative Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms. (iv) Any Lender may request that its Term B Loans, Revolving Loans or, in the case of the Swing Line Lender, the Swing Line Loans, be evidenced by promissory notes (the "Notes") in substantially the form of Exhibit E-1 or E-2 with appropriate changes for notes evidencing Swing Line Loans. In such event, the Borrower shall prepare, execute and deliver to such Lender such Note(s) payable to the order of such Lender. Thereafter, the Loans evidenced by such Note(s) and interest thereon shall at all times (prior to any assignment pursuant to Section 12.3) be represented by one or more Notes payable to the order of the payee named therein, except to the extent that any such Lender subsequently returns any such Note(s) for cancellation and requests that such Loans once again be evidenced as described in paragraphs (i) and (ii) above. 2.14. Telephonic Notices. The Borrower hereby authorizes the Lenders and the Administrative Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Administrative Agent or any Lender in good faith believes to be acting on behalf of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing 36 Notices and Conversion/Continuation Notices to be given telephonically. The Borrower agrees to deliver promptly to the Administrative Agent a written confirmation, signed by an Authorized Officer, if such confirmation is requested by the Administrative Agent or any Lender, of each telephonic notice. If the written confirmation differs in any material respect from the action taken by the Administrative Agent and the Lenders, the reasonable and documented records of the Administrative Agent and the Lenders shall govern absent manifest error. 2.15. Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Floating Rate Advance shall be payable in arrears on each Payment Date, commencing with the first such date to occur after the Closing Date, on any date on which the Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Advance on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Eurodollar Advances, LC Fees and all other fees hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. Interest on Floating Rate Advances shall be calculated for actual days elapsed on the basis of a 365/366-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 1:00 pm (New York City time) at the place of payment. If any payment of principal of or interest on an Advance, any fees or any other amounts payable to the Administrative Agent or any Lender hereunder shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest, fees and commissions in connection with such payment. 2.16. Notification of Advances, Interest Rates, Prepayments and Revolving Loan Commitment Reductions; Availability of Loans. Promptly after receipt thereof, the Administrative Agent will notify each Lender of the contents of each Aggregate Revolving Loan Commitment reduction notice, LC Commitment reduction notice, Borrowing Notice, Swing Line Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. Promptly after notice from any LC Issuer, the Administrative Agent will notify each Lender of the contents of each request for issuance of a Facility LC hereunder. The Administrative Agent will notify the Borrower and each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give the Borrower and each Lender prompt notice of each change in the Alternate Base Rate. Not later than 1:00 p.m. (New York City time) on each Borrowing Date, each Lender shall make available its Revolving Loan or Revolving Loans in funds immediately available in New York City to the Administrative Agent at its address specified pursuant to Article XIII. The Administrative Agent will promptly make the funds so received from the Lenders available to the Borrower at the Administrative Agent's aforesaid address. 2.17. Lending Installations. Each Lender may book its Loans and its participation in any LC Obligations and each LC Issuer may book the Facility LCs at any Lending Installation selected by such Lender or such LC Issuer, as 37 applicable, and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans, Facility LCs, participations in LC Obligations and any Notes issued hereunder shall be deemed held by each Lender or each LC Issuer, as applicable, for the benefit of any such Lending Installation. Each Lender and each LC Issuer may, by written notice to the Administrative Agent and the Borrower in accordance with Article XIII, designate replacement or additional Lending Installations through which Loans will be made by it or Facility LCs will be issued by it and for whose account Loan payments or payments with respect to Facility LCs are to be made. 2.18. Non-Receipt of Funds by the Administrative Agent. Unless the Borrower or a Lender, as the case may be, notifies the Administrative Agent prior to the date on which it is scheduled to make payment to the Administrative Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Administrative Agent for the account of the Lenders, that it does not intend to make such payment, the Administrative Agent may assume that such payment has been made. The Administrative Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Administrative Agent, the recipient of such payment shall, on demand by the Administrative Agent, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first three days and, thereafter, the interest rate applicable to the relevant Loan or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. 2.19. Replacement of Lender. If the Borrower is required pursuant to Section 3.1, 3.2 or 3.5 to make any additional payment to any Lender or if any Lender's obligation to make or continue, or to convert Floating Rate Advances into, Eurodollar Advances shall be suspended pursuant to Section 3.3 or if any Lender becomes a Defaulting Lender (any Lender so affected an "Affected Lender"), the Borrower may elect, if such amounts continue to be charged or such suspension is still effective, to terminate or replace the Revolving Loan Commitment, Term Loan B Commitment and Loans of such Affected Lender, provided that no Default or Unmatured Default shall have occurred and be continuing at the time of such termination or replacement, and provided further that, concurrently with such termination or replacement, (i) if the Affected Lender is being replaced, another bank or other entity which is reasonably satisfactory to the Borrower and the Administrative Agent shall agree, as of such date, to purchase for cash the Outstanding Revolving Credit Exposure and Term B Loans of the Affected Lender pursuant to an Assignment Agreement substantially in the form of Exhibit C and to become a Lender for all purposes under this Agreement and to assume all obligations of the Affected Lender to be terminated as of such date and to comply with the requirements of Section 12.3 applicable to assignments, and (ii) the Borrower shall pay to such Affected Lender in immediately available funds on the day of such replacement (A) all interest, fees and other amounts then accrued but unpaid to such Affected Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Affected Lender under Sections 3.1, 3.2 and 3.5, and (B) an amount, if any, equal to the payment which would have been due to such Lender on the day of such replacement under Section 3.4 had the Loans of such Affected Lender been prepaid on such date rather than sold to the 38 replacement Lender, in each case to the extent not paid by the purchasing lender and (iii) if the Affected Lender is being terminated, the Borrower shall pay to such Affected Lender all Obligations due to such Affected Lender (including the amounts described in the immediately preceding clauses (i) and (ii) plus, to the extent not paid by the replacement Lender, the outstanding principal balance of such Affected Lender's Credit Extensions). 2.20. Facility LCs. 2.20.1 Existing Letters of Credit; Issuance. The Borrower, the Lenders, the Administrative Agent and the Initial LC Issuers agree and confirm that, as of the Closing Date, and subject to the satisfaction of the condition precedent set forth in Section 4.1, the Existing Letters of Credit shall (x) be deemed to have been issued pursuant to this Agreement, (y) constitute Facility LCs, and (z) be governed by this Section 2.20, together with the other terms and conditions of this Agreement. Each LC Issuer hereby agrees, on the terms and conditions set forth in this Agreement, to issue, or cause to be issued, standby and commercial Letters of Credit (each, a "Facility LC") and to renew, extend, increase, decrease or otherwise modify each Facility LC ("Modify," and each such action, a "Modification"), from time to time from and including the date of this Agreement and prior to the Revolving Loan Termination Date upon the request of the Borrower; provided that, immediately after each such Facility LC is issued or Modified, the Aggregate Outstanding Revolving Credit Exposure shall not exceed the Aggregate Revolving Loan Commitment and the aggregate amount of the LC Obligations shall not exceed the LC Sublimit. No Facility LC shall have an expiry date later than the earlier of (x) the fifth Business Day prior to the Revolving Loan Termination Date and (y) one year after its issuance; provided that any Facility LC with a one-year term may provide for the renewal thereof for additional one-year periods (which in no event shall extend beyond the date referred to in the preceding clause (x)). Notwithstanding the foregoing or anything else contained in the Loan Documents, Bank One shall have no obligation whatsoever to issue or renew any Letters of Credit other than the deemed issuance of the Existing Letters of Credit. 2.20.2 Participations. Upon the issuance or Modification by any LC Issuer of a Facility LC in accordance with this Section 2.20, such LC Issuer shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably purchased from such LC Issuer, a participation in such Facility LC (and each Modification thereof) and the related LC Obligations in proportion to its Revolving Loan Pro Rata Share. 2.20.3 Notice. Subject to Section 2.20.1, the Borrower shall give any LC Issuer notice prior to 1:00 p.m. (New York City time) at least five Business Days prior to the proposed date of issuance or Modification of each Facility LC, specifying the beneficiary, the proposed date of issuance (or Modification) and the expiry date of such Facility LC, and describing the proposed terms of such Facility LC and the nature of the transactions proposed to be supported thereby. Upon receipt of such notice, such LC Issuer shall promptly notify the 39 Administrative Agent, and, upon issuance only, the Administrative Agent shall promptly notify each Lender, of the contents thereof and of the amount of such Lender's participation in such proposed Facility LC. The issuance or Modification by any LC Issuer of any Facility LC shall, in addition to the conditions precedent set forth in Article IV (the satisfaction of which such LC Issuer shall have no duty to ascertain), be subject to the conditions precedent that such Facility LC shall be satisfactory to such LC Issuer and that the Borrower shall have executed and delivered such application agreement and/or such other instruments and agreements relating to such Facility LC as such LC Issuer shall have reasonably requested (each, a "Facility LC Application"). In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control. 2.20.4 LC Fees. The Borrower shall pay to the Administrative Agent, for the account of the Lenders ratably in accordance with their respective Revolving Loan Pro Rata Shares, a letter of credit fee at a per annum rate equal to the Applicable Margin for Eurodollar Loans in effect from time to time on the average daily undrawn stated amount under such Facility LC, such fee to be payable in arrears on each Payment Date. The Borrower shall also pay to each LC Issuer for its own account (x) at the time of issuance of each Facility LC which is a standby letter of credit, a fronting fee in an amount equal to 0.25% times the face amount of such Facility LC and (y) documentary and processing charges in connection with the issuance or Modification of and draws under Facility LCs in accordance with such LC Issuer's standard schedule for such charges as in effect from time to time. Each fee described in this Section 2.20.4 shall constitute an "LC Fee". 2.20.5 Administration; Reimbursement by Lenders. Upon receipt from the beneficiary of any Facility LC of any demand for payment under such Facility LC, each LC Issuer shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Lender as to the amount to be paid by such LC Issuer as a result of such demand and the proposed payment date (the "LC Payment Date"). The responsibility of each LC Issuer to the Borrower and each Lender shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC. Each LC Issuer shall endeavor to exercise the same care in the issuance and administration of the Facility LCs as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by such LC Issuer, each Lender shall be unconditionally and irrevocably liable without regard to the occurrence of any Default or any condition precedent whatsoever, to reimburse such LC Issuer on demand for (i) such Lender's Revolving Loan Pro Rata Share of the amount of each payment made by such LC Issuer under each Facility LC to the extent such amount is not reimbursed by the Borrower pursuant to Section 2.20.6 below, plus (ii) interest on the foregoing amount to be reimbursed by such Lender, for each day from the date of such LC Issuer's demand for such reimbursement (or, if such demand is made after 2:00 p.m. (New York City time) on such date, from the next succeeding Business Day) to the date on which such Lender pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Effective Rate for the first three days and, thereafter, at a rate of interest equal to the rate applicable to Floating Rate Advances. 40 2.20.6 Reimbursement by Borrower. The Borrower shall be irrevocably and unconditionally obligated to reimburse such LC Issuer on or before the applicable LC Payment Date for any amounts to be paid by such LC Issuer upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that neither the Borrower nor any Lender shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Borrower or such Lender to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of such LC Issuer in determining whether a request presented under any Facility LC issued by it complied with the terms of such Facility LC or (ii) such LC Issuer's failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. If the Borrower at any time fails to repay a Reimbursement Obligation pursuant to this Section 2.20, such unpaid Reimbursement Obligation shall at that time be automatically converted into an obligation and the Borrower shall be deemed to have elected to borrow a Revolving Loan from the Lenders, as of the date of the payment by the applicable LC Issuer giving rise to the Reimbursement Obligation equal in amount to the amount of the unpaid Reimbursement Obligation. Such Revolving Loan shall be made as of the date of the payment giving rise to such Reimbursement Obligation, automatically, without notice and without any requirement to satisfy the conditions precedent otherwise applicable to a Revolving Loan if the Borrower shall have failed to make such payment to the Administrative Agent for the account of such LC Issuer prior to such time. Such Revolving Loan shall constitute a Floating Rate Advance and the proceeds of such Advance shall be used to repay such Reimbursement Obligation. If, for any reason, the Borrower fails to repay a Reimbursement Obligation on the day such Reimbursement Obligation arises and, for any reason, the Lenders are unable to make or have no obligation to make a Revolving Loan, then such Reimbursement Obligation shall bear interest from and after such day, until paid in full, at the interest rate applicable to a Floating Rate Advance. The Borrower agrees to indemnify each LC Issuer against any loss or expense determined by such LC Issuer in good faith to have resulted from any conversion pursuant to this Section 2.20 by reason of the inability of such LC Issuer to convert the amount received from the Borrower or from the Lenders, as applicable, into an amount equal to the amount of such Reimbursement Obligation. Each LC Issuer will pay to each Lender ratably in accordance with its Revolving Loan Pro Rata Share all amounts received by it from the Borrower for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Facility LC issued by such LC Issuer, but only to the extent such Lender has made payment to such LC Issuer in respect of such Facility LC pursuant to Section 2.20.5. 2.20.7 Obligations Absolute. The Borrower's obligations under this Section 2.20 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against any LC Issuer, any Lender or any beneficiary of a Facility LC. The Borrower further agrees with the LC Issuers and the Lenders that the LC Issuers and the Lenders shall not be responsible for, and the Borrower's Reimbursement Obligation in respect of any Facility LC shall not be 41 affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower, any of its Affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or defenses whatsoever of the Borrower or of any of its Affiliates against the beneficiary of any Facility LC or any such transferee. The LC Issuers shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Facility LC. The Borrower agrees that any action taken or omitted by any LC Issuer or any Lender under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or willful misconduct, shall be binding upon the Borrower and shall not put any LC Issuer or any Lender under any liability to the Borrower. Nothing in this Section 2.20.7 is intended to limit the right of the Borrower to make a claim against any LC Issuer for damages as contemplated by the proviso to the first sentence of Section 2.20.6. 2.20.8 Actions of LC Issuers. Each LC Issuer shall be entitled to rely, and shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by such LC Issuer. Each LC Issuer shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Required Lenders as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Notwithstanding any other provision of this Section 2.20, each LC Issuer shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and any future holders of a participation in any Facility LC. 2.20.9 Indemnification. The Borrower hereby agrees to indemnify and hold harmless each Lender, each LC Issuer and the Administrative Agent, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, costs or expenses which such Lender, such LC Issuer or the Administrative Agent may incur (or which may be claimed against such Lender, such LC Issuer or the Administrative Agent by any Person whatsoever) by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which such LC Issuer may incur by reason of or in connection with (i) the failure of any other Lender to fulfill or comply with its obligations to such LC Issuer hereunder (but nothing herein contained shall affect any rights the Borrower may have against any defaulting Lender) or (ii) by reason of or on account of such LC Issuer issuing any Facility LC which specifies that the term "Beneficiary" included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to such LC Issuer, evidencing the appointment of such successor Beneficiary; provided that the 42 Borrower shall not be required to indemnify any Lender, any LC Issuer or the Administrative Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of any LC Issuer in determining whether a request presented under any Facility LC complied with the terms of such Facility LC or (y) any LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 2.20.9 is intended to limit the obligations of the Borrower under any other provision of this Agreement. 2.20.10 Lenders' Indemnification. Each Lender shall, ratably in accordance with its Revolving Loan Pro Rata Share, indemnify each LC Issuer, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or such LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of the Facility LC) that such indemnitees may suffer or incur in connection with this Section 2.20 or any action taken or omitted by such indemnitees hereunder. 2.20.11 Facility LC Collateral Account. The Borrower agrees that it will, upon the request of the Administrative Agent or the Required Lenders and until the final expiration date of any Facility LC and thereafter as long as any amount is payable to any LC Issuer or the Lenders in respect of any Facility LC, maintain the Facility LC Collateral Account. The Borrower hereby pledges, assigns and grants to the Administrative Agent, on behalf of and for the ratable benefit of the Lenders and the LC Issuers, a security interest in all of the Borrower's right, title and interest in and to all funds which may from time to time be on deposit in the Facility LC Collateral Account to secure the prompt and complete payment and performance of the Secured Obligations. The Administrative Agent will invest any funds on deposit from time to time in the Facility LC Collateral Account in Cash Equivalent Investments having a maturity not exceeding 30 days. Nothing in this Section 2.20.11 shall (i) require the Borrower or any Subsidiary to either establish the Facility LC Collateral Account or deposit any funds in the Facility LC Collateral Account or (ii) limit the right of the Administrative Agent to release any funds held in the Facility LC Collateral Account, in each case other than as required by Section 2.2 or Section 8.1. 2.20.12 Rights as a Lender. In its capacity as a Lender, if any, each LC Issuer shall have the same rights and obligations as any other Lender. 2.21. Defaulting Lenders. (a) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Loan to the Borrower and (iii) the Borrower shall be required to make any payment hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then the Borrower may, so long as no Default shall occur or be continuing at such time and to the fullest extent permitted by applicable law, set off and otherwise apply the Obligation of the Borrower to make such 43 payment to or for the account of such Defaulting Lender against the obligation of such Defaulting Lender to make such Defaulted Loan. In the event that, on any date, the Borrower shall so set off and otherwise apply its obligation to make any such payment against the obligation of such Defaulting Lender to make any such Defaulted Loan on or prior to such date, the amount so set off and otherwise applied by the Borrower shall constitute for all purposes of this Agreement and the other Loan Documents a Loan by such Defaulting Lender made on the date of such setoff under the Facility pursuant to which such Defaulted Loan was originally required to have been made pursuant to Section 2.1. Such Loan shall be considered, for all purposes of this Agreement, to comprise part of the Advance in connection with which such Defaulted Loan was originally required to have been made pursuant to Section 2.1, even if the other Loans comprising such Advance shall be Eurodollar Loans on the date such Loan is deemed to be made pursuant to this subsection (a). The Borrower shall notify the Administrative Agent at any time the Borrower exercises its right of set-off pursuant to this subsection (a) and shall set forth in such notice (A) the name of the Defaulting Lender and the Defaulted Loan required to be made by such Defaulting Lender and (B) the amount set off and otherwise applied in respect of such Defaulted Loan pursuant to this subsection (a). Any portion of such payment otherwise required to be made by the Borrower to or for the account of such Defaulting Lender which is paid by the Borrower, after giving effect to the amount set off and otherwise applied by the Borrower pursuant to this subsection (a), shall be applied by the Administrative Agent as specified in subsection (b) or (c) of this Section 2.21. (b) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Amount to any Agent or any of the other Lenders and (iii) the Borrower shall make any payment hereunder or under any other Loan Document to the Administrative Agent for the account of such Defaulting Lender, then the Administrative Agent may, on its behalf or on behalf of such other Agents or such other Lenders and to the fullest extent permitted by applicable law, apply at such time the amount so paid by the Borrower to or for the account of such Defaulting Lender to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. In the event that the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this Agreement and the other Loan Documents payment, to such extent, of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Agents or such other Lenders, ratably in accordance with the respective portions of such Defaulted Amounts payable at such time to the Administrative Agent, such other Agents and such other Lenders and, if the amount of such payment made by the Borrower shall at such time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent, such other Agents and such other Lenders, in the following order of priority: (i) first, to the Agents for any Defaulted Amounts then owing to them, in their capacities as such, ratably in accordance with such respective Defaulted Amounts then owing to the Agents; (ii) second, to the LC Issuers and the Swing Line Lender for any Defaulted Amounts then owing to them, in their capacities as such, ratably in accordance with such respective Defaulted Amounts then owing to each LC Issuer and the Swing Line Lender; and 44 (iii) third, to any other Lenders for any Defaulted Amounts then owing to such other Lenders, ratably in accordance with such respective Defaulted Amounts then owing to such other Lenders. Any portion of such amount paid by the Borrower for the account of such Defaulting Lender remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this subsection (b), shall be applied by the Administrative Agent as specified in subsection (c) of this Section 2.21. (c) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall not owe a Defaulted Loan or a Defaulted Amount and (iii) the Borrower, any Agent or any other Lender shall be required to pay or distribute any amount hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then the Borrower or such Agent or such other Lender shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow or the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in escrow under this subsection (c) shall be deposited by the Administrative Agent in an account with a bank (the "Escrow Bank") selected by the Administrative Agent, in the name and under the control of the Administrative Agent, but subject to the provisions of this subsection (c). The terms applicable to such account, including the rate of interest payable with respect to the credit balance of such account from time to time, shall be the Escrow Bank's standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this subsection (c). The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Loans required to be made by such Defaulting Lender and to pay any amount payable by such Defaulting Lender hereunder and under the other Loan Documents to the Administrative Agent or any other Lender, as and when such Loans or amounts are required to be made or paid and, if the amount so held in escrow shall at any time be insufficient to make and pay all such Loans and amounts required to be made or paid at such time, in the following order of priority: (i) first, to the Agents for any amounts then due and payable by such Defaulting Lender to them hereunder, in their capacities as such, ratably in accordance with such respective amounts then due and payable to the Agents; (ii) second, to the LC Issuers and the Swing Line Lender for any amounts then due and payable to them hereunder, in their capacities as such, by such Defaulting Lender, ratably in accordance with such respective amounts then due and payable to each LC Issuer and the Swing Line Lender; (iii) third, to any other Lenders for any amount then due and payable by such Defaulting Lender to such other Lenders hereunder, ratably in accordance with such respective amounts then due and payable to such other Lenders; and 45 (iv) fourth, to the Borrower for any Loan then required to be made by such Defaulting Lender pursuant to a Revolving Loan Commitment, Swing Line Commitment, Term Loan B Commitment or LC Commitment of such Defaulting Lender. In the event that any Lender that is a Defaulting Lender shall, at any time, cease to be a Defaulting Lender, any funds held by the Administrative Agent in escrow at such time with respect to such Lender shall be distributed by the Administrative Agent to such Lender and applied by such Lender to the Obligations owing to such Lender at such time under this Agreement and the other Loan Documents ratably in accordance with the respective amounts of such Obligations outstanding at such time. (d) The rights and remedies against a Defaulting Lender under this Section 2.21 are in addition to other rights and remedies that the Borrower may have against such Defaulting Lender with respect to any Defaulted Loan and that any Agent or any Lender may have against such Defaulting Lender with respect to any Defaulted Amount. ARTICLE III YIELD PROTECTION; TAXES 3.1. Yield Protection. If, on or after the Closing Date, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in any such law, rule, regulation, policy, guideline or directive or in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or applicable Lending Installation or any LC Issuer with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency (other than any change by way of imposition or increase of Reserve Requirements): (i) subjects any Lender or any applicable Lending Installation or any LC Issuer to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender or any LC Issuer in respect of its Revolving Loan Commitments, LC Commitments, Eurodollar Loans, Facility LCs or participations therein, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation or any LC Issuer (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining its Revolving Loan 46 Commitment or Eurodollar Loans or its LC Commitment or of issuing or participating in Facility LCs, or reduces any amount receivable by any Lender or any applicable Lending Installation or any LC Issuer in connection with its Revolving Loan Commitment, LC Commitment or Eurodollar Loans or Facility LCs (including participations therein), or requires any Lender or any applicable Lending Installation or any LC Issuer to make any payment calculated by reference to the amount of Revolving Loan Commitment, LC Commitment or Eurodollar Loans or Facility LCs (including participations therein) held or interest or LC Fees received by it, by an amount deemed material by such Lender or such LC Issuer, as applicable. and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Installation or such LC Issuer of making or maintaining its Eurodollar Loans or Revolving Loan Commitment or LC Commitment or of issuing or participating in Facility LCs, as applicable, or to reduce the return received by such Lender or applicable Lending Installation or such LC Issuer in connection with such Eurodollar Loans or Revolving Loan Commitment, LC Commitment or Facility LCs (including participations therein), then, within 15 days of demand, accompanied by the written statement required by Section 3.6, by such Lender or such LC Issuer, the Borrower shall pay such Lender or such LC Issuer such additional amount or amounts as will compensate such Lender or such LC Issuer for such increased cost or reduction in amount received. If, upon receipt of the notice specified by the immediately preceding sentence, the Borrower so notifies the Administrative Agent, the Borrower may either (i) prepay in full all Eurodollar Loans of such Lender then outstanding, so long as the Borrower reimburses such Lender for its increased costs in accordance with this Section 3.1, or (ii) convert all Eurodollar Loans of all Lenders then outstanding into Floating Rate Loans in accordance with this Agreement, so long as the Borrower reimburses the Lenders for all of their increased costs in accordance with this Section 3.1. 3.2. Changes in Capital Adequacy Regulations. If a Lender or LC Issuer determines the amount of capital required or expected to be maintained by such Lender or LC Issuer, any Lending Installation of such Lender or LC Issuer or any corporation controlling such Lender or LC Issuer is increased as a result of a Change, then, within 15 days of demand, accompanied by the written statement required by Section 3.6, by such Lender or LC Issuer, the Borrower shall pay such Lender or LC Issuer the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender or LC Issuer determines is attributable to this Agreement, its Outstanding Revolving Credit Exposure, its Term B Loans, its Term B Loan Commitment to make Term B Loans, its Revolving Loan Commitment or LC Commitment to make Revolving Loans and issue or participate in Facility LCs, as applicable, hereunder (after taking into account such Lender's or LC Issuer's policies as to capital adequacy). "Change" means (i) any change after the Closing Date in the Risk-Based Capital Guidelines or (ii) any adoption of, or change in, or change in the interpretation or administration of any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the Closing Date which affects the amount of capital required or expected to be maintained by any Lender or LC Issuer or any Lending Installation or any corporation controlling any Lender or LC Issuer. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the Closing Date, including transition rules, and (ii) the corresponding capital regulations 47 promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the Closing Date. 3.3. Availability of Types of Advances. (a) Eurodollar Advances shall not be available on the Closing Date. For 45 days following the Closing Date no Eurodollar Advances shall be available other than those with an Interest Period of one month. (b) If (x) any Lender reasonably determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or (y) the Required Lenders determine in good faith that (i) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available or (ii) the interest rate applicable to Eurodollar Advances does not accurately reflect the cost of making or maintaining Eurodollar Advances, or (iii) no reasonable basis exists for determining the Eurodollar Base Rate, then the Administrative Agent shall suspend the availability of Eurodollar Advances and require any affected Eurodollar Advances to be repaid or converted to Floating Rate Advances on the respective last days of the then current Interest Periods with respect to such Revolving Loans or within such earlier period as required by law, subject to the payment of any funding indemnification amounts required by Section 3.4. 3.4. Funding Indemnification. If any payment of a Eurodollar Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance is not made or continued, or a Floating Rate Advance is not converted into a Eurodollar Advance, on the date specified by the Borrower for any reason other than default by the Lenders, or a Eurodollar Advance is not prepaid on the date specified by the Borrower for any reason, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance. 3.5. Taxes. (i) All payments by the Borrower to or for the account of any Lender or any LC Issuer or the Administrative Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender, LC Issuer or the Administrative Agent, (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.5) such Lender, LC Issuer or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) the Borrower shall make such deductions, (c) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower shall furnish to the Administrative Agent the original copy of a receipt evidencing payment thereof or, if a receipt cannot be obtained with reasonable efforts, such other evidence of payment as is reasonably acceptable to the Administrative Agent, in each case within 30 days after such payment is made. 48 (ii) In addition, the Borrower shall pay any present or future stamp or documentary taxes and any other excise or property taxes, intangible or mortgage recording taxes, charges or similar levies which arise from any payment made hereunder or under any Note or Facility LC Application or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or Facility LC Application ("Other Taxes"). (iii) The Borrower shall indemnify the Administrative Agent, each LC Issuer and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Administrative Agent, such LC Issuer or such Lender as a result of its Revolving Loan Commitment or LC Commitment, any Credit Extensions made by it hereunder, any Facility LC issued or participated in by it hereunder, or otherwise in connection with its participation in this Agreement and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Administrative Agent, such LC Issuer or such Lender makes demand therefor pursuant to Section 3.6. (iv) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Lender") agrees that it will, not more than ten Business Days after the date on which it becomes a party to this Agreement (but in any event before a payment is due to it hereunder), (i) deliver to each of the Borrower and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, or (ii) in the case of a Non-U.S. Lender that is fiscally transparent, deliver to the Administrative Agent a United States Internal Revenue Form W-8IMY together with the applicable accompanying forms, W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Administrative Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Administrative Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. 49 (v) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv) above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv) above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes. (vi) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. (vii) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Administrative Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Administrative Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Administrative Agent, which attorneys may be employees of the Administrative Agent). The obligations of the Lenders under this Section 3.5(vii) shall survive the payment of the Obligations and termination of this Agreement. 3.6. Lender Statements; Survival of Indemnity. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Administrative Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type, currency and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. 50 Notwithstanding any other term or condition contained herein or elsewhere in the Loan Documents, a Lender claiming compensation under Section 3.1, 3.2, 3.4 or 3.5 shall only be entitled to compensation under this Article III (i) from and after the date of such notice until the events giving rise to such claim have ceased to exist, and (ii) during the ninety (90) day period preceding the date the Borrower receives notice from the Administrative Agent or such Lender setting forth the described claim for compensation. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement. The obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement. 3.7. Alternative Lending Installation. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of Eurodollar Advances under Section 3.3, so long as such designation is not, in the judgment of such Lender, reasonably disadvantageous to such Lender. A Lender's designation of an alternative Lending Installation shall not affect the Borrower's rights under Section 2.19 to replace a Lender. ARTICLE IV CONDITIONS PRECEDENT 4.1. Initial Credit Extension. The Lenders shall not be required to make the initial Credit Extension hereunder, which initial Credit Extension shall occur no later than the Closing Date, unless the following conditions precedent have been satisfied and, if applicable, the Borrower has furnished to the Administrative Agent with sufficient copies for the Lenders: 4.1.1 Copies of the articles or certificate of incorporation (or the equivalent thereof) of each initial Credit Party, in each case, together with all amendments thereto, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of organization, as well as any other information required by Section 326 of the USA Patriot Act, 31 U.S.C. Section 5318 or otherwise necessary for the Administrative Agent or any Lender to verify the identity of such Credit Party as required by Section 326 of the USA Patriot Act, 31 U.S.C. Section 5318. 4.1.2 Copies, certified by the Secretary or Assistant Secretary (or the equivalent thereof) of each initial Credit Party, in each case, of its by-laws and of its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents and Tapco Acquisition Documents to which such Credit Party is a party and certified copies of the Tapco Acquisition Documents. 4.1.3 An incumbency certificate, executed by the Secretary or Assistant Secretary (or the equivalent thereof) of each initial Credit Party, in each case, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of such Credit Party authorized to sign the Loan Documents to which such Credit Party is party, upon which certificate the Administrative Agent and the Lenders shall be entitled to rely until informed of any change in writing by such Credit Party. 51 4.1.4 A certificate signed by the chief financial officer of the Borrower, stating that on the initial Credit Extension Date (a) no Default or Unmatured Default has occurred and is continuing, (b) all of the representations and warranties in Article V shall be true and correct in all material respects as of such date and (c) (i) no Material Adverse Change has occurred since September 30, 2003 and (ii) no material adverse change in the business, condition (financial or otherwise), operations, performance and properties of Tapco Holdings, Inc. and its Subsidiaries, taken as a whole, has occurred since October 31, 2003. 4.1.5 A written opinion of the initial Credit Parties' counsel, in form and substance satisfactory to the Administrative Agent and addressed to the Lenders, in substantially the form of Exhibit A. 4.1.6 Any Notes requested by a Lender pursuant to Section 2.13 payable to the order of each such requesting Lender. 4.1.7 Written money transfer instructions, in substantially the form of Exhibit D, addressed to the Administrative Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as the Administrative Agent may have reasonably requested. 4.1.8 Intentionally Omitted. 4.1.9 The Administrative Agent shall have received the audited consolidated financial statements of the Borrower and its Subsidiaries for the Borrower's fiscal year ended September 30, 2003, audited consolidated financial statements of Tapco Holdings, Inc. and its Subsidiaries for the fiscal year ended October 31, 2003 and interim financial statements of the Borrower and Tapco Holdings, Inc. dated the end of the most recent fiscal quarter for which financial statements are available (or, in the event the Lenders' due diligence review reveals material changes since such financial statements, as of a later date within 45 days of the initial Credit Extension). 4.1.10 The Administrative Agent and the Lenders shall have received pro forma opening consolidated financial statements ("Pro Forma Opening Statements") giving effect to the Tapco Acquisition and financial statement projections ("Projections") of balance sheets, income statements and cash flow statements on a quarterly basis for the first year following the day of the initial Credit Extension and on an annual basis for each year thereafter until the fiscal year 2011, together with such information as the Administrative Agent and the Lenders may reasonably request to confirm the tax, legal, and business assumptions made in such Pro Forma Opening Statements and Projections, such Pro Forma Opening Statements and Projections demonstrating, in the reasonable judgment of the Administrative Agent and the Lenders, together with all other information then available to the Administrative Agent and the Lenders, that the Borrower and its Subsidiaries have the ability to repay their debts and satisfy the respective other obligations as and when due and to comply with Sections 6.21 through 6.25. 52 4.1.11 The Administrative Agent and the Lenders shall have received a certificate from the Chief Financial Officer of the Borrower and each Guarantor certifying that the Borrower and each Guarantor, as the case may be, is Solvent and will be Solvent subsequent to incurring the Indebtedness hereunder (including the Credit Extensions), will be able to pay its debts and liabilities as they become due and will not be left with unreasonably small capital with which to engage in its businesses. 4.1.12 The Administrative Agent shall have received evidence reasonably satisfactory to the Administrative Agent of (i) the consummation of the Tapco Acquisition concurrently with the initial Credit Extension strictly in accordance with the terms of the Tapco Acquisition Agreement, without any waiver or amendment not consented to by the Lenders of any term, provision or condition set forth therein and in compliance with all applicable laws and (ii) the payment of all principal, interest, fees and premiums, if any, on all (x) Indebtedness under the Existing Credit Agreement and (y) Indebtedness of Tapco, and, in each case, the agreement to release all Liens and the termination of the applicable agreements relating thereto, all taking effect concurrently with the effectiveness of this Agreement; provided, however, that any Existing Letters of Credit incorporated into and governed by the terms of this Agreement shall not be required to be terminated in connection with the termination of the Existing Credit Agreement and the agreements, documents, and instruments related thereto. 4.1.13 Such other documents as the Administrative Agent or its counsel may have reasonably requested, including, without limitation, those documents set forth in Exhibit G hereto. 4.1.14 The Lenders shall have completed a legal, environmental, tax, accounting and confirmatory business due diligence investigation of the Credit Parties and their respective Subsidiaries in scope, and with results, satisfactory to the Lenders. 4.1.15 The Lenders shall have received true and complete copies of the consolidated audited balance sheets of Tapco Holdings, Inc. and its Subsidiaries as of October 31, 2001, 2002 and 2003 and the related audited consolidated statements of income and members' equity and cash flow for the fiscal years ended October 31, 2001, 2002 and 2003 including the audit reports and notes thereto, in each case prepared in accordance with GAAP consistently applied throughout the periods covered thereby. Such financial statements shall fairly reflect in all material respects the financial position of Tapco Holdings, Inc. and the Subsidiaries on a consolidated basis as of the respective dates thereof and the results of operations and changes in members' equity and cash flow for the periods then ended. 4.1.16 The Lenders shall be satisfied with the corporate and legal structure and capitalization of each Credit Party and each of its Subsidiaries, including the terms and conditions of the charter, bylaws and each class of Equity Interest in each Credit Party and each Subsidiary and of each agreement or instrument relating to such structure or capitalization. 53 4.1.17 (a) The Lenders shall be satisfied with the terms and conditions of the Second Lien Financing and the documentation with respect thereto and the Borrower shall have received at least $150 million in gross cash proceeds from the incurrence of the Second Lien Financing, and all such proceeds shall have been used or shall be used simultaneously with the initial Credit Extension by the Borrower to fund the Transaction and (b) the full amount of the Revolving Credit Commitments (minus any amount attributable to the Existing Letters of Credit) shall be available to be drawn under the Revolving Credit Facility after giving effect to all drawings on the Closing Date. 4.1.18 The Lead Arrangers shall be satisfied with the Borrower's arrangements to retain and compensate key employees of Tapco Holdings, Inc. and its Subsidiaries. 4.1.19 The Lenders shall be satisfied, and shall have received a certificate from the Chief Financial Officer of the Borrower certifying (based on stated assumptions as to the EBITDA of Tapco and its Subsidiaries), that (a) Consolidated EBITDA for the 12-month period ending as of the most recently ended fiscal quarter on a pro forma basis after giving effect to the Transaction, is no less than $190 million and (b) the Total Leverage Ratio (on a pro forma basis after giving effect to the Transaction) for such 12-month period, is no greater than 5.10:1.00. 4.1.20 The Borrower shall have paid all accrued fees of the Administrative Agent, the Lead Arrangers and the Lenders (including the fees and expenses of counsel for the Lead Arrangers and local counsel for the Lenders). 4.1.21 The credit facilities contemplated by the terms of this Agreement shall have received debt ratings from Moody's Investor Services, Inc. and Standard & Poor's Ratings Services, a division of the McGraw Hill Companies, Inc. 4.2. Each Credit Extension. The Lenders shall not (except as otherwise set forth in Section 2.4.4 with respect to Revolving Loans extended for the purpose of repaying Swing Line Loans) be required to make any Credit Extension unless on the applicable Credit Extension Date: 4.2.1 There exists no Default or Unmatured Default and no Default or Unmatured Default would result from such Credit Extension or issuance or renewal of from the application of proceeds therefrom. 4.2.2 The representations and warranties contained in Article V are true and correct in all material respects as of such Credit Extension Date before and after giving effect to such Credit Extension or issuance or renewal and to the application of proceeds therefrom except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date. Each Borrowing Notice or Swing Line Borrowing Notice, as the case may be, or request for issuance of a Facility LC, with respect to each such Credit Extension shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2.1 and 4.2.2 have been satisfied. The Administrative Agent may require a duly completed compliance certificate in substantially the form of Exhibit B as a condition to making a Credit Extension. 54 ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to each Lender and the Administrative Agent as of each of (i) the Closing Date, (ii) the date of the initial Credit Extension hereunder (if different from the Closing Date) and (iii) each date as required by Section 4.2: 5.1. Existence and Standing. Each of the Borrower and its Subsidiaries is a corporation, partnership (in the case of Subsidiaries only) or limited liability company (in the case of Subsidiaries only) duly and properly incorporated or organized, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted, except where the failure to do so could reasonably be expected to result in a Material Adverse Change. 5.2. Authorization and Validity. The Borrower has the power and authority and legal right to execute and deliver the Transaction Documents to which it is a party and to perform its obligations thereunder. The execution and delivery by the Borrower of the Transaction Documents to which it is a party and the performance of its obligations thereunder have been duly authorized by proper proceedings, and the Transaction Documents to which the Borrower is a party constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by (i) bankruptcy, insolvency, fraudulent conveyances, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally; (ii) general equitable principles (whether considered in a proceeding in equity or at law); and (iii) requirements of reasonableness, good faith and fair dealing. 5.3. No Conflict; Government Consent. Neither the execution and delivery by the Borrower or its Subsidiaries, as applicable, of the Loan Documents to which such Person is a party, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, nor the consummation of the Tapco Acquisition or the Refinancing will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or (ii) the Borrower's or any Subsidiary's articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating agreement or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with, or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of the Borrower or a Subsidiary pursuant to the terms of, any such indenture, instrument or agreement, except as in the aggregate could not be reasonably likely to result in a Material Adverse Change. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any of its Subsidiaries, is required to be obtained by the Borrower or any of its Subsidiaries in 55 connection with the execution and delivery of the Loan Documents, the borrowings under this Agreement, the payment and performance by the Borrower of the Obligations or the legality, validity, binding effect or enforceability of any of the Loan Documents, or the consummation of the Tapco Acquisition or the Refinancing except as in the aggregate cannot reasonably be expected to result in a Material Adverse Change. 5.4. Financial Statements. (a) The September 30, 2003 audited consolidated financial statements of the Borrower and its Subsidiaries and the October 31, 2003 audited consolidated financial statements of Tapco Holdings, Inc. and its Subsidiaries heretofore delivered to the Administrative Agent and the Lenders were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present, in all material respects, the consolidated financial condition and operations of the Borrower and its Subsidiaries and Tapco Holdings, Inc. and its Subsidiaries, respectively, at such date and the consolidated results of their operations for the period then ended. The June 30, 2004 unaudited consolidated financial statements of the Borrower and its Subsidiaries and Tapco Holdings, Inc. and its Subsidiaries, respectively, heretofore delivered to the Administrative Agent and the Lenders, were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present, subject to year-end audit adjustments, in all material respects, the consolidated financial condition and operations of the Borrower and its Subsidiaries as at such date and the consolidated results of their operations for the period then ended. (b) The consolidated pro forma balance sheet of the Borrower and its Subsidiaries as at June 30, 2004 and the related Consolidated pro forma statements of income and cash flows of the Borrower for the twelve months then ended, certified by the chief financial officer of the Borrower, copies of which have been furnished to each Lender Party, fairly present, subject to year-end audit adjustments, in all material respects the consolidated pro forma financial condition of the Borrower and its Subsidiaries as at such date and the Consolidated pro forma results of operations of the Borrower and its Subsidiaries for the period ended on such date, in each case giving effect to the Tapco Acquisition, all in accordance with generally accepted accounting principles. 5.5. Material Adverse Change. Since September 30, 2003, there has been no Material Adverse Change and since October 31, 2003, there has been no material adverse change in the business, condition (financial or otherwise), operations, performance and properties of Tapco Holdings, Inc. and its Subsidiaries, taken as a whole. 5.6. Taxes. The Borrower and its Subsidiaries have filed all United States federal tax returns, Utah state tax returns and, to the Borrower's best knowledge after due inquiry, all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except in respect of such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles and as to which no Lien exists (except as permitted by Section 6.15.1), except as could not be reasonably expected to result in a Material Adverse Change. No Liens have been filed and no claims are being asserted with respect to such taxes. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate under Agreement Accounting Principles. 56 5.7. Litigation and Contingent Obligations. There is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which could reasonably be expected to result in a Material Adverse Change or affecting Tapco Holdings, Inc. and its Subsidiaries which could reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, performance or properties of Tapco Holdings, Inc. and its subsidiaries taken as a whole, or which seeks to prevent, enjoin or delay the making of any Credit Extensions. Other than liabilities incident to any litigation, arbitration or proceeding which could not reasonably be expected to be in an aggregate amount in excess of $1,000,000 or as disclosed in Schedule 5.7, the Borrower has no material contingent obligations not provided for or disclosed in the financial statements referred to in Section 5.4. 5.8. Subsidiaries. Schedule 5.8 contains an accurate list of all Subsidiaries of the Borrower as of the date of this Agreement, setting forth their respective jurisdictions of organization and the percentage of their respective capital stock or other ownership interests owned by the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock or other ownership interests of such Subsidiaries have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and non-assessable and are owned by such Credit Party or one or more of its Subsidiaries free and clear of all Liens, except those created under the Collateral Documents and the second priority liens created under the Second Lien Collateral Documents. 5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans do not in the aggregate exceed $1,000,000. Neither the Borrower nor any other member of the Controlled Group has incurred, or is reasonably expected to incur, pursuant to Section 4201 of ERISA, any withdrawal liability to Multiemployer Plans an amount that would result in a Material Adverse Change. Each Plan complies in all material respects with all applicable requirements of law and regulations. No Reportable Event has occurred with respect to any Plan. Neither the Borrower nor any other member of the Controlled Group has withdrawn from any Multiemployer Plan or Multiple Employer Plan within the meaning of Title IV of ERISA or initiated steps to do so, and no steps have been taken to reorganize or terminate, within the meaning of Title IV of ERISA, any Multiemployer Plan. No steps have been taken to initiate the termination of any Plan, and the PBGC has not given notice that it intends to terminate any Plan. 5.10. Accuracy of Information. (a) No Loan Document or written statement furnished by the Borrower or any of its Subsidiaries to the Administrative Agent or to any Lender in connection with the negotiation of, or compliance with, the Loan Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading. (b) The consolidated forecasted financial statements of the Borrower and its Subsidiaries delivered to the Lenders pursuant to Section 6.1.7 were prepared in good faith on the basis of the assumptions stated therein, which assumptions were fair in light of the conditions existing at the time of delivery of such forecasts, and represented, at the time of delivery, the Borrower's reasonable estimate of its future financial performance. 57 5.11. Regulation U. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate of buying or carrying margin stock (as defined in Regulation U), and after applying the proceeds of each Credit Extension, margin stock (as defined in Regulation U) constitutes less than 25% of the value of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or any other restriction hereunder. 5.12. Material Agreements. Neither the Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to result in a Material Adverse Change. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any (i) agreement or instrument to which it is a party, which default could reasonably be expected to result in a Material Adverse Change or (ii) any agreement or instrument evidencing or governing Indebtedness. 5.13. Compliance with Laws. The Borrower and its Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property, except as cannot reasonably be expected to result in a Material Adverse Change. 5.14. Ownership of Properties. (a)(i) Set forth on Schedule 5.14(a)(i) hereto is a complete and accurate list of all Owned Real Property as of the date hereof, showing as of the date hereof the street address, county or other relevant jurisdiction, state, record owner and book and book value thereof; (ii) set forth on Schedule 5.14(a)(ii) hereto is a complete and accurate list of all Real Property Leases as of the date hereof, showing the street address or other information sufficient to identify the location of the affected real property, state, lessor, lessee, expiration date and annual rental cost thereof; and (iii) set forth on Schedule 5.14(a)(iii) hereto is a complete and accurate list of all Tenant Leases as of the date hereof, showing the street address or other information sufficient to identify the location of the affected real property, state, lessor, lessee, expiration date and annual rental cost thereof. (b) (i) The Borrower and its Subsidiaries have good, marketable and insurable fee simple title to, or a valid leasehold interest in, to all of the Owned Real Property listed on Schedule 5.14(a)(i) hereto and all of the Leased Real Property listed on Schedule 5.14(a)(ii) hereto, free and clear of all Liens, other than Liens created or permitted by the Loan Documents, including, without limitation, such items that will constitute Permitted Encumbrances and Liens set forth on Schedule 6.15, (ii) each Real Property Lease and Real Property Sublease is the legal, valid and binding obligation of the Borrower or its applicable Subsidiary party thereto, enforceable in accordance with its terms against the Borrower or Subsidiary and (iii) the Real Property Collateral set forth on Schedule 5.14(b)(iii) hereto comprises all of the Owned Real Properties as of the date hereof required to be subject to a Mortgage pursuant to the Existing Credit Agreement, or acquired subsequent to the date thereof (after giving effect to the Acquisition), other than the property located at 32906-32808 Riverwood St, Magnolia, Texas 77354 and any properties acquired in connection with the Tapco Acquisition with a net book value of less than $200,000. 58 5.15. Plan Assets; Prohibited Transactions. The Borrower is not an entity deemed to hold "plan assets" within the meaning of 29 C.F.R. ss. 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any plan (within the meaning of Section 4975 of the Code), and neither the execution of this Agreement nor the making of Loans hereunder gives rise to a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. 5.16. Environmental Matters. In the ordinary course of its business, the officers of the Borrower consider the effect of Environmental Laws on the business of the Borrower and its Subsidiaries, in the course of which they identify and evaluate potential risks and liabilities accruing to the Borrower due to Environmental Laws. On the basis of this consideration, the Borrower has concluded that Environmental Laws are not reasonably expected to result in a Material Adverse Change. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to result in a Material Adverse Change. 5.17. Investment Company Act. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 5.18. Public Utility Holding Company Act. The Borrower is not a "holding company" as such term is defined in the Public Utility Holding Company Act of 1935, as amended. 5.19. Insurance. The Borrower maintains, and has caused each Subsidiary to maintain, with financially sound and reputable insurance companies insurance on all their Property in such amounts, subject to such deductibles and self-insurance retentions and covering such properties and risks as is consistent with sound business practice. 5.20. No Default or Unmatured Default. No Default or Unmatured Default has occurred and is continuing. 5.21. SDN List Designation. Neither the Borrower nor any of its Subsidiaries or Affiliates is a country, individual or entity named on the Specifically Designated National and Blocked Persons (SDN) list issued by the Office of Foreign Asset Control of the Department of the Treasury of the United States of America. 5.22. Solvency. Each Credit Party is, individually and together with its Subsidiaries, Solvent. 5.23. Senior Indebtedness. The Obligations of the Borrower under the Loan Documents constitute "Senior Indebtedness" and "Designated Senior Indebtedness" (each as defined in the Convertible Notes Indenture) for all purposes under the Convertible Notes Indenture. 59 ARTICLE VI COVENANTS During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: 6.1. Financial Reporting. The Borrower will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Lenders: 6.1.1 Upon the earlier to occur of (i) the date required by law or regulation for the following to be filed with a government body and (ii) the date that is 90 days after the close of each of its fiscal years, financial statements prepared in accordance with generally accepted accounting principles as in effect in the United States from time to time on a consolidated basis for itself and its Subsidiaries, including balance sheets as of the end of such period, statements of income and statements of cash flows, accompanied by (a) an audit report, unqualified as to scope, of a nationally recognized firm of independent public accountants or other independent public accountants reasonably acceptable to the Required Lenders; (b) any management letter prepared by said accountants and (c) a certificate of said accountants that, in the course of their examination necessary for their certification of the foregoing, they have obtained no knowledge of any Default or Unmatured Default under Sections 6.21, 6.22 or 6.23, or if, in the opinion of such accountants, any such Default or Unmatured Default shall exist, stating the nature and status thereof. 6.1.2 Upon the earlier to occur of (i) the date required by law or regulation for the following to be filed with a government body and (ii) the date that is 45 days after the close of the first three quarterly periods of each of its fiscal years, for itself and its Subsidiaries, consolidated unaudited balance sheets as at the close of each such period, consolidated statements of income, and a consolidated statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified as to fairness of presentation, compliance with generally accepted accounting principles as in effect in the United States from time to time and consistency by its chief financial officer or treasurer. 6.1.3 Together with the financial statements required under Sections 6.1.1 and 6.1.2, a compliance certificate in substantially the form of Exhibit B signed by its chief financial officer or treasurer showing the calculations necessary to determine compliance with this Agreement, an officer's certificate in substantially the form of Exhibit F stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof, and a certificate executed and delivered by the chief executive officer or chief financial officer stating that the Borrower and each of its principal officers are in compliance with all requirements of Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 and all rules and regulations related thereto. 60 6.1.4 Within 270 days after the close of each fiscal year of the Borrower, a copy of the actuarial report showing the Unfunded Liabilities of each Single Employer Plan as of the valuation date occurring in such fiscal year, certified by an actuary enrolled under ERISA, if applicable. 6.1.5 As soon as possible and in any event within 10 days after the Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by the chief financial officer or treasurer of the Borrower, describing said Reportable Event and the action which the Borrower or any member of the Controlled Group proposes to take with respect thereto. 6.1.6 As soon as possible and in any event within 10 days after receipt by the Borrower, a copy of (a) any notice or claim to the effect that the Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Borrower, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by the Borrower or any of its Subsidiaries, which, in either case, could reasonably be expected to result in a Material Adverse Change. 6.1.7 As soon as practicable, and in any event within 45 days after the beginning of each fiscal year of the Borrower, a copy of the plan and forecast (including a projected consolidated balance sheet, income statement and cash flow statement) of the Borrower for such fiscal year. 6.1.8 As soon as possible, and in any event within 15 days after the occurrence thereof, a reasonably detailed notification to the Administrative Agent and its counsel of any change in the jurisdiction of organization of the Borrower or any Guarantor. 6.1.9 (a) By no later than such date as the Administrative Agent may from time to time specify, such valuations and appraisals (all costs and expenses with respect to which shall be for the account of the Borrower) as the Administrative Agent may require with respect to the value of the Real Property Collateral; provided that, so long as no Default has occurred and is continuing, no such valuations and appraisals shall be required more than once with respect to any individual Owned Real Property and (b) As soon as available and in any event within 30 days after the end of each fiscal year of the Borrower, a report supplementing Schedules 5.14(a)(i), 5.14(a)(ii), 5.14(a)(iii), 5.14(b)(iii) and 5.14(b)(iv) hereto, including an identification of all Real Property disposed of by any Credit Party during such fiscal year in accordance with the terms of this Agreement, a list and description (including the street address, country or other relevant jurisdiction, state, record owner, book value thereof and, in the case of leases or property, lessor, lessee, expiration date and annual rental cost hereof) of all Real Property acquired or for which leases were entered into during such fiscal year and, as to all such Schedules, a description of such other changes in the information included in such Schedule as may be necessary for such Schedule to be accurate and complete. 61 6.1.10 Promptly after the commencement thereof, notice of all actions, suits, investigations, litigation and proceedings before any Governmental Authority affecting any Credit Party or any of its Subsidiaries of the type described in Section 5.7. 6.1.11 Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that any Credit Party or any of its Subsidiaries sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements, that any Credit Party or any of its Subsidiaries files with the Securities and Exchange Commission or any governmental authority that may be substituted therefor, or with any national securities exchange. 6.1.12 As soon as available and in any event within 30 days after the end of each fiscal year, a report summarizing the insurance coverage (specifying type, amount and carrier) in effect for each Credit Party and its Subsidiaries and containing such additional information as any Agent, or any Lender through the Administrative Agent, may reasonably specify. 6.1.13 Such other information (including non-financial information) as the Administrative Agent or any Lender may from time to time reasonably request. If any information which is required to be furnished to the Lenders under this Section 6.1 is required by law or regulation to be filed by the Borrower with a government body on an earlier date, then the information required hereunder shall be furnished to the Lenders at such earlier date. 6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary to, use the (i) proceeds of the Term B Loans solely for the Refinancing, repaying the Indebtedness of Tapco and to finance the Tapco Acquisition, in each case, including payment of the costs, fees and expenses incurred by the Borrower and its Subsidiaries in connection therewith and (ii) the proceeds of the Revolving Loans for general corporate purposes, including, without limitation, for working capital and Permitted Acquisitions. The Borrower shall use the proceeds of Credit Extensions in compliance with all applicable legal and regulatory requirements and any such use shall not result in a violation of any such requirements, including, without limitation, Regulation U and X, the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder. 6.3. Notice of Default. Within three (3) Business Days after an Authorized Officer becomes aware thereof, the Borrower will, and will cause each Subsidiary to, give notice in writing to the Lenders of the occurrence (i) of any Default or Unmatured Default and (ii) of any other development, financial or otherwise, which (solely with respect to this clause (ii)) could reasonably be expected to result in a Material Adverse Change. 6.4. Conduct of Business. Except as a result of Acquisitions permitted under Section 6.13, the Borrower will, and will cause each Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated or organized, validly existing 62 and (to the extent such concept applies to such entity) in good standing as a domestic corporation, partnership or limited liability company in its jurisdiction of incorporation or organization, as the case may be, as in effect on the Closing Date, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 6.5. Taxes. The Borrower will, and will cause each Subsidiary to, timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with Agreement Accounting Principles; provided, however, that it shall not be a Default or Unmatured Default under this Section 6.5 if all such failures in the aggregate do not result in a Material Adverse Change. 6.6. Insurance. The Borrower will, and will cause each Subsidiary to, maintain with financially sound and reputable insurance companies insurance on all their Property in such amounts, subject to such deductibles and self-insurance retentions, and covering such risks as is consistent with sound business practice, and the Borrower will furnish to any Lender upon request full information as to the insurance carried. The Borrower shall deliver to the Collateral Agent endorsements in form and substance reasonably acceptable to the Collateral Agent (x) to all "All Risk" physical damage insurance policies on all of the Borrower's and its Subsidiaries' tangible real and personal property and assets and business interruption insurance policies naming the Collateral Agent as loss payee and (y) to all general liability and other liability policies naming the Collateral Agent as an additional insured. Each such policy shall in addition (i) contain the agreement by the insurer that any loss thereunder that exceeds $500,000 shall be payable to the Collateral Agent notwithstanding any action, inaction or breach of representation or warranty by such Grantor, (ii) provide that there shall be no recourse against the Collateral Agent for payment of premiums or other amounts with respect thereto and (iii) provide that at least 10 days prior written notice of cancellation or of lapse shall be given to the Collateral Agent by the insurer. Reimbursement under any liability insurance maintained by any Grantor pursuant to this Section 6.6 may be paid directly to the Person who shall have incurred liability covered by such insurance. In the event the Borrower or any of its Subsidiaries at any time or times hereafter shall fail to obtain or maintain any of the policies or insurance required herein or to pay any premium in whole or in part relating thereto, then the Collateral Agent, without waiving or releasing any obligations or resulting Default hereunder, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto which the Collateral Agent deems advisable. All sums so disbursed by the Collateral Agent shall constitute part of the Obligations, payable as provided in this Agreement. 6.7. Compliance with Laws. (a) The Borrower will, and will cause each Subsidiary to, comply in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject including, without limitation, all Environmental Laws, ERISA and Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002; provided, however, that it shall not be a Default or Unmatured Default under this Section 6.7(a) if all such failures in the aggregate do not result in a Material Adverse Change. 63 (b) The Borrower will, and will cause each Subsidiary and all lessees and other Persons operating or occupying its properties to, comply with all applicable Environmental Laws and Environmental Permits; obtain and renew, and cause each of its Subsidiaries to obtain and renew, all Environmental Permits necessary for its operations and properties; and conduct, and cause each of its Subsidiaries to conduct, any investigation, study, sampling and testing, and undertake any cleanup, removal, remedial or other action necessary to remove and clean up all Hazardous Materials from any of its properties, in accordance with the requirements of all Environmental Laws; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to undertake any such cleanup, removal, remedial or other action to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances; provided, further, that it shall not be a Default or Unmatured Default under this Section 6.7(b) if all such failures in the aggregate do not result in a Material Adverse Change. 6.8. Maintenance of Properties. Subject to Section 6.12, the Borrower will, and will cause each Subsidiary to, do all things reasonably necessary to maintain, preserve, protect and keep its Property used in the operation of its business in good repair, working order and condition, (ordinary wear and tear excepted), and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times. 6.9. Inspection; Keeping of Books and Records. The Borrower will, and will cause each Subsidiary to, permit the Administrative Agent and the Lenders, by their respective representatives and agents, at the Borrower's expense, to inspect any of the Property, including, without limitation, the Collateral, books and financial records of the Borrower and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Borrower and each Subsidiary, and to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals (and, so long as no Default has occurred and is continuing, upon the provision of reasonable notice to the Borrower) as the Administrative Agent or any Lender may designate. The Borrower shall keep and maintain, and cause each of its Subsidiaries to keep and maintain, in all material respects, proper books of record and account in which entries in conformity with Agreement Accounting Principles shall be made of all dealings and transactions in relation to their respective businesses and activities. Notwithstanding the foregoing, so long as no Default or Unmatured Default has occurred and is continuing, the Borrower shall not be obligated to reimburse any costs in connection with its obligations under this Section 6.9, other than fees and expenses not in excess of $20,000 payable to the Administrative Agent in connection with not more than one inspection per calendar year. 6.10. Restricted Payments. The Borrower will not, nor will it permit any Subsidiary to, make any Restricted Payment (other than dividends payable in its own capital stock) except that, (i) any Subsidiary may declare and pay dividends or make distributions to the Borrower or to a Guarantor and (ii) so long as no Default or Unmatured Default exists at the time thereof or would arise after giving effect thereto, the Borrower may make Restricted Payments pursuant to any of the Borrower Incentive Plans or those Restricted Payments set forth in Schedule 6.10. 64 6.11. Merger or Dissolution. The Borrower will not, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person or dissolve, except that: 6.11.1 A Guarantor may merge into (x) the Borrower or (y) a Wholly-Owned Subsidiary that is a Guarantor or becomes a Guarantor promptly upon the completion of the applicable merger or consolidation. 6.11.2 A Subsidiary may merge into (x) the Borrower or (y) a Wholly-Owned Subsidiary that is a Guarantor or becomes a Guarantor promptly upon the completion of the applicable merger or consolidation. 6.11.3 The Borrower or any Subsidiary may consummate any merger or consolidation in connection with any Permitted Acquisition, provided, that the Person formed by such merger or consolidation shall be the Borrower or a Guarantor. 6.11.4 The Borrower may dissolve any Subsidiary other than a Guarantor that the Borrower reasonably determines that in good faith is no longer necessary for the operation of its business. 6.12. Sale of Assets. The Borrower will not, nor will it permit any Subsidiary to, lease, sell or otherwise dispose of its Property (other than cash or Cash Equivalent Investments) to any other Person, except: 6.12.1 Sales of Property in the ordinary course of business and the granting of any option or other right to purchase, lease or otherwise, but excluding Property (other than fixtures and personal Property) subject to a Lien under a Mortgage. 6.12.2 A disposition or transfer of Property by a Subsidiary to the Borrower or a Guarantor, by the Borrower to a Guarantor, or by a Guarantor to another Guarantor or to the Borrower; provided that such a disposition or transfer of any Property that constitutes Collateral may only be made to the Borrower or any Guarantor that is a party to the Pledge and Security Agreement. 6.12.3 A disposition of obsolete Property, Property no longer used in the business of the Borrower or its Subsidiaries or other assets in the ordinary course of business of the Borrower or any Subsidiary, but excluding in each case Property (other than fixtures and personal Property) subject to a Lien under a Mortgage. 6.12.4 A sale or grant of licenses of intellectual property entered into in the ordinary course of business. 6.12.5 Leases, sales or other dispositions of its Property that, together with all other Property of the Borrower and its Subsidiaries previously leased, sold or disposed of (other than dispositions otherwise permitted by this Section 6.12) as permitted by this Section during any fiscal year of the Borrower do not exceed one percent (1%) of Consolidated Total Assets in the aggregate. 65 6.13. Investments and Acquisitions. The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Investments (including without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Acquisition of any Person, except: 6.13.1 Cash Equivalent Investments and other Investments in existence on the date hereof and described in Schedule 6.13(A). 6.13.2 Investments in Subsidiaries which are Guarantors. 6.13.3 Acquisitions meeting the following requirements or otherwise approved by the Required Lenders (each such Acquisition constituting a "Permitted Acquisition"): (i) as of the date of the consummation of such Acquisition, no Default or Unmatured Default shall have occurred and be continuing or would result from such Acquisition, and the representation and warranty contained in Section 5.11 shall be true both before and after giving effect to such Acquisition; (ii) such Acquisition is consummated on a non-hostile basis pursuant to a negotiated acquisition agreement approved by the board of directors or other applicable governing body of the seller or entity to be acquired, and no material challenge to such Acquisition (excluding the exercise of appraisal rights) shall be pending or threatened by any shareholder or director of the seller or entity to be acquired; (iii) the business to be acquired in such Acquisition is similar or related to one or more of the lines of business in which the Borrower and its Subsidiaries are engaged on the Closing Date; (iv) as of the date of the consummation of such Acquisition, all material governmental and corporate approvals required in connection therewith shall have been obtained; (v) (a) such Acquisition is the Permitted Alternative Fuel Acquisition or (b) (1) the Purchase Price for each such Acquisition (other than a Permitted Fuel Acquisition) payable in cash shall not exceed $30,000,000 and, together with the Purchase Price payable in cash for all other Permitted Acquisitions, shall not exceed an amount equal to $50,000,000 and (2) the Purchase Price for each such Acquisition (other than the Permitted Alternative Fuel Acquisition) not payable in cash (other than equity issuances by the Borrower), together with the Purchase Price not payable in cash (other than equity issuances by the Borrower) for all other Permitted Acquisitions, shall not exceed an amount equal to $20,000,000 (as determined by reference to the underlying documents for such transaction, as long as such documents shall be the product of an arm's length basis and entered into in good faith), provided that (x) the limitations on Acquisitions set forth in this subclause (b) shall not apply to any Acquisition if the Total Leverage Ratio after giving pro forma effect to such Acquisition is less than or equal to 3.50:1.00 and (y) 66 any Acquisition consummated during a period when the Total Leverage Ratio, after giving pro forma effect to such Acquisition, was less than or equal to 3.50:1.00 shall be disregarded for purposes of determining compliance with this subclause (b); and (vi) prior to the consummation of such Permitted Acquisition, the Borrower shall have delivered to the Administrative Agent a pro forma consolidated balance sheet, income statement and cash flow statement of the Borrower and its Subsidiaries (the "Acquisition Pro Forma"), based on the Borrower's most recent financial statements delivered pursuant to Section 6.1.1 and using historical financial statements for the acquired entity provided by the seller(s) or which shall be complete and shall fairly present, in all material respects, the financial condition and results of operations and cash flows of the Borrower and its Subsidiaries in accordance with Agreement Accounting Principles, but taking into account such Permitted Acquisition and the funding of all Indebtedness in connection therewith, and such Acquisition Pro Forma shall reflect that, on a pro forma basis, the Borrower would have been in compliance with the financial covenants set forth in Sections 6.21, 6.22 and 6.23 for the four fiscal quarter period reflected in the compliance certificate most recently delivered to the Administrative Agent pursuant to Section 6.1.3 prior to the consummation of such Permitted Acquisition (giving effect to such Permitted Acquisition and all Indebtedness funded in connection therewith as if made on the first day of such period). 6.13.4 Investments in entities in which the Borrower or any Subsidiary owns less than 100% of the issued and outstanding equity interests thereof, including the Investments described in Schedule 6.13(B), provided that Investments made after the date of this Agreement do not exceed, over the term of this Agreement, an amount equal to $10 million plus an aggregate amount equal to 2% of Consolidated EBITDA for each twelve month period following the Closing Date (the "Minority Investment Base Amount"); provided further that if the aggregate amount of such Investments actually made in any one fiscal year of the Borrower are actually less than the Minority Investment Base Amount (the difference being the "Shortfall Amount"), then, so long as no Default or Unmatured Default has occurred and is continuing, the permitted amount of such Investments during the immediately succeeding fiscal year only shall be an amount equal to the Minority Investment Base Amount plus the Shortfall Amount. 6.13.5 Creation of or Investment in a Subsidiary that is or becomes immediately following such creation or Investment a Guarantor. 6.13.6 the Tapco Acquisition 6.14. Indebtedness. The Borrower will not, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except: 6.14.1 The Secured Obligations. 6.14.2 Indebtedness existing on the date hereof and described in Schedule 6.14 (and renewals, refinancings or extensions thereof on terms and conditions no less favorable to the applicable obligor than 67 such existing Indebtedness and in a principal amount not in excess of that outstanding as of the date of such renewal, refinancing or extension). 6.14.3 To the extent approved by the Administrative Agent, Indebtedness arising under Rate Management Transactions. 6.14.4 Secured or unsecured purchase money Indebtedness (excluding Capitalized Leases) incurred by the Borrower or any of its Subsidiaries after the Closing Date to finance the acquisition of assets used in its business, if (1) the total of all such Indebtedness for the Borrower and its Subsidiaries taken together incurred on or after the Closing Date shall not exceed an aggregate principal amount of $1,000,000 at any one time outstanding, (2) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed, (3) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing, and (4) any Lien securing such Indebtedness is permitted under Section 6.15 (such Indebtedness being referred to herein as "Permitted Purchase Money Indebtedness"). 6.14.5 Indebtedness arising from intercompany loans and advances (i) made by any Subsidiary to the Borrower or any Domestic Subsidiary or (ii) made by the Borrower to any Guarantor; provided that (a) the Borrower agrees that all such Indebtedness shall be expressly subordinated to the Secured Obligations pursuant to subordination provisions set forth in Schedule 6.14(B). 6.14.6 Guaranty obligations of the Borrower of any Indebtedness of any Subsidiary permitted under this Section 6.14. 6.14.7 Guaranty obligations of any Guarantor with respect to any Indebtedness of the Borrower or any other Subsidiary permitted under this Section 6.14. 6.14.8 Permitted Indebtedness. 6.14.9 Indebtedness of the Borrower and its Subsidiaries constituting Capitalized Lease Obligations in an aggregate principal amount not exceeding $10,000,000 at any time outstanding. 6.14.10 Indebtedness in respect of take or pay contracts entered into by the Borrower and its Subsidiaries in the ordinary course of business and consistent with past practices. 6.14.11 Additional unsecured Indebtedness of the Borrower or any Subsidiary, to the extent not otherwise permitted under this Section 6.14; provided, however, that the aggregate principal amount of such Indebtedness shall not exceed $5,000,000 at any time outstanding. 6.14.12 Indebtedness incurred under the Second Lien Credit Agreement and the related loan documents. 68 6.15. Liens. The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of the Borrower or any of its Subsidiaries, except: 6.15.1 Liens securing Secured Obligations. 6.15.2 Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books, unless and until any Lien resulting therefrom attaches to its Property or becomes enforceable against its other creditors. 6.15.3 Liens imposed by law, such as landlords', wage earners', carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which (a) secure payment of obligations not more than 60 days past due, (b) are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books, or (c) individually or together with all other Liens permitted to this Section 6.15 outstanding on any date of determination do not materially adversely affect the use of the Property to which they relate. 6.15.4 Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. 6.15.5 Liens existing on the Closing Date and described in Schedule 6.15. 6.15.6 Deposits securing liability to insurance carriers under insurance or self-insurance arrangements. 6.15.7 Deposits to secure the performance of bids, trade or supply contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business. 6.15.8 Easements, reservations, rights-of-way, restrictions, survey exceptions and other similar encumbrances as to real property of the Borrower and its Subsidiaries which customarily exist on properties of corporations engaged in similar activities and similarly situated and which (a) were not incurred in connection with and do not secure indebtedness (except as expressly permitted by this Section 6.15), (b) do not render title to the property encumbered thereby unmarketable, and (c) do not materially interfere with the conduct of the business of the Borrower or such Subsidiary conducted at the property subject thereto. 6.15.9 Purchase money Liens securing Permitted Purchase Money Indebtedness (as defined in Section 6.14); provided, that such Liens 69 shall not apply to any property of the Borrower or its Subsidiaries other than that purchased with the proceeds of such Permitted Purchase Money Indebtedness. 6.15.10 Liens existing on any asset of any Subsidiary of the Borrower at the time such Subsidiary becomes a Subsidiary and not created in contemplation of such event. 6.15.11 Liens on any asset securing Indebtedness incurred or assumed for the purpose of financing or refinancing all or any part of the cost of acquiring or constructing such asset; provided that such Lien attaches to such asset concurrently with or within eighteen (18) months after the acquisition or completion or construction thereof. 6.15.12 Liens existing on any asset of any Subsidiary of the Borrower at the time such Subsidiary is merged or consolidated with or into the Borrower or any Subsidiary and not created in contemplation of such event. 6.15.13 Liens existing on any asset prior to the acquisition thereof by the Borrower or any Subsidiary and not created in contemplation thereof; provided that such Liens do not encumber any other property or assets. 6.15.14 Liens in respect of judgments that do not otherwise cause a Default under this Agreement. 6.15.15 Liens arising under the Second Lien Collateral Documents. 6.15.16 Liens arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted under Sections 6.15.11 through 6.15.16; provided that (a) such Indebtedness is not secured by any additional assets and (b) the amount of such Indebtedness secured by any such Lien is not increased. 6.15.17 So long as no Default or Unmatured Default has occurred and is continuing, or would result therefrom, Liens on the accounts referred to in clause (iv) of the definition of "Exempt Property" and on refundable cash earnest money deposits made in connection with Permitted Acquisitions or other purchases of assets used in its business otherwise permitted under this Agreement, in an aggregate amount not to exceed 25% of the purchase price of such Property. 6.15.18 Other Liens securing Indebtedness in an aggregate amount not to exceed am amount equal to 5% of Consolidated Tangible Assets at any time outstanding. In addition, neither the Borrower nor any of its Subsidiaries shall become a party to any agreement, note, indenture or other instrument, or take any other action, which would prohibit the creation of a Lien on any of its Properties or other assets in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations; provided, further, that any agreement, note, indenture or other instrument in connection with purchase money Indebtedness (including Capitalized Leases) for which the related Liens are permitted hereunder may prohibit the creation of a Lien in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations, with respect to the assets or Property obtained with the proceeds of such Indebtedness. 70 6.16. Affiliates. The Borrower will not, and will not permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate (other than the Borrower and the other Credit Parties) except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arm's-length transaction. 6.17. Financial Contracts. Within 90 days following the Closing Date, the Borrower shall enter into Rate Management Transactions covering a notional amount of not less than $300 million and providing for the counterparties thereto to make payments thereunder for a period of no less than three years to the extent that the Eurodollar Base Rate exceeds 5% for an interest period of one month. Except to the extent set forth in the preceding sentence, the Borrower will not, nor will it permit any Subsidiary to, enter into or remain liable upon any Rate Management Transactions except for those entered into in the ordinary course of business for bona fide hedging purposes and not for speculative purposes. 6.18. Subsidiary Covenants. The Borrower will not, and will not permit any Subsidiary to, create or otherwise cause to become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary (i) to pay dividends or make any other distribution on its stock, (ii) to pay any Indebtedness or other obligation owed to the Borrower or any other Subsidiary, (iii) to make loans or advances or other Investments in the Borrower or any other Subsidiary, or (iv) to sell, transfer or otherwise convey any of its property to the Borrower or any other Subsidiary. 6.19. Contingent Obligations. The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Contingent Obligation (including, without limitation, any Contingent Obligation with respect to the obligations of a Subsidiary), except (i) the Reimbursement Obligations, (ii) any guaranty of the Secured Obligations, (iii) any guaranty pursuant to any of the Subordinated Indebtedness Documents and (iv) any guaranty of any Indebtedness permitted by Section 6.14. 6.20. Subordinated Indebtedness and Amendments to Subordinated Indebtedness Documents. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly voluntarily prepay, defease or in substance defease, purchase, redeem, retire or otherwise acquire, any Subordinated Indebtedness or the Indebtedness from time to time outstanding under the Subordinated Indebtedness Documents. Furthermore, the Borrower will not, and will not permit any Subsidiary to, amend the other Subordinated Indebtedness Documents or any document, agreement or instrument evidencing any Indebtedness incurred pursuant to the Subordinated Indebtedness Documents (or any replacements, substitutions, extensions or renewals thereof) or pursuant to which such Indebtedness is issued where such amendment, modification or supplement provides for the following or which has any of the following effects: (i) increases the overall principal amount of any such Indebtedness or increases the amount of any single scheduled installment of principal or interest; 71 (ii) shortens or accelerates the date upon which any installment of principal or interest becomes due or adds any additional mandatory redemption provisions; (iii) shortens the final maturity date of such Indebtedness or otherwise accelerates the amortization schedule with respect to such Indebtedness; (iv) increases the rate of interest accruing on such Indebtedness; (v) provides for the payment of additional fees or increases existing fees; (vi) amends or modifies any financial or negative covenant (or covenant which prohibits or restricts the Borrower or any of its Subsidiaries from taking certain actions) in a manner which is more onerous or more restrictive in any material respect to the Borrower or such Subsidiary or which is otherwise materially adverse to the Borrower, its Subsidiaries and/or the Lenders or, in the case of any such covenant, which places material additional restrictions on the Borrower or such Subsidiary or which requires the Borrower or such Subsidiary to comply with more restrictive financial ratios or which requires the Borrower to better its financial performance, in each case from that set forth in the existing applicable covenants in the Subordinated Indebtedness Documents or the applicable covenants in this Agreement; or (vii) amends, modifies or adds any affirmative covenant in a manner which (a) when taken as a whole, is materially adverse to the Borrower, its Subsidiaries and/or the Lenders or (b) is more onerous than the existing applicable covenant in the Subordinated Indebtedness Documents or the applicable covenant in this Agreement. 6.21. Leverage Ratios. 6.21.1 Total Leverage Ratio. The Borrower will not permit the ratio (the "Total Leverage Ratio"), determined as of the end of each of its fiscal quarters set forth below, of (i) Consolidated Funded Indebtedness of the Borrower to (ii) Consolidated EBITDA for the then most recently ended four fiscal quarters to be greater than the ratio set forth for such period below: For each four fiscal quarter period ended: Total Leverage Ratio ------------------------------------------ -------------------- September 30, 2004 through December 31, 2004 5.00:1.00 March 31, 2005 through June 30, 2005 4.75:1.00 September 30, 2005 through December 31, 2005 4.50:1.00 March 31, 2006 through June 30, 2006 4.25:1.00 September 30, 2006 4.00:1.00 72 December 31, 2006 through September 30, 2009 3.75:1.00 December 31, 2009 through the Term Loan B Maturity Date 3.50:1.00 6.21.2 Senior Leverage Ratio. The Borrower will not permit the ratio (the "Senior Leverage Ratio"), determined as of the end of each of its fiscal quarters set forth below, of (i) Consolidated Funded Indebtedness of the Borrower minus Subordinated Indebtedness of the Borrower and its Subsidiaries to (ii) Consolidated EBITDA for the then most-recently ended four fiscal quarters to be greater than the ratio set forth for such period below: For each four fiscal quarter period ended: Senior Leverage Ratio ------------------------------------------ --------------------- September 30, 2004 through December 31, 2004 4.00:1.00 March 31, 2005 through June 30, 2005 3.75:1.00 September 30, 2005 through December 31, 2005 3.50:1.00 March 31, 2006 through June 30, 2006 3.25:1.00 September 30, 2006 3.00:1.00 December 31, 2006 through September 30, 2009 2.75:1.00 December 31, 2009 through the Term Loan B Maturity Date 2.50:1.00 The Total Leverage Ratio and the Senior Leverage Ratio shall be calculated as of the last day of each fiscal quarter of the Borrower based upon (a) for Consolidated Funded Indebtedness and, if relevant, Subordinated Indebtedness, Consolidated Funded Indebtedness and Subordinated Indebtedness as of the last day of each such fiscal quarter and (b) for Consolidated EBITDA, the actual amount as of the last day of each fiscal quarter for the most recently ended four consecutive fiscal quarters. 6.22. Fixed Charge Coverage Ratio. The Borrower will not permit the ratio (the "Fixed Charge Coverage Ratio"), determined as of the end of each Measurement Period, of (i) Consolidated EBITDAR minus Consolidated Capital Expenditures minus expenses for taxes paid in cash or taxes accrued during such 73 period (which shall be deemed to be $10,800,000 for the fiscal quarter ended September 30, 2004) to (ii) Consolidated Future Maturities following such period (including, without limitation, Capitalized Lease Obligations) plus Consolidated Interest Expense during such period plus Rentals to be paid during such period, all calculated for the Borrower and its Subsidiaries on a consolidated basis, to be less than (x) for each Measurement Period ending on or prior to September 30, 2006, 1.10:1.00 and (y) for each Measurement Period ending after September 30, 2006, 1.25:1.00. 6.23. Capital Expenditures. Other than the Capital Expenditures set forth on Schedule 6.23, the Borrower will not, nor will it permit any Subsidiary to, expend, or be committed to expend, in excess of an aggregate amount for Capital Expenditures of the Borrower and its Subsidiaries during any fiscal year of the Borrower to be greater than the amount set forth for such fiscal year below: For fiscal year: Capital Expenditures ---------------- -------------------- 2005 through 2006 $50,000,000 2007 through 2010 $55,000,000 2011 $60,000,000 Notwithstanding the foregoing, in the event that the amount of Capital Expenditures permitted to be made in any fiscal year (before giving effect to any increase in such permitted expenditure amount pursuant to this sentence) exceeds the amount of Capital Expenditures made during such fiscal year, such excess may be carried forward and utilized to make Capital Expenditures in the next succeeding fiscal year. 6.24. Rentals. The Borrower shall not permit, nor shall it permit any Subsidiary to, create, pay or incur aggregate Rentals in excess of five percent (5%) of Consolidated Total Assets for any fiscal year during the term of this Agreement on a consolidated basis for the Borrower and its Subsidiaries. 6.25. Guarantors. The Borrower shall cause each of its Subsidiaries to guarantee pursuant to the Guaranty Agreement or supplement thereto (or, in the case of a Foreign Subsidiary, any other guarantee agreement requested by the Administrative Agent) the Secured Obligations. In furtherance of the above, the Borrower shall promptly (and in any event within 45 days thereof, except as otherwise provided in Section 6.32) (i) provide written notice to the Administrative Agent and the Lenders upon any Person becoming a Subsidiary, setting forth information in reasonable detail describing all of the assets of such Person, (ii) cause such Person to execute a supplement to the Guaranty Agreement and such other Collateral Documents as are necessary for the Borrower and its Subsidiaries to comply with Section 6.26, (iii) cause the Applicable Pledge Percentage of the issued and outstanding equity interests of such Person to be delivered to the Administrative Agent (together with undated stock powers signed in blank, if applicable) and pledged to the Administrative Agent pursuant to an appropriate pledge agreement(s) in substantially the form of the Pledge and Security Agreement (or joinder or other supplement thereto) and otherwise in 74 form reasonably acceptable to the Administrative Agent and (iv) deliver such other documentation as the Administrative Agent may reasonably request in connection with the foregoing, including, without limitation, certified resolutions and other authority documents of such Person and, to the extent requested by the Administrative Agent, favorable opinions of counsel to such Person (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to above), all in form, content and scope reasonably satisfactory to the Administrative Agent. Notwithstanding the foregoing, no Foreign Subsidiary shall be required to execute and deliver the Guaranty Agreement (or supplement thereto) or such other guarantee agreement if such execution and delivery would cause a Deemed Dividend Problem or a Financial Assistance Problem with respect to such Foreign Subsidiary and, in lieu thereof, the Borrower and the relevant Subsidiaries shall provide the pledge agreements required under this Section 6.25 or Section 6.26. Notwithstanding the foregoing, to the extent that the aggregate EBITDA of FlexCrete Building Systems, L.C., Florida N-Viro, L.P. and Florida N-Viro Management, LLC for the most recently completed four fiscal quarter period does not exceed one percent (1%) of the Consolidated EBITDA for the Borrower and its Subsidiaries for the same period, the Borrower shall not be required to cause FlexCrete Building Systems, L.C., Florida N-Viro, L.P. or Florida N-Viro Management, LLC to guarantee the Secured Obligations. 6.26. Collateral; Environmental Reports. (a) Subject to the exceptions set forth in this Section 6.26, the Borrower will cause, and will cause each other Credit Party to cause, all of its owned Property whether now or hereafter acquired (other than Exempt Property) to be subject at all times to first priority perfected Liens in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations to secure the Secured Obligations in accordance with the terms and conditions of the Collateral Documents, subject in any case to Liens permitted by Section 6.15 hereof. Without limiting the generality of the foregoing, the Borrower will cause the Applicable Pledge Percentage of the issued and outstanding equity interests of each Pledge Subsidiary directly owned by the Borrower or any other Credit Party to be subject at all times to a first priority, perfected Lien in favor of the Administrative Agent to secure the Secured Obligations in accordance with the terms and conditions of the Collateral Documents or such other security documents as the Administrative Agent shall reasonably request. Notwithstanding the foregoing, (1) no pledge agreement in respect of the equity interests of a Foreign Subsidiary shall be required hereunder to the extent such pledge thereunder is prohibited by applicable law or the Administrative Agent reasonably determines that such pledge would not provide material credit support for the benefit of the Holders of Secured Obligations pursuant to legally valid, binding and enforceable pledge agreements and (2) no such pledge agreement shall be required to be delivered hereunder with respect to Foreign Subsidiaries existing as of the Closing Date, unless otherwise determined in the reasonable discretion of the Administrative Agent upon 45 days notice to the Borrower. (b) The Borrower will cause, and will cause each other Credit Party to cause all of its Real Property Collateral whether now or hereafter acquired or leased to be subject at all times to first priority perfected Liens in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations to secure the Secured Obligations in accordance with the terms and conditions of the Collateral Documents, subject in each case to Liens created or permitted by the Loan Documents, including, without limitation, such items that will constitute Permitted Encumbrances and Liens set forth on Schedule 6.15. Without limiting the generality of the foregoing, the Borrower will, and will cause each Guarantor to, deliver Mortgages and, to the extent applicable, Mortgage Instruments with respect to the Real Property Collateral to the extent, and within such time period as is, reasonably required by the Administrative Agent; 75 provided, however, that with respect to the Real Property Collateral existing as of the Closing Date, no such Mortgages, Mortgage Instruments and pledge agreements are required to be delivered hereunder until 90 days following the Closing Date with respect to Real Property Collateral that comprises 75% of the book value of all Real Property Collateral and 120 days following the Closing Date with respect to all other Real Property Collateral (it being understood and agreed that the failure to deliver such Mortgages, Mortgage Instruments and pledge agreements by 120 days following the Closing Date or such date 30 days later as the Administrative Agent may agree in its sole discretion shall constitute a Default under Section 7.3); provided that the Borrower hereby agrees to use its reasonable efforts to cause the delivery of such Mortgages and Mortgage Instruments as soon as practicable after the Closing Date. Without limiting the generality of the foregoing, in addition to each Mortgage delivered pursuant to this Section 6.26, the Administrative Agent shall receive the following items with respect to the Real Property Collateral (collectively, the "Mortgage Instruments"): (A) evidence that counterparts of the Mortgages have been duly executed, acknowledged and delivered and are in form suitable for filing or recording in all filing or recording offices that the Administrative Agent may deem necessary or desirable in order to create a valid first and subsisting Lien on the property described therein in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations and that all applicable filing and recording taxes and fees have been paid, (B) with respect to the Real Property Collateral, fully paid American Land Title Association Lender's Extended Coverage title insurance policies (the "Mortgage Policies") in form and substance, with endorsements and in amount reasonably acceptable to the Administrative Agent, issued by Chicago Title Insurance Company, insuring the Mortgages of the Real Property Collateral to be valid first and subsisting Liens on the property described therein, free and clear of all defects (including, but not limited to, mechanics' and materialmen's Liens) and encumbrances, excepting only Permitted Encumbrances, and providing for such other affirmative insurance (including endorsements for future advances under the Loan Documents and for mechanics' and materialmen's Liens) and such direct access reinsurance as the Administrative Agent may reasonably require, (C) with respect to the Real Property Collateral, American Land Title Association/American Congress on Surveying and Mapping form surveys, for which all necessary fees (where applicable) have been paid, and dated no more than 60 days before the filing of the related Mortgage or such other date as the Administrative Agent shall reasonably determine; provided that Chicago Title Insurance Company shall agree to omit the general survey exception to the applicable Mortgage Policy on the basis of such survey, certified to the Administrative Agent and Chicago Title Insurance Company in a manner satisfactory to the Administrative Agent by a land surveyor duly registered and licensed in the States in which the property described in such surveys is located and acceptable to the Administrative Agent, showing all buildings and other improvements, any off-site improvements, the location of any easements, parking spaces, rights of way, building set-back lines and other dimensional regulations and the absence of encroachments, either by such improvements or on to such 76 property, and other defects, other than encroachments and other defects acceptable to the Administrative Agent or for which affirmative reinsurance coverage is provided in the Mortgage Policies, (D) such consents and agreements of third parties, and such estoppel letters and other confirmations, as the Administrative Agent may deem necessary or desirable, (E) evidence of the insurance required by the terms of the Mortgages, (F) evidence that all other action that the Administrative Agent may deem necessary or desirable in order to create valid first and subsisting Liens on the property described in the Mortgages has been taken, (G) favorable opinions of local counsel for the Credit Parties (i) in states in which the Real Property Collateral is located, with respect to the enforceability and perfection of the Mortgages and any related fixture filings substantially in the form of Exhibit A-2 hereto and otherwise in form and substance satisfactory to the Administrative Agent and (ii) in states in which the Credit Parties party to the Mortgages are organized or formed, with respect to the valid existence, corporate power and authority of such Credit Parties in the granting of the Mortgages, in substantially the form of Exhibit A-3 hereto, and otherwise in form and substance satisfactory to the Administrative Agent. (c) The Borrower shall, within 30 days of the Closing Date (which may be extended by up to an additional 30 days in the sole discretion of the Administrative Agent), cause, and cause each other Credit Party to cause, all of its Deposit Accounts (as defined in the Pledge and Security Agreement) and securities accounts (as defined in the New York Uniform Commercial Code) to be subject to Account Control Agreements or Securities Account Control Agreements (each as defined in the Pledge and Security Agreement), as applicable, acceptable to the Collateral Agent and subject to any exceptions set forth in the Pledge and Security Agreement. (d) Within 45 days of the Closing Date the Borrower shall deliver to the Lenders a Phase I environmental assessment report, from an environmental consulting firm acceptable to the Lenders, which report shall identify existing and potential environmental concerns, and shall quantify related costs and liabilities, associated with all of the Real Property Collateral and the Lenders shall be satisfied with the Borrower's plans with respect thereto and if so recommended by any such Phase I report, the Borrower shall deliver to the Lenders within 60 days of the Closing Date a Phase II environmental assessment report with respect to the applicable site and the Lenders shall be satisfied with the Borrower's plans with respect to the matters addressed therein. (e) The Borrower shall use its commercially reasonable efforts to obtain the consent of Brown Brothers Harriman within 90 days of the Closing Date to the grant by ACM Block & Brick, and shall cause ACM Block & Brick to so grant, of a perfected second priority lien, on terms satisfactory to the Administrative Agent, on all property securing the BBH Debt in favor of the Collateral Agent on behalf of the Holders of the Secured Obligations. If such consent is not obtained within 90 days of the Closing Date, the Borrower shall cause the BBH Debt to be repaid in full and cause ACM Block & Brick to grant a perfected first priority lien, on terms satisfactory to the Administrative 77 Agent, on all property securing the BBH Debt in favor of the Collateral Agent on behalf of the Holders of the Secured Obligations. Simultaneously with the granting of the liens contemplated by this Section 6.26(e), the Borrower shall cause ACM Block & Brick to satisfy all requirements of this Section 6.26 and of the Pledge and Security Agreement as they apply to Collateral with respect to the property being so pledged. Upon the granting of a first lien security interest in the property secured by the BBH Debt to the Collateral Agent on behalf of the Holders of the Secured Obligations, the Borrower shall cause ACM Block & Brick to comply with the provisions of Section 6.6 as they relate to such property. (f) Within 14 days of the Closing Date, the Borrower shall cause Tapco International Corporation to enter into an employment agreement with John N. Lawless, III, as president of Tapco International Corporation, on terms and conditions satisfactory to the Lead Arrangers. 6.27. Sale and Leaseback Transactions. The Borrower shall not, nor shall it permit any Subsidiary to, enter into any Sale and Leaseback Transaction other than Sale and Leaseback Transactions in respect of (a) existing assets of the Eldorado Stone division of Headwaters Concrete Materials and of ACM Block & Brick with a fair market value in the aggregate over the term of the Agreement not to exceed $10,000,000 and (b) Permitted Acquisitions with a fair market value in the aggregate over the term of the Agreement not to exceed $10,000,000. 6.28. Sale of Receivables. The Borrower will not, nor will it permit any Subsidiary to, sell or otherwise dispose of any Receivables, with or without recourse. 6.29. Insurance and Condemnation Proceeds. The Borrower directs (and, if applicable, shall cause its Subsidiaries to direct) all insurers under policies of property damage, boiler and machinery and business interruption insurance and payors and any condemnation claim or award relating to the property to pay all proceeds payable under such policies or with respect to such claim or award for any loss with respect to the Collateral directly to the Administrative Agent, for the benefit of the Holders of Secured Obligations, to the extent such proceeds are required to be used to prepay the Obligations pursuant to Section 2.2 hereof. Each such policy shall contain a long-form loss-payable endorsement naming the Administrative Agent as loss payee, which endorsement shall be in form and substance acceptable to the Administrative Agent. 6.30. Amendments of Constitutive Documents. The Borrower shall not, nor shall it permit any Subsidiary to, amend its certificate of incorporation or bylaws or other constitutive documents other than amendments that could not be reasonably expected to result in a Material Adverse Change. 6.31. Partnership, Etc. The Borrower shall not, nor shall it permit any Subsidiary to become a general partner in any general or limited partnership or joint venture, other than any Subsidiary the sole assets of which consist of its interest in such partnership or joint venture. 6.32. Negative Pledge. The Borrower shall not enter into or suffer to exist, or permit any of its Subsidiaries to enter into or suffer to exist, any agreement prohibiting or conditioning the creation or assumption of any Lien upon any of its property or assets except (i) under this Agreement, (ii) under the Second Lien Credit Agreement, (iii) in any agreement governing Permitted Indebtedness so long as the terms of such prohibitions or conditions on the 78 creation or assumption of Liens are no more restrictive than the terms hereof and permit the creation or assumption of Liens securing the Obligations of the Borrower and its Subsidiaries under this Agreement and (iv) (A) any such prohibitions or conditions in effect on the Closing Date, (B) in any agreement governing any purchase money Indebtedness permitted by Section 6.14.4 solely to the extent that the agreement or instrument governing such Indebtedness prohibits a Lien on the property acquired with the proceeds of such Indebtedness, (C) in any agreement governing any Capitalized Lease permitted by Section 6.14.9 solely to the extent that such Capitalized Lease prohibits a Lien on the property subject thereto, or (D) in any agreement governing any Indebtedness outstanding on the date any Subsidiary of the Borrower becomes such a Subsidiary (so long as such agreement was not entered into solely in contemplation of such Subsidiary becoming a Subsidiary of the Borrower). ARTICLE VII DEFAULTS The occurrence of any one or more of the following events shall constitute a Default: 7.1. Any representation or warranty made or deemed made by the Borrower, any of its Subsidiaries, or any Authorized Officer thereof to the Lenders or the Administrative Agent under or in connection with this Agreement, any Credit Extension, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be false in any material respect on the date as of which made or deemed made. 7.2. Nonpayment of (i) principal of any Loan when due, (ii) any Reimbursement Obligation within one Business Day after the same becomes due, or (iii) interest upon any Loan or any Commitment Fee, LC Fee or other Obligations under any of the Loan Documents within five (5) Business Days after such interest, fee or other Obligation becomes due. 7.3. The breach by the Borrower of any of the terms or provisions of Sections 6.1, 6.2, 6.3, 6.9, 6.10, 6.11, 6.12, 6.13, 6.14, 6.15, 6.16, 6.18, 6.19, 6.20, 6.21, 6.22, 6.23, 6.24, 6.25, 6.26, 6.27, 6.28, 6.29, 6.30, 6.31 and 6.32. 7.4. The breach by the Borrower (other than a breach which constitutes a Default under another Section of this Article VII) of (i) any other terms, covenants, agreements or provisions of this Agreement or (ii) any other Loan Document (beyond the applicable grace period with respect thereto, if any), in each case which is not remedied within thirty (30) days after the earlier to occur of (x) written notice from the Administrative Agent or any Lender to the Borrower or (y) an Authorized Officer otherwise become aware of any such breach. 7.5. Failure of the Borrower or any of its Subsidiaries to pay when due any Material Indebtedness (subject to any applicable grace period with respect thereto, if any, set forth in the Material Indebtedness Agreement evidencing such Material Indebtedness) which failure has not been (i) timely cured or (ii) waived in writing by the requisite holders of such Material Indebtedness; or the default by the Borrower or any of its Subsidiaries in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in any Material Indebtedness Agreement and such default has not been (x) timely cured or (y) waived in writing by the requisite holders 79 of the Material Indebtedness in respect thereof, or any other event shall occur or condition exist, the effect of which default, event or condition is to cause, or to permit the holder(s) of such Material Indebtedness or the lender(s) under any Material Indebtedness Agreement to cause, such Material Indebtedness to become due prior to its stated maturity or any commitment to lend under any Material Indebtedness Agreement to be terminated prior to its stated expiration date; or any Material Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries shall not pay, or admit in writing its inability to pay, its debts generally as they become due. 7.6. The Borrower or any of its Subsidiaries shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate or partnership action to authorize or effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7. 7.7. Without the application, approval or consent of the Borrower or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the Borrower or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding described in Section 7.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 60 consecutive days. 7.8. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of, all or any portion of the Property of the Borrower and its Subsidiaries which, when taken together with all other Property of the Borrower and its Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such action occurs, constitutes a Substantial Portion. 7.9. The Borrower or any of its Subsidiaries shall fail within 30 days to pay, bond or otherwise discharge one or more (i) judgments or orders for the payment of money in excess of $1,000,000 (or the equivalent thereof in currencies other than Dollars) in the aggregate, or (ii) nonmonetary judgments or orders which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Change, which judgment(s), in any such case, is/are not stayed on appeal or otherwise being appropriately contested in good faith or otherwise not covered by a creditworthy insurer or indemnitor. 80 7.10. The Unfunded Liabilities of all Single Employer Plans shall be in an amount reasonably expected to result in a Material Adverse Change, or any Reportable Event shall occur in connection with any Plan. 7.11. Any steps shall be taken to initiate the termination of any Plan, or the PBGC shall give notice that it intends to terminate any Plan. 7.12. Nonpayment by the Borrower or any Subsidiary of any Rate Management Obligation, when due or the breach by the Borrower or any Subsidiary of any term, provision or condition contained in any Rate Management Transaction or any transaction of the type described in the definition of "Rate Management Transactions," whether or not any Lender or Affiliate of a Lender is a party thereto. 7.13. Any Change of Control shall occur. 7.14. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred, pursuant to Section 4201 of ERISA, withdrawal liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Borrower or any other member of the Controlled Group as withdrawal liability (determined as of the date of such notification), exceeds an amount reasonably expected to result in a Material Adverse Change. 7.15. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Borrower and the other members of the Controlled Group (taken as a whole) to all Multiemployer Plans which are then in reorganization or being terminated have been or will be increased, in the aggregate, over the amounts contributed to such Multiemployer Plans for the respective plan years of such Multiemployer Plans immediately preceding the plan year in which the reorganization or termination occurs by an amount reasonably expected to result in a Material Adverse Change. 7.16. The Borrower or any of its Subsidiaries shall (i) be the subject of any proceeding or investigation pertaining to the release by the Borrower, any of its Subsidiaries or any other Person of any toxic or hazardous waste or substance into the environment, or (ii) violate any Environmental Law, which, in the case of an event described in clause (i) or clause (ii), has resulted in liability to the Borrower or any of its Subsidiaries in an amount sufficient to cause a Material Adverse Change. 7.17. Any Loan Document shall fail to remain in full force or effect or any action shall be taken by any of the Credit Parties or shall be failed to be taken by any of the Credit Parties to discontinue or to assert the invalidity or unenforceability of, or which results in the discontinuation or invalidity or unenforceability of, any Loan Document or any Lien in favor of the Administrative Agent under the Loan Documents, or such Lien shall not have the priority contemplated by the Loan Documents. 81 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 8.1. Acceleration. (i) If any Default described in Section 7.6 or 7.7 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder and the obligation and power of the LC Issuers to issue Facility LCs shall automatically terminate and the Secured Obligations shall immediately become due and payable without any election or action on the part of the Administrative Agent, any LC Issuer or any Lender, and the Borrower will be and become thereby unconditionally obligated, without any further notice, act or demand, to pay the Administrative Agent an amount in immediately available funds, which funds shall be held in the Facility LC Collateral Account, equal to the difference of (x) the amount of LC Obligations at such time less (y) the amount or deposit in the Facility LC Collateral Account at such time which is free and clear of all rights and claims of third parties and has not been applied against the Obligations (the "Collateral Shortfall Amount"). If any other Default occurs, the Required Lenders (or the Administrative Agent with the consent of the Required Lenders) may (a) terminate or suspend the obligations of the Lenders to make Loans hereunder and the obligation and power of the LC Issuers to issue Facility LCs, or declare the Secured Obligations to be due and payable, or both, whereupon the Secured Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives and (b) upon notice to the Borrower and in addition to the continuing right to demand payment of all amounts payable under this Agreement, make demand on the Borrower to pay, and the Borrower will forthwith upon such demand and without any further notice or act pay to the Administrative Agent the Collateral Shortfall Amount which funds shall be deposited in the Facility LC Collateral Account. (ii) If at any time while any Default is continuing, the Administrative Agent determines that the Collateral Shortfall Amount at such time is greater than zero, the Administrative Agent may make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Administrative Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (iii) The Administrative Agent may at any time or from time to time after funds are deposited in the Facility LC Collateral Account, apply such funds to the payment of the Secured Obligations and any other amounts as shall from time to time have become due and payable by the Borrower to the Lenders or the LC Issuers under the Loan Documents. (iv) At any time while any Default is continuing, neither the Borrower nor any Person claiming on behalf of or through the 82 Borrower shall have any right to withdraw any of the funds held in the Facility LC Collateral Account. After all of the Secured Obligations have been indefeasibly paid in full and the Aggregate Revolving Loan Commitment, the LC Sublimit and Aggregate Term Loan B Commitment have been terminated, any funds remaining in the Facility LC Collateral Account shall be returned by the Administrative Agent to the Borrower or paid to whomever may be legally entitled thereto at such time. (v) If, after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans and the obligation and power of the LC Issuers to issue Facility LCs hereunder as a result of any Default (other than any Default as described in Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Administrative Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.2. Amendments. Subject to the provisions of this Section 8.2 and the Intercreditor Agreement, the Required Lenders (or the Administrative Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or thereunder or waiving any Default hereunder or thereunder; provided, however, that no such supplemental agreement shall, without the consent of all of the Lenders (other than any Lender that is, at such time, a Defaulting Lender), except for any amendment, waiver or consent with respect to the items set forth in Sections 8.2.1 and 8.2.3, which shall only require the consent of all of the Lenders directly affected by such amendment, waiver or consent: 8.2.1 Extend the Revolving Loan Termination Date, extend the final maturity of any Revolving Loan or extend the expiry date of any Facility LC to a date after the Revolving Loan Termination Date, extend the final maturity date of any Term B Loan to a date after the Term Loan B Maturity Date, or postpone any regularly scheduled payment of principal of any Loan or forgive all or any portion of the principal amount thereof, or any Reimbursement Obligation related thereto, or reduce the rate or extend the time of payment of interest or fees thereon or Reimbursement Obligations related thereto (other than (x) a waiver of the application of the default rate of interest pursuant to Section 2.11 hereof and (y) any reduction of the amount of or any extension of the payment date for the mandatory payments required under Section 2.2, in each case which shall only require the approval of the Required Lenders). 8.2.2 Reduce the percentage specified in the definition of Required Lenders or any other percentage of Lenders specified to be the applicable percentage in this Agreement to act on specified matters or amend the definition of "Pro Rata Share", "Revolving Loan Pro Rata Share" or "Term Loan Pro Rata Share". 8.2.3 Increase the amount of the Revolving Loan Commitment or Term Loan B Commitment of any Lender hereunder. 83 8.2.4 Amend this Section 8.2, or permit the Borrower to assign its rights or obligations under this Agreement. 8.2.5 Other than in connection with a transaction permitted under this Agreement, release all or substantially all of the Collateral. 8.2.6 Other than in connection with a transaction permitted under this Agreement, release any Guarantor from its obligations thereunder. If, in connection with any proposed amendment, waiver, or consent, the consent of all of the Lenders, or all of the Lenders directly affected thereby, is required pursuant to this Section 8.2, and any such Lender refuses to consent to such amendment, waiver or consent (any such Lender whose consent is not obtained as described in this Section 8.2 being referred to as a "Non-Consenting Lender"), then, so long as the Administrative Agent is not a Non-Consenting Lender, at the Borrower's request, the Administrative Agent or an Eligible Assignee shall be entitled (but shall have no obligation) to purchase from such Non-Consenting Lender, and such Non-Consenting Lender (by its acceptance of the benefits of the applicable Loan Documents) agrees that it shall, upon the Administrative Agent's request, sell and assign to the Administrative Agent or such Eligible Assignee, all of the Loans of such Non-Consenting Lender or Non-Consenting Lenders for an amount equal to the principal balance of all Loans held by the Non-Consenting Lender and all accrued interest and fees with respect thereto through the date of sale. Each Lender (by its acceptance of the benefits of the Loan Documents) agrees that, if it becomes a Non-Consenting Lender, it shall execute and deliver to the Administrative Agent an Assignment and Acceptance to evidence such sale and purchase and shall deliver to the Administrative Agent any Note (if the assigning Lender's Loans are evidenced by Notes) subject to such Assignment and Acceptance; provided, however, that the failure of any Non-Consenting Lender to execute an Assignment and Acceptance shall not render such sale and purchase (and the corresponding assignment) ineffective. No amendment of any provision of this Agreement relating to or affecting the Administrative Agent shall be effective without the written consent of the Administrative Agent. The Administrative Agent may waive payment of the fee without obtaining the consent of any other party to this Agreement. No amendment of any provision of this Agreement relating to or affecting the Swing Line Lender or any Swing Line Loan shall be effective without the written consent of the Swing Line Lender. No amendment of any provision of this Agreement relating to or affecting any LC Issuer shall be effective without the written consent of such LC Issuer. 8.3. Preservation of Rights. No delay or omission of the Lenders, the LC Issuers or the Administrative Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Credit Extension notwithstanding the existence of a Default or Unmatured Default or the inability of the Borrower to satisfy the conditions precedent to such Credit Extension shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by, or by the Administrative Agent with the consent of, the requisite number of Lenders required pursuant to Section 8.2, and then only to 84 the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Administrative Agent, the LC Issuers and the Lenders until all of the Secured Obligations have been paid in full. ARTICLE IX GENERAL PROVISIONS 9.1. Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Credit Extensions herein contemplated. 9.2. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, neither any LC Issuer nor any Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.3. Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.4. Entire Agreement. The Loan Documents embody the entire agreement and understanding among the Borrower, the Administrative Agent, the LC Issuers and the Lenders and supersede all prior agreements and understandings among the Borrower, the Administrative Agent, the LC Issuers and the Lenders relating to the subject matter thereof other than those contained in the fee letter described in Section 10.13 which shall survive and remain in full force and effect during the term of this Agreement. 9.5. Several Obligations; Benefits of This Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Administrative Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided, however, that the parties hereto expressly agree that the Lead Arrangers shall enjoy the benefits of the provisions of Sections 9.6, 9.10 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement. 9.6. Expenses; Indemnification. (i) The Borrower shall reimburse the Administrative Agent and the Lead Arrangers for any reasonable out-of-pocket expenses (including reasonable attorneys' and paralegals' fees and time charges of attorneys for the Administrative Agent) paid or incurred by the Administrative Agent or the Lead Arrangers in connection with the investigation, preparation, negotiation, documentation, execution, delivery, syndication, distribution (including, without limitation, via the internet), review, 85 amendment, modification and administration of the Loan Documents. The Borrower also agrees to reimburse the Administrative Agent, the Lead Arrangers, the LC Issuers and the Lenders for any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' and paralegals' fees and time charges and expenses of attorneys and paralegals for the Administrative Agent, the Lead Arrangers, the LC Issuers and the Lenders, which attorneys and paralegals may be employees of the Administrative Agent, the Lead Arrangers, the LC Issuers or the Lenders) paid or incurred by the Administrative Agent, the Lead Arrangers, the LC Issuers or any Lender in connection with the collection and enforcement of the Loan Documents. Expenses being reimbursed by the Borrower under this Section include, without limitation, the cost and expense of obtaining an appraisal of each parcel of real property or interest in real property described in any relevant Collateral Document, which appraisal shall be in conformity with the applicable requirements of any law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, and any rules promulgated to implement such provisions and costs and expenses incurred in connection with the Reports described in the following sentence. (ii) The Borrower hereby further agrees to indemnify the Administrative Agent, the Lead Arrangers, each LC Issuer, each Lender, their respective affiliates, and each of their directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and out-of-pocket expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Administrative Agent, the Lead Arrangers, any LC Issuer, any Lender or any affiliate is a party thereto, and all attorneys' and paralegals' fees, time charges and expenses of attorneys and paralegals of the party seeking indemnification, which attorneys and paralegals may or may not be employees of such party seeking indemnification) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Credit Extension hereunder except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification. The obligations of the Borrower under this Section 9.6 shall survive the termination of this Agreement. 9.7. Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Administrative Agent with sufficient counterparts so that the Administrative Agent may furnish one to each of the Lenders, as shall have been reasonably requested of the Borrower by the Administrative Agent. 9.8. Accounting. Except as provided to the contrary herein, all accounting terms used in the calculation of any financial covenant or test shall be interpreted and all accounting determinations hereunder in the calculation of any financial covenant or test shall be made in accordance with Agreement Accounting Principles. If any changes in generally accepted accounting principles are hereafter required or permitted and are adopted by the Borrower or any of its Subsidiaries with the agreement of its independent certified public accountants and such changes result in a change in the method of calculation of any of the financial covenants, tests, restrictions or standards herein or in the related definitions or terms used therein ("Accounting Changes"), the parties hereto agree, at the Borrower's request, to enter into negotiations, in good faith, in order to amend such provisions in a credit neutral manner so as to reflect equitably such changes with the desired result that the criteria for evaluating the Borrower's and its Subsidiaries' financial 86 condition shall be the same after such changes as if such changes had not been made; provided, however, until such provisions are amended in a manner reasonably satisfactory to the Administrative Agent and the Required Lenders, no Accounting Change shall be given effect in such calculations. In the event such amendment is entered into, all references in this Agreement to Agreement Accounting Principles shall mean generally accepted accounting principles as of the date of such amendment. Notwithstanding the foregoing, all financial statements to be delivered by the Borrower pursuant to Section 6.1 shall be prepared in accordance with generally accepted accounting principles in effect at such time. 9.9. Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.10. Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders, the LC Issuers and the Administrative Agent on the other hand shall be solely that of borrower and lender. Neither the Administrative Agent, the Lead Arrangers, any LC Issuer nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Administrative Agent, the Lead Arrangers, any LC Issuer nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. The Borrower agrees that neither the Administrative Agent, the Lead Arrangers, any LC Issuer nor any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. None of the parties hereto shall have any liability with respect to, and each party hereto hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by any such party in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby. 9.11. Confidentiality. The Administrative Agent and each Lender agrees to hold any confidential information which it may receive from the Borrower in connection with this Agreement in confidence, except for disclosure (i) to its Affiliates and to the Administrative Agent and any other Lender and their respective Affiliates, to the extent such Person is or is reasonably expected to be involved in the evaluation of such information in connection with the transactions contemplated by this Agreement, (ii) to legal counsel, accountants, and other professional advisors to such Lender or to a Transferee, (iii) to regulatory officials, (iv) to any Person as required by law, regulation, or legal process, or to any Person as required in connection with any legal proceeding to which it is a party, provided that the Borrower shall have received prior written notice of such disclosure to the extent such notice is permitted and the disclosing party shall have taken all steps reasonably requested by the Borrower to protect the confidentiality of the information so disclosed, (v) to its direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, to the extent required in connection with such swap agreements, (vi) permitted by Section 12.4, and (vii) to rating agencies subject to confidentiality restrictions reasonably acceptable to the Borrower, if 87 requested or required by such agencies in connection with a rating relating to the Credit Extensions hereunder. Without limiting Section 9.4, the Borrower agrees that the terms of this Section 9.11 shall set forth the entire agreement between the Borrower and each Lender (including the Administrative Agent) with respect to any confidential information previously or hereafter received by such Lender in connection with this Agreement, and this Section 9.11 shall supersede any and all prior confidentiality agreements entered into by such Lender with respect to such confidential information. 9.12. Nonreliance. Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for herein. 9.13. Disclosure. The Borrower and each Lender, including the LC Issuers, hereby acknowledge and agree that each Lender and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with the Borrower and its Affiliates. 9.14. Performance of Obligations. The Borrower agrees that the Administrative Agent may, but shall have no obligation to (i) at any time, pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against any Collateral and (ii) after the occurrence and during the continuance of a Default make any other payment or perform any act required of the Borrower under any Loan Document or take any other action which the Administrative Agent in its discretion deems necessary or desirable to protect or preserve the Collateral, including, without limitation, any action to (x) effect any repairs or obtain any insurance called for by the terms of any of the Loan Documents and to pay all or any part of the premiums therefor and the costs thereof and (y) pay any rents payable by the Borrower which are more than 30 days past due, or as to which the landlord has given notice of termination, under any lease. The Administrative Agent shall use its best efforts to give the Borrower notice of any action taken under this Section 9.14 prior to the taking of such action or promptly thereafter provided the failure to give such notice shall not affect the Borrower's obligations in respect thereof. The Borrower agrees to pay the Administrative Agent, upon demand, the principal amount of all funds advanced by the Administrative Agent under this Section 9.14, together with interest thereon at the rate from time to time applicable to Floating Rate Loans from the date of such advance until the outstanding principal balance thereof is paid in full. If the Borrower fails to make payment in respect of any such advance under this Section 9.14 within one (1) Business Day after the date the Borrower receives written demand therefor from the Administrative Agent, the Administrative Agent shall promptly notify each Lender and each Lender agrees that it shall thereupon make available to the Administrative Agent, in Dollars in immediately available funds, the amount equal to such Lender's Pro Rata Share of such advance. If such funds are not made available to the Administrative Agent by such Lender within one (1) Business Day after the Administrative Agent's demand therefor, the Administrative Agent will be entitled to recover any such amount from such Lender together with interest thereon at the Federal Funds Effective Rate for each day during the period commencing on the date of such demand and ending on the date such amount is received. The failure of any Lender to make available to the Administrative Agent its Pro Rata Share of any such unreimbursed advance under this Section 9.14 shall neither relieve any 88 other Lender of its obligation hereunder to make available to the Administrative Agent such other Lender's Pro Rata Share of such advance on the date such payment is to be made nor increase the obligation of any other Lender to make such payment to the Administrative Agent. All outstanding principal of, and interest on, advances made under this Section 9.14 shall constitute Obligations secured by the Collateral until paid in full by the Borrower. 9.15. USA Patriot Act Notification. The following notification is provided to the Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318: IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government of the United States of America fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each Person that opens an account, including any deposit account, treasury management account, loan, other extension of credit, or other financial services product. Accordingly, when the Borrower opens an account, the Administrative Agent and the Lenders will ask for the Borrower's name, tax identification number, business address, and other information that will allow the Administrative Agent and the Lenders to identify the Borrower. The Administrative Agent and the Lenders may also ask to see the Borrower's legal organizational documents or other identifying documents. ARTICLE X THE AGENTS 10.1. Appointment; Nature of Relationship. MSSF is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "Administrative Agent") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Administrative Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. MS&Co. is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "Collateral Agent" and, together with the Administrative Agent, the "Agents") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Collateral Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. Each of the Agents agrees to act as such contractual representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined terms "Administrative Agent" and "Collateral Agent" it is expressly understood and agreed that the Agents shall not have any fiduciary responsibilities to any of the Holders of Secured Obligations by reason of this Agreement or any other Loan Document and that the Agents are merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual representative, each of the Agents (i) does not hereby assume any fiduciary duties to any of the Holders of Secured Obligations, (ii) is a "representative" of the Holders of Secured Obligations within the meaning of the term "secured party" as defined in the New York Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders, for 89 itself and on behalf of its Affiliates as Holders of Secured Obligations, hereby agrees to assert no claim against either of the Agents on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Holder of Secured Obligations hereby waives. 10.2. Powers. Each of the Agents shall have and may exercise such powers under the Loan Documents as are specifically delegated to such Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. Neither Agent shall have any implied duties or fiduciary duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by such Agent. 10.3. General Immunity. Neither Agent nor any of its respective directors, officers, agents or employees shall be liable to the Borrower, or any Lender or Holder of Secured Obligations for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final, non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. 10.4. No Responsibility for Loans, Recitals, Etc. Neither Agent nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, in the case of the Administrative Agent, except receipt of items required to be delivered solely to the Administrative Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any Collateral; or (g) the financial condition of the Borrower or any guarantor of any of the Obligations or of any of the Borrower's or any such guarantor's respective Subsidiaries. Neither Agent shall have any duty to disclose to the Lenders information that is not required to be furnished by the Borrower to such Agent at such time, but is voluntarily furnished by the Borrower such Agent (either in its capacity as such Agent or in its individual capacity). 10.5. Action on Instructions of Lenders. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders (or all of the Lenders in the event that and to the extent that this Agreement expressly requires such), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that neither Agent shall be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders (or all of the Lenders in the event that and to the extent that this Agreement expressly requires such). Each Agent shall be fully justified in failing or refusing to take any action 90 hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 10.6. Employment of Agents and Counsel. Each Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Each Agent shall be entitled to advice of counsel concerning the contractual arrangement between such Agent and the Lenders and all matters pertaining to such Agent's duties hereunder and under any other Loan Document. 10.7. Reliance on Documents; Counsel. Each Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex, electronic mail message, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by such Agent, which counsel may be employees of such Agent. For purposes of determining compliance with the conditions specified in Sections 4.1 and 4.2, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the applicable date specifying its objection thereto. 10.8. Administrative Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Administrative Agent and the Collateral Agent ratably in proportion to the Lenders' Pro Rata Shares (i) for any amounts not reimbursed by the Borrower for which such Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by such Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by such Agent in connection with any dispute between such Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against such Agent in connection with any dispute between such Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Agent and (ii) any indemnification required pursuant to Section 3.5(vii) shall, notwithstanding the provisions of this Section 10.8, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 10.8 shall survive payment of the Secured Obligations and termination of this Agreement. 91 10.9. Notice of Default. Neither Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless such Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. 10.10. Rights as a Lender. In the event either Agent is a Lender, such Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Revolving Loan Commitment and its Credit Extensions as any Lender and may exercise the same as though it were not an Agent, and the term "Lender" or "Lenders" shall, at any time when an Agent is a Lender, unless the context otherwise indicates, include such Agent in its individual capacity. Either Agent and their respective Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. Neither Agent, in its individual capacity, is obligated to remain a Lender. 10.11. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Collateral Agent, the Lead Arrangers, the Syndication Agent or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Collateral Agent, the Lead Arrangers, the Syndication Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.12. Successor Agents. (a) The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective (x) twenty (20) days after the retiring Administrative Agent gives notice of its intention to resign, if the Administrative Agent resigns due to its determination, in its sole discretion, that being the Administrative Agent poses a conflict of interest for it or (y) otherwise, upon the appointment of a successor Administrative Agent or, if no successor Administrative Agent has been appointed, forty-five (45) days after the retiring Administrative Agent gives notice of its intention to resign. The Administrative Agent may be removed at any time with or without cause by written notice received by the Administrative Agent from the Required Lenders, such removal to be (i) subject to, so long as no Default has occurred and is continuing, the prior written consent of the Borrower, such consent not to be unreasonably withheld and (ii) effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. If no successor Administrative Agent shall have been so 92 appointed by the Required Lenders within thirty days after the resigning Administrative Agent's giving notice of its intention to resign, then the resigning Administrative Agent may appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. Notwithstanding the previous sentence, the Administrative Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Administrative Agent hereunder. If the Administrative Agent has resigned or been removed and no successor Administrative Agent has been appointed, the Lenders may perform all the duties of the Administrative Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Administrative Agent shall be deemed to be appointed hereunder until such successor Administrative Agent has accepted the appointment. Any such successor Administrative Agent shall be a commercial bank or other financial institution having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Administrative Agent. Upon the effectiveness of the resignation or removal of the Administrative Agent, the resigning or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Administrative Agent, the provisions of this Article X shall continue in effect for the benefit of such Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Administrative Agent by merger, or the Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this Section 10.12, then the term "Prime Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administrative Agent. . (b) The Collateral Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective (x) twenty (20) days after the retiring Collateral Agent gives notice of its intention to resign, if the Collateral Agent resigns due to its determination, in its sole discretion, that being the Collateral Agent poses a conflict of interest for it, or (y) otherwise upon the appointment of a successor Collateral Agent or, if no successor Collateral Agent has been appointed, forty-five (45) days after the retiring Collateral Agent gives notice of its intention to resign. The Collateral Agent may be removed at any time with or without cause by written notice received by the Collateral Agent from the Required Lenders, such removal to be (i) subject to, so long as no Default has occurred and is continuing, the prior written consent of the Borrower, such consent not to be unreasonably withheld and (ii) effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Collateral Agent. If no successor Collateral Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Collateral Agent's giving notice of its intention to resign, then the resigning Collateral Agent may appoint, on behalf of the Borrower and the Lenders, a successor Collateral Agent. Notwithstanding the previous sentence, the Collateral Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates as a successor Collateral Agent hereunder. If the Collateral Agent has resigned or been removed and no successor Collateral Agent has been appointed, the Lenders may perform all the duties of the Collateral Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Collateral Agent shall be deemed to be appointed hereunder until such successor Collateral Agent has accepted the appointment. Any such 93 successor Collateral Agent shall be a commercial bank, trust company or other financial institution having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Collateral Agent. Upon the effectiveness of the resignation or removal of the Collateral Agent, the resigning or removed Collateral Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of a Collateral Agent, the provisions of this Article X shall continue in effect for the benefit of such Collateral Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Collateral Agent hereunder and under the other Loan Documents. 10.13. Administrative Agent and Lead Arrangers Fees. The Borrower agrees to pay to the Administrative Agent and the Lead Arrangers, for their respective accounts, the fees agreed to by the Borrower, the Administrative Agent and the Lead Arrangers pursuant to that certain letter agreement dated September 3, 2004, or as otherwise agreed from time to time. 10.14. Delegation to Affiliates. The Borrower and the Lenders agree that each of the Administrative Agent and the Collateral Agent may delegate any of its respective duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which such Agent is entitled under Articles IX and X. 10.15. Co-Agents, Documentation Agent, Syndication Agent, Etc. None of the Lenders, if any, identified in this Agreement as a "co-agent", "documentation agent" or "syndication agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of such Lenders shall have or be deemed to have a fiduciary relationship with any Lender. Each Lender hereby makes the same acknowledgments with respect to such Lenders as it makes with respect to the Administrative Agent and the Collateral Agent in Section 10.11. 10.16. Collateral Documents. (a) Each Lender authorizes the Collateral Agent to enter into each of the Collateral Documents to which it is a party and to take all action contemplated by such documents. Each Lender agrees that no Holder of Secured Obligations (other than the Collateral Agent) shall have the right individually to seek to realize upon the security granted by any Collateral Document, it being understood and agreed that such rights and remedies may be exercised solely by the Collateral Agent for the benefit of the Holders of Secured Obligations upon the terms of the Collateral Documents. (b) In the event that any Collateral is hereafter pledged by any Person as collateral security for the Secured Obligations, the Collateral Agent is hereby authorized to execute and deliver on behalf of the Holders of Secured Obligations any Loan Documents necessary or appropriate to grant and perfect a Lien on such Collateral in favor of the Collateral Agent on behalf of the Holders of Secured Obligations. (c) The Lenders hereby authorize the Collateral Agent, at its option and in its discretion, to release any Lien granted to or held by the 94 Collateral Agent upon any Collateral (i) upon termination of the Revolving Loan Commitments, LC Commitments, Term Loan B Commitments and payment and satisfaction of all of the Obligations (other than contingent indemnity obligations and Rate Management Obligations) at any time arising under or in respect of this Agreement or the Loan Documents or the transactions contemplated hereby or thereby; (ii) as permitted by, but only in accordance with, the terms of the applicable Loan Document; or (iii) if approved, authorized or ratified in writing by the Required Lenders, unless such release is required to be approved by all of the Lenders hereunder. Upon request by the Collateral Agent at any time, the Lenders will confirm in writing the Collateral Agent's authority to release particular types or items of Collateral pursuant to this Section 10.16. (d) Upon any sale or transfer of assets constituting Collateral which is permitted pursuant to the terms of any Loan Document, or consented to in writing by the Required Lenders or all of the Lenders, as applicable, and upon at least five Business Days' prior written request by the Borrower to the Collateral Agent, the Collateral Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to evidence the release of the Liens granted to the Collateral Agent for the benefit of the Holders of Secured Obligations herein or pursuant hereto upon the Collateral that was sold or transferred; provided, however, that (i) the Collateral Agent shall not be required to execute any such document on terms which, in the Collateral Agent's opinion, would expose the Collateral Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Secured Obligations or any Liens upon (or obligations of the Borrower or any Subsidiary in respect of) all interests retained by the Borrower or any Subsidiary, including (without limitation) the proceeds of the sale, all of which shall continue to constitute part of the Collateral. 10.17. Supplemental Collateral Agent. Anything contained herein or in the Collateral Documents to the contrary notwithstanding, the Administrative Agent may from time to time, when the Administrative Agent deems it necessary, appoint one or more trustees, co-trustees, collateral co-agents or collateral subagents (each a "Supplemental Collateral Agent") with respect to all or any part of the Real Property Collateral. In the event that the Administrative Agent so appoints any Supplemental Collateral Agent with respect to any Real Property Collateral, (i) such Supplemental Collateral Agent shall automatically be vested, in addition to the Administrative Agent, with all rights, powers, privileges, interests and remedies of the Administrative Agent under the Collateral Documents with respect to such Real Property Collateral; (ii) such Supplemental Collateral Agent shall be deemed to be an "Agent" for purposes of this Agreement and the other Loan Documents, and the provisions of Section 9.1 of the Security Agreement, this Article and Section 9.6 hereof that refer to the Agents (or either of them) shall inure to the benefit of such Supplemental Collateral Agent, and all references therein and in the other Loan Documents to 95 the Administrative Agent shall be deemed to be references to the Administrative Agent and/or such Supplemental Collateral Agent, as the context may require; and (iii) the term "Administrative Agent," when used herein or in any applicable Collateral Document in relation to the Liens on or security interests in such Real Property Collateral granted in favor of the Administrative Agent, and any rights, powers, privileges, interests and remedies of the Administrative Agent with respect to such Real Property Collateral, shall be deemed to include such Supplemental Collateral Agent; provided, however, that no such Supplemental Collateral Agent shall be authorized to take any action with respect to any such Real Property Collateral unless and except to the extent expressly authorized in writing by the Administrative Agent. Should any instrument in writing from the Borrower or any other Credit Party be required by any Supplemental Collateral Agent so appointed by the Administrative Agent to more fully or certainly vest in and confirming to such Supplemental Collateral Agent such rights, powers, privileges and duties, the Borrower shall, or shall cause such Credit Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by the Administrative Agent. If any Supplemental Collateral Agent, or successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall automatically vest in and be exercised by the Administrative Agent until the appointment of a new Supplemental Collateral Agent. ARTICLE XI SETOFF; RATABLE PAYMENTS 11.1. Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any other Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or any Affiliate of any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Secured Obligations owing to such Lender, whether or not the Secured Obligations, or any part thereof, shall then be due. 11.2. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Outstanding Revolving Credit Exposure or its Term B Loans (other than payments received pursuant to Section 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a participation in the Aggregate Outstanding Revolving Credit Exposure and Term B Loans held by the other Lenders so that after such purchase each Lender will hold its Pro Rata Share, Revolving Loan Pro Rata Share and Term Loan Pro Rata Share. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their respective Pro Rata Shares. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 12.1. Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and the Lenders and their respective successors and assigns permitted hereby, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents without the prior 96 written consent of each Lender, (ii) any assignment by any Lender must be made in compliance with Section 12.3, and (iii) any transfer by Participation must be made in compliance with Section 12.2. Any attempted assignment or transfer by any party not made in compliance with this Section 12.1 shall be null and void, unless such attempted assignment or transfer is treated as a participation in accordance with Section 12.3.2. The parties to this Agreement acknowledge that clause (ii) of this Section 12.1 relates only to absolute assignments and this Section 12.1 does not prohibit assignments creating security interests, including, without limitation, (x) any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank, (y) in the case of a Lender which is a Fund, any pledge or assignment of all or any portion of its rights under this Agreement and any Note to its trustee in support of its obligations to its trustee or (z) any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to direct or indirect contractual counterparties in swap agreements relating to the Loans; provided, however, that no such pledge or assignment creating a security interest shall release the transferor Lender from its obligations hereunder unless and until the parties thereto have complied with the provisions of Section 12.3. The Administrative Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 12.3; provided, however, that the Administrative Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Loan or which holds any Note to direct payments relating to such Loan or Note to another Person. Any assignee of the rights to any Loan or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Loan. 12.2. Participations. 12.2.1 Permitted Participants; Effect. Any Lender may at any time sell to one or more banks or other entities ("Participants") participating interests in any Outstanding Revolving Credit Exposure of such Lender, any Term B Loans of such Lender, any Note held by such Lender, any Revolving Loan Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Outstanding Revolving Credit Exposure and Term B Loans and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 12.2.2 Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, 97 modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Credit Extension or Revolving Loan Commitment in which such Participant has an interest which would require consent of all of the Lenders or all of the Lenders directly affected thereby pursuant to the terms of Section 8.2 or of any other Loan Document. 12.2.3 Benefit of Certain Provisions. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender. The Borrower further agrees that each Participant shall be entitled to the benefits of Sections 3.1, 3.2, 3.4 and 3.5 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 12.3, provided that (i) a Participant shall not be entitled to receive any greater payment under Section 3.1, 3.2 or 3.5 than the Lender who sold the participating interest to such Participant would have received had it retained such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of the Borrower, and (ii) any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 3.5 to the same extent as if it were a Lender. 12.3. Assignments. 12.3.1 Permitted Assignments. Any Lender may at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents. Such assignment shall be evidenced by an agreement substantially in the form of Exhibit C or in such other form as may be agreed to by the parties thereto (each such agreement, an "Assignment Agreement"). Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate of a Lender or an Approved Fund shall either be in an amount equal to the entire applicable Revolving Loan Commitment, LC Commitment, Term Loan B Commitment and Outstanding Revolving Credit Exposure and/or Term B Loans, as applicable, of the assigning Lender or (unless each of the Borrower and the Administrative Agent otherwise consents) be in an aggregate amount not less than $1,000,000 (with contemporaneous assignments to Approved Funds of a single Lender being treated as one assignment for purposes of such minimum amount). The amount of the assignment shall be based on the Revolving Loan Commitment, LC Commitment, Term Loan B Commitment, Outstanding Revolving Credit Exposure (if the Revolving Loan Commitment has been terminated) and/or outstanding Term B Loans (if the Term Loan B Commitment has been terminated), as applicable, subject to the assignment, determined as of the date of such assignment or as of the "Trade Date," if the "Trade Date" is specified in the Assignment Agreement. 98 12.3.2 Consents. The consent of the Borrower shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund, provided that the consent of the Borrower shall not be required if (i) a Default has occurred and is continuing, (ii) if such assignment is in connection with the physical settlement of any Lender's obligations to direct or indirect contractual counterparties in swap agreements relating to the Loans or (iii) if such assignment is made in connection with the primary syndication of the loans and commitments hereunder. The consent of the Administrative Agent shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund. The consent of each of the LC Issuers shall be required prior to an assignment of any Revolving Loan Commitment any LC Commitment or Outstanding Revolving Credit Exposure becoming effective. Any consent required under this Section 12.3.2 shall not be unreasonably withheld or delayed. 12.3.3 Effect; Effective Date. Upon delivery to the Administrative Agent of an Assignment Agreement, together with any consents required by Sections 12.3.1 and 12.3.2, such assignment shall become effective as of the effective date specified in such assignment after recordation of such assignment by the Administrative Agent in the Register pursuant to Section 12.3.4. The Assignment Agreement shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Revolving Loan Commitment, LC Commitment and Outstanding Revolving Credit Exposure and/or Term B Loans, as applicable, under the applicable Assignment Agreement constitutes "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party thereto, and the transferor Lender shall be released with respect to the Revolving Loan Commitment, LC Commitment and Outstanding Revolving Credit Exposure and/or Term B Loans, as applicable, assigned to such Purchaser without any further consent or action by the Borrower, the Lenders or the Administrative Agent. In the case of an assignment covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a Lender hereunder but shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Documents which survive payment of the Obligations and termination of the applicable agreement. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 12.3 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 12.2. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.3, the transferor Lender, the Administrative Agent and the Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender, if applicable, and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Revolving Loan Commitments (or, if the Revolving Loan 99 Termination Date has occurred, their respective Outstanding Revolving Credit Exposure) or Term Loan B Commitments (or, if the Term Loan B Commitments have been terminated, outstanding Term B Loans), as applicable, as adjusted pursuant to such assignment. 12.3.4 Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain a copy of each Assignment Agreement delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Revolving Loan Commitments of, LC Commitments of, and principal amounts of the Credit Extensions owing to, each Lender pursuant to the terms hereof from time to time (the "Register") and shall record in the Register each assignment pursuant to each Assignment Agreement delivered to it. The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender at any reasonable time and from time to time upon reasonable prior notice. 12.3.5 Borrower Increased Costs. Notwithstanding any other provision of this Agreement to the contrary, if solely and directly as a result of any assignment or transfer effected by a Lender under this Agreement, there arises or will arise any obligation on the part of the Borrower under Article III of this Agreement to pay any sum in excess of the sum (if any) which, but for such assignment or transfer, it would have been obliged to pay to such Lender as an additional amount under Article III, the Borrower shall not be obliged to pay such excess. 12.4. Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries, including without limitation any information contained in any Reports; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement. 12.5. Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is not incorporated under the laws of the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.5(iv). ARTICLE XIII NOTICES 13.1. Notices; Effectiveness; Electronic Communication 13.1.1 Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in Section 13.1.2 below), all notices and other 100 communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows: (i) if to the Borrower, at its address or telecopier number set forth on the signature page hereof; (ii) if to the Administrative Agent, at its address or telecopier number set forth on the signature page hereof; (iii) if to an Initial LC Issuer, at its address or telecopier number set forth on the signature page hereof; (iv) if to a Lender, to it at its address (or telecopier number) set forth in its Administrative Questionnaire. Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications to the extent provided in Section 13.1.2 below, shall be effective as provided in said Section 13.1.2. 13.1.2 Electronic Communications. Notices and other communications to the Lenders and the LC Issuers hereunder may be delivered or furnished by electronic communication (including e-mail and internet or intranet websites) pursuant to procedures approved by the Administrative Agent or as otherwise determined by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender or any LC Issuer pursuant to Article II if such Lender or such LC Issuer, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its respective discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it or as it otherwise determines, provided that such determination or approval may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not given during the normal business hours of the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor. 101 13.2. Change of Address, Etc. Any party hereto may change its address or telecopier number for notices and other communications hereunder by notice to the other parties hereto. ARTICLE XIV COUNTERPARTS; INTEGRATION; EFFECTIVENESS; ELECTRONIC EXECUTION 14.1. Counterparts; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Except as provided in Article IV, this Agreement shall become effective when it shall have been executed by the Borrower, the Administrative Agent, the Initial LC Issuers and the Lenders and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of such parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. 14.2. Electronic Execution of Assignments. The words "execution," "signed," "signature," and words of like import in any Assignment Agreement shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, or any other state laws based on the Uniform Electronic Transactions Act. ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL 15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 15.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK CITY, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL 102 LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT, ANY LC ISSUER, ANY LENDER OR ANY HOLDER OF SECURED OBLIGATIONS TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE ADMINISTRATIVE AGENT, ANY LC ISSUER, ANY LENDER OR ANY HOLDER OF SECURED OBLIGATIONS OR ANY AFFILIATE OF THE ADMINISTRATIVE AGENT, ANY LC ISSUER, ANY LENDER OR ANY HOLDER OF SECURED OBLIGATIONS INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW YORK CITY, NEW YORK. 15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT, ANY LC ISSUER, EACH LENDER, AND EACH OTHER HOLDER OF SECURED OBLIGATIONS HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. [Signature Pages Follow] 103 IN WITNESS WHEREOF, the Borrower, the Lenders, the Initial LC Issuers and the Administrative Agent have executed this Agreement as of the date first above written. HEADWATERS INCORPORATED as the Borrower By: /s/ Steven G. Stewart ---------------------------------- Name: Steven G. Stewart Title: Chief Financial Officer 10653 S. River Front Parkway, Suite 300 South Jordan, Utah 84095 Attention: Steven G. Stewart Telephone: (801) 984-9400 FAX: (801) 984-9430 MORGAN STANLEY SENIOR FUNDING, INC., as a Lender, as Swing Line Lender, as Initial LC Issuer, as Administrative Agent, and as Joint Lead Arranger By: /s/ Todd Vannucci ------------------------------------------------ Name: Todd Vannucci Title: Executive Director 1633 Broadway, 25th Floor New York, NY 10019 Attention: James Morgan/Larry Benison Telephone: 212-537-1470/1439 FAX: 212-537-1867/1866 Email: james.morgan@morganstanley.com/ larry.benison@morganstanley.com MORGAN STANLEY & CO. INCORPORATED, as Collateral Agent By: /s/ Todd Vannucci Name: Todd Vannucci Title: Executive Director 1633 Broadway, 25th Floor New York, NY 10019 Attention: James Morgan/Larry Benison Telephone: 212-537-1470/1439 FAX: 212-537-1867/1866 Email: james.morgan@morganstanley.com/ larry.benison@morganstanley.com JPMORGAN CHASE BANK, as a Lender and Syndication Agent By: /s/ David L. Howard______________ Name: David L. Howard Title: Vice President 2200 Ross Avenue, Floor 3 Dallas, TX 75201 Attention: David L. Howard Tel: 214-965-4756 Fax: 214-965-2044 Email: david.l.howard@chase.com With a copy to: Bank One, N.A. Attention: Tony C. Nielsen 50 West Broadway, Salt Lake City, UT 84101 Tel: 801-481-5004/Fax: 801-481-5031 Email: tony_c_Nielsen@bankone.com J.P. MORGAN SECURITIES INC., as Joint Lead Arranger By: /s/ Adam G. Bernard____________ Name: Adam G. Bernard Title: Vice President 270 Park Avenue, Floor 5 New York, NY 10017 Attention: Adam G. Bernard Tel: 212-270-9253 Fax: 212-270-1063 Email: adam.g.bernard@jpmorgan.com BANK ONE, NA, as Initial LC Issuer By: /s/ Tony C. Nielsen --------------------------------------------- Name: Tony C. Nielsen Title: First Vice President Attention: Tony C. Nielsen ------------------------------------ Telephone: 801-481-5004 FAX: 801-481-5031 email: tony_c_Nielsen@bankone.com COMMITMENT SCHEDULE Revolving Loan Commitments Amount of Revolving % of Aggregate Revolving Lender Loan Commitment Loan Commitment - ------ ------------------- ------------------------ Morgan Stanley Senior Funding, Inc. $30,000,000 50% JPMorgan Chase Bank $30,000,000 50% TOTAL $60,000,000.00 100% Term Loan B Commitments Amount of Term % of Aggregate Term Lender Loan B Commitment Loan B Commitment - ------ ----------------- ------------------- Morgan Stanley Senior Funding, Inc. $320,000,000 50% JPMorgan Chase Bank $320,000,000 50% TOTAL $640,000,000.00 100% Letter of Credit Commitment Amount of Letter of LC Issuer Credit Commitment --------- ----------------- Morgan Stanley Senior Funding, Inc. $25,000,000 Bank One, NA $2,070,000 TOTAL PRICING SCHEDULE ========================= ============= ============= ============= ============ APPLICABLE LEVEL I LEVEL II LEVEL III LEVEL IV MARGIN FOR REVOLVING STATUS STATUS STATUS STATUS LOANS - ------------------------- ------------- ------------- ------------- ------------ Eurodollar Rate 1.75% 2.00% 2.25% 2.50% - ------------------------- ------------- ------------- ------------- ------------ Floating Rate 0.75 1.00% 1.25% 1.50% ========================= ============= ============= ============= ============ ========================= ============= ============= ============= ============ APPLICABLE FEE LEVEL I LEVEL II LEVEL III LEVEL IV RATE STATUS STATUS STATUS STATUS - ------------------------- ------------- ------------- ------------- ------------ Commitment Fee 0.50% 0.625% 0.625% 0.75% ========================= ============= ============= ============= ============ =================================== ====================== ===================== APPLICABLE TERM LEVEL I STATUS TERM LEVEL II STATUS MARGIN FOR TERM B LOANS - ----------------------------------- ---------------------- --------------------- Eurodollar Rate 3.00% 3.25% - ----------------------------------- ---------------------- --------------------- Floating Rate 2.00% 2.25% =================================== ====================== ===================== For the purposes of this Schedule, the following terms have the following meanings, subject to the final paragraph of this Schedule: "Financials" means the annual or quarterly financial statements of the Borrower delivered pursuant to Section 6.1.1 or 6.1.2. "Level I Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the most recent Financials, the Total Leverage Ratio is less than 3.0 to 1.0. "Level II Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the most recent Financials, (i) the Borrower has not qualified for Level I Status and (ii) the Total Leverage Ratio is less than 3.5 to 1.0. "Level III Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the most recent Financials, (i) the Borrower has not qualified for Level I Status or Level II Status and (ii) the Total Leverage Ratio is less than 4.0 to 1.0. "Level IV Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the most recent Financials, the Borrower has not qualified for Level I Status or Level II Status or Level III Status. 2 "Status" means (x) either Level I Status, Level II Status, Level III Status or Level IV Status and (y) either Term Level I Status or Term Level II Status, as applicable. "Term Level I Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the most recent Financials, the Total Leverage Ratio is less than or equal to 3.75 to 1.0. "Term Level II Status" exists at any date if, as of the last day of the fiscal quarter of the Borrower referred to in the most recent Financials, the Borrower has not qualified for Term Level I Status. The Applicable Margin in respect of each Facility and Applicable Fee Rate shall be determined in accordance with the foregoing table applicable to such Facility or fee based on the Borrower's Status as reflected in the then most recent Financials. Adjustments, if any, to the Applicable Margin or Applicable Fee Rate shall be effective five Business Days after the Administrative Agent has received the applicable Financials. If the Borrower fails to deliver the Financials to the Administrative Agent at the time required pursuant to Section 6.1, then the Applicable Margin in respect of each Facility and Applicable Fee Rate shall be the highest Applicable Margin and Applicable Fee Rate set forth in the foregoing table applicable to such Facility or fee until five days after such Financials are so delivered. Notwithstanding the foregoing, Level IV Status and Term Level II Status shall be deemed to be applicable until five (5) Business Days after the Administrative Agent's receipt of the applicable Financials for the Borrower's fiscal quarter ending on or about September 30, 2004 and adjustments to the Applicable Margin for each Facility and Applicable Fee Rate shall thereafter be effected in accordance with the preceding paragraph. 3 SCHEDULE I [Intentionally Omitted] SCHEDULE III PERMITTED ALTERNATIVE FUEL ACQUISITION Membership interests in DTE IndyCoke, LLC SCHEDULE 2.20 EXISTING LETTERS OF CREDIT 1. Letter of Credit no. CLS420210 dated May 17, 2004, issued by Bank One, NA in favor of Dow Reichold Specialty Laytex LLC in the face amount of $1,500,000. 2. Letter of Credit no. CLS420287 dated June 24, 2004 (and amended June 30, 2004), issued by Bank One, NA in favor of National Union Fire Insurance Company and other parties named therein as beneficiaries in the face amount of $470,000. 3. Letter of Credit no. CLS420422 dated September 7, 2004, issued by Bank One, NA in favor of Wells Fargo Bank, National Association in the face amount of $100,000. SCHEDULE 5.7 LITIGATION Headwaters: 1. Boynton, et al v. Headwaters, Inc. et al, U.S. Dist. Ct. W.D. Tenn., Civ. No. 1-02-1111, filed 2002. In October 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to a synthetic fuel technology invented by Davidson. (This technology is distinct from the technology developed by Headwaters.) This action is factually related to an earlier action brought by certain purported officers and directors of Adtech, Inc. That action was dismissed by the United States District Court for the Western District of Tennessee and the District Court's order of dismissal was affirmed on appeal. In the current action, the allegations arise from the same facts, but the claims are asserted by certain purported stockholders of Adtech. In June 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee alleging, among other things, fraud, conspiracy, constructive trust, conversion, patent infringement and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. The complaint seeks declaratory relief and compensatory damages in the approximate amount of $10 million and punitive damages. The District Court has dismissed all claims against Headwaters except conspiracy and constructive trust. The case is set for trial in November 2004. 2. AGTC v. Headwaters Incorporated, American Arbitration Association, Salt Lake City, Utah, No. 81 181 031 02, filed 2002. In March 1996, Headwaters entered into an agreement with AGTC and its associates for certain services related to the identification and selection of synthetic fuel projects. In March 2002, AGTC filed an arbitration demand in Salt Lake City, Utah claiming that it is owed commissions under the 1996 agreement for 8% of the revenues received by Headwaters from the Port Hodder project. AGTC claims approximate damages in a range between $520,000 and $14,000,000. Headwaters asserts that AGTC did not perform under the agreement and that the agreement was terminated and the disputes were settled in July 1996. Headwaters has filed an answer in the arbitration, denying AGTC's claims and has asserted counterclaims against AGTC. In July and August 2004, the arbitrator held hearings. The arbitrator has asked the parties for post-hearing briefs and proposed findings and conclusions. 3. Headwaters Incorporated v. AJG Financial Services, Inc., Fourth Dist. Ct., State of Utah, Civ. No. 000403381, filed 2000. 3 In December 1996, Headwaters entered into a technology license and proprietary chemical reagent sale agreement with AJG Financial Services, Inc. The agreement called for AJG to pay royalties and to purchase proprietary chemical reagent material from Headwaters. In October 2000, Headwaters filed a complaint in the Fourth District Court for the State of Utah against AJG alleging that it had failed to make payments and to perform other obligations under the agreement. Headwaters asserts claims including breach of contract, declaratory judgment, unjust enrichment and accounting and seeks money damages as well as other relief. AJG's answer to the complaint denies Headwaters' claims and asserted counterclaims based upon allegations of misrepresentation and breach of contract. AJG seeks compensatory damages in the approximate amount of $71 million and punitive damages. Headwaters denies the allegations of AJG's counterclaims. The case is set for trial in January 2005. 4. EEOC and Chavez et al v. Eldorado Stone, LLC, U.S. Dist. Ct. W.D. Wash., Civ. No. CV03-2768P, filed 2003. In September 2003, the EEOC filed a complaint in the Federal District Court for the Western District of Washington against Eldorado Stone, LLC, an affiliated company, and certain individuals alleging sexual harassment, retaliation, and constructive discharge in violation of the Civil Rights Act, arising out of the operations at a Carnation, Washington facility. Six individual former employees joined the lawsuit alleging multiple related causes of action. Plaintiffs pray for injunctive relief as well as compensatory and punitive damages. Eldorado Stone has filed answers to the complaints, denying liability and damages. Plaintiffs have not provided a damages calculation, but estimates range between $500,000 and $1,000,000. 5. McEwan v. Headwaters Incorporated, Fourth Dist. Ct., State of Utah, Civ. No. 040401670, filed 2004. In 1995, Headwaters granted stock options to a member of its board of directors, Lloyd , McEwan. The director resigned from the board in 1996. Headwaters has declined McEwan's attempts to exercise most of the options on grounds that the options terminated. In May 2004, McEwan filed a complaint in the Fourth District Court for the State of Utah against Headwaters alleging breach of contract, breach of implied covenant of good faith and fair dealing, fraud, and misrepresentation. McEwan seeks declaratory relief as well as compensatory damages in the approximate amount of $2,000,000 and punitive damages. Headwaters has filed an answer denying McEwan's claims and has asserted counterclaims against McEwan. McEwan denies the counterclaims. 4 Tapco:(1) 1. Eason Associates Sales Company, Inc. vs. Darin Lee Watson, Evergreene Marketing, Inc., John D. Greene, and Franklin Murray Hyatt, North Carolina Superior Court, Columbus County, Division Case No. 03CV01428. Eason Associate Sales Company, Inc. ("Eason"), a company which formerly provided sales representatives to Tapco International Corporation ("Tapco International"), filed a claim on November 3, 2003 against two former Tapco International individual sales representatives, John D. Greene and Franklin Murray Hyatt, seeking compensatory damages in excess of $10,000 and punitive damages. Although Tapco International is not a named defendant in the suit, Tapco International has an oral indemnification agreement with Mr. Greene and Mr. Hyatt and has, consequently, undertaken their defense. Although the suit is still ongoing, Tapco International believes that the General Release obtained from Eason pursuant to settlement of an earlier related lawsuit filed by Eason against Tapco International bars this second lawsuit. 2. Richard Grubola vs. Tapco International Corporation, Wayne County Circuit Court, State of Michigan, Case No. 03-318496NZ. On June 9, 2003, Richard Grubola, an employee of Tapco International who was terminated in 2002, filed an age discrimination complaint. Although the claims was denied by the EEOC on March 10, 2003, the matter is still ongoing. Mr. Grubola claims compensatory damages in the amount of $25,000, exemplary damages in the amount of $25,000 and lost wages and benefits, past and future. Tapco International maintains that the decision to terminate Mr. Grubola was performance-related. 3. Dinesol Building Products, Ltd. vs. Tapco International, Inc., U.S. District Court for the Northern District of Ohio, Case No. 4:04 CV 0185. This litigation involves claims and counterclaims for both patent infringement and trade dress claims in connection with certain vent, block and shutter products. While the patent infringement claims were settled in June 2004 pursuant to a settlement agreement under which Dinesold Building Products, Ltd. agreed to change its design, the trade dress claims are currently being litigated. 4. Tapco International Corporation vs. Novik Inc., U.S. District Court for the Eastern District of Michigan, Case No. 03-72109. - ------------- (1) The information regarding litigation involving Tapco Holdings, Inc. and its subsidiaries ("Tapco") is based solely on information received from Tapco's counsel, Skadden, Arps, Slate, Meagher & Flom LLP. 5 On May 29, 2003, Tapco International filed a claim of patent infringement against a Canadian competitor, Novik, Inc. ("Novik"). Tapco International is seeking preliminary and permanent enjoinment of Novik from infringing various of its patents. 5. Pamela Darling vs. Tapco International Corporation, Michigan Department of Civil Rights, Complaint/Charge No. 316048, EEOC 23AA400557C. Pamela Darling, a current employee of Tapco International, filed a claim of age, gender and disability discrimination against her employer. No specific amount of damages have been claimed. On January 20, 2004, the State of Michigan Department of Civil Rights sent Tapco International a notice requesting a response to interrogatories and a statement of position with regard to the complaint. Tapco responded to this request in a letter dated February 17, 2004. In this letter, Tapco International states that no adverse employment action has been taken against Ms. Darling and requests that the charge be dismissed with a finding of no probable cause. 6. Metamora There is historical contamination at the 4057 South Oak Street, Metamora, MI property, which has been the subject of several investigations. Initially, the site was targeted for investigation due to a disgruntled former employee's 1991 report of illegal disposal of hazardous waste drums in a pond on the property that has since been filled. Subsequent investigation discredited the employee's claims but did turn up modest levels of contaminants at the site. A No Further Action ("NFA") letter from the Michigan Department of Environmental Quality has been requested. There are presently no estimates of amounts of remediation should remediation eventually be required. 7. Internal Revenue Service audit of Tapco Holdings, Inc. & Subsidiaries federal income tax returns for the tax year ended October 31, 2002. 8. Workers Compensation claims by Brandon Montrull, Anna Hotelling, Matthew Little and Pamela Darling. 6
SCHEDULE 5.8 SUBSIDIARIES Headwaters: - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Block & Brick ACM Block & Utah Common Stock 100 100 100 General, Inc. Brick, LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Block & Brick American Utah Units -- -- 100 Partner, LLC Construction Materials, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Block & Brick, American Utah Units -- -- 100 LLC Construction Materials, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Block & Brick, ACM Block & Texas Partnership -- -- 1 LP Brick Interest General, Inc. (General Partner) -------------- ----------------- ACM Block & 99 Brick Partner, LLC (Limited Partner) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM FlexCrete, LP ACM Block & Texas Partnership -- -- 1 Brick Interest General, Inc. (General Partner) -------------- ----------------- ACM Block & 99 Brick Partner, LLC (Limited Partner) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Georgia, Inc. ACM Block & Georgia Common Stock 100 100 100 Brick Partner, LLC (Limited Partner) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- American Headwaters Utah Common Stock 100 100 100 Construction Incorporated Materials, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Best Masonry & ISG Texas Common Stock 100,000 1,000 100 Tool Supply, Inc. Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Chihuahua Stone LLC Eldorado Delaware Units -- -- 100 Stone LLC (Member) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- 7 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Covol Engineered Headwaters Utah Units -- -- 100 Fuels, LC Clean Coal Corp. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Covol Services Headwaters Utah Common Stock 100 100 100 Corporation Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Don's Building ISG Texas Partnership -- -- 1 Supply, L.P. Manufactured Interest Products, Inc. (General Partner) -------------- ----------------- ISG Partner, 99 Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eagle Stone & Brick Eldorado Delaware Units -- -- 100 LLC Stone (Member) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Headwaters Utah Units -- -- 100 Acquisition, LLC Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Funding Co. Headwaters Utah Common Stock 100 100 100 Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Headwaters Utah Common Stock 100 100 100 G-Acquisition Co. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Headwaters Utah Common Stock 100 100 100 SC-Acquisition Co. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Delaware Units -- -- 4 Acquisition Co., LLC G-Acquisition Co. -------------- ----------------- Eldorado 96 Acquisition, LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Washington Common Stock 5000 1000 100 Corporation Stone Acquisition Co., LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Utah Units -- -- 50 Funding Co., LLC G-Acquisition Co. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Utah Units -- -- 50 Funding Co., LLC Acquisition, LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone LLC Eldorado Delaware Units -- -- 22 Stone Coporation -------------- ----------------- Northwest 17 Stone & Brick Co., Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- 8 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado 24 SC-Acquisition Co. -------------- ----------------- Eldorado 37 Stone Acquisition Co., LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Delaware Units -- -- 100 Operations LLC Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- FlexCrete Building ISG Utah Units -- -- 90 Systems, L.C. Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Florida N-Viro, L.P. VFL Delaware -- -- -- 51 Technology Corporation (GP) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Florida N-Viro VFL Delaware Units -- -- 52 Management, LLC Technology Corporation (Member) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Global Climate Headwaters Utah Common Stock 100 100 100 Reserve Corporation Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Clean Headwaters Utah Common Stock 100 100 100 Coal Corp. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Heavy Headwaters Utah Common Stock 100 100 90 Oil, Inc. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Headwaters Utah Common Stock 100 100 100 NanoKinetix, Inc. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Olysub Headwaters Delaware Common Stock 1, 000 100 100 Corporation Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Headwaters Utah Common Stock 100 100 100 Technology Incorporated Innovation Group, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- HTI Chemical Headwaters New Jersey Common Stock 1,000,000 100 100 Subsidiary, Inc. Technology (f/k/a Chemsampco, Innovation Inc.) Group - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Hydrocarbon Hydrocarbon Canada, Class A (Common Unlimited 1,000,000 100 Technologies Technologies, province of Voting) Canada, Inc. Inc. Alberta -------------- ------------------ --------------- ---------------- ----------------- -- Class B (Common Unlimited 0 -- Non-Voting) -------------- ------------------ --------------- ---------------- ----------------- -- Class C Unlimited 0 -- (Preferred Redeemable Voting) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- 9 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- -- Class D Unlimited 0 -- Preferred Redeemable Voting) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Hydrocarbon Headwaters Utah Common Stock 100 100 100 Technologies, Inc. Technology Innovation Group - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Canada Limited ISG Canada, Common Stock Unlimited 100 100 Resources, province of Inc. New Brunswick - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Manufactured ISG Utah Common Stock 20,000,00 1,000 100 Products, Inc. Resources, Inc. -------------- ----------------- --------------- ---------------- ----------------- N/A Preferred Stock 10,000,000 0 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Partner, Inc. ISG Utah Common Stock 20,000,00 100 100 Resources, Inc. -------------- ------------------ --------------- ---------------- ----------------- N/A Preferred Stock 10,000,000 0 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Resources, Inc. Headwaters Utah Common Stock 8,000,000 100 100 Olysub Corporation -------------- ------------------ --------------- ---------------- ----------------- N/A Preferred Stock 2,000,000 0 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Services Headwaters Utah Common Stock 100 100 100 Corporation (f/k/a Olysub ISG Capital Corporation Corporation) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Swift Crete, ISG Utah Common Stock 10,000,000 100 100 Inc. Resources, Inc. -------------- ------------------ --------------- ---------------- ----------------- N/A Preferred Stock 20,000,000 0 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- L&S Stone LLC Eldorado Delaware Units -- -- 100 Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- L-B Stone LLC Eldorado Delaware Units -- -- 100 Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Lewis W. Osborne, ISG California Common Stock 25,000 12,296 100 Inc. Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Magna Wall, Inc. ISG Texas Common Stock 1,000,000 1,000 100 Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Northwest Eldorado Delaware Units -- -- 100 Properties LLC Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Northwest Stone & Eldorado Washington Common Stock 5000 1000 100 Brick Co., Inc. Stone Acquisition Co., LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- 10 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Northwest Stone & Eldorado Delaware Units -- -- 100 Brick LLC Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Palestine Concrete ISG Texas Partnership -- -- 1 Tile Company, L.P. Manufactured Interest Products, Inc. (General Partner) -------------- ----------------- ISG Partner, 99 Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- StoneCraft Eldorado Delaware Units -- -- 100 Industries LLC Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Tempe Stone LLC Eldorado Delaware Units -- -- 100 Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- United Terrazzo ISG California Common Stock 800 16 100 Supply Co., Inc. Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- VFL Technology ISG Pennsylvania Common Stock 1000 100 100 Corporation Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Tapco Holdings, Inc. Headwaters Michigan Common Stock 100 100 100 Incorporated - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Tapco International Tapco Holdings, Michigan Common Stock 60,000 1,000 100 Corporation Inc. - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Atlantic Shutter Tapco South Carolina Common Stock 100,000 1,000 100 Systems, Inc. International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Builder's Edge, Inc. Wamco Corporation Pennsylvania Common Stock 10,000 100 100 - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Comaco, Inc. Wamco Corporation Pennsylvania Common Stock 10,000 100 100 - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- MTP, Inc. (d/b/a Tapco Ohio Common Stock 75 45 100 The Foundry) International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Metamora Products Tapco Michigan Common Stock 550,000 390.407 67.47 Corporation International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Metamora Products Wamco Corporation Michigan Common Stock 550,000 390.407 32.53 Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Metamora Products Metamora Pennsylvania Common Stock 400,000 400,000 100 Corporation of Products Elkland Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- 11 - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Tapco Europe Tapco United Kingdom Common Stock 600,000 501,000 100 Limited International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Vantage Building Tapco Michigan Common Stock 1,000 1,000 100 Products Corporation International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Wamco Corporation Metamora Michigan Common Stock 100,000 85,000 100 Products Corporation of Elkland - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- 12
SCHEDULE 5.14(a)(i) OWNED REAL PROPERTY Headwaters: - ------------------------------- ------------------------------------------------ ------------------------------------------- Record Owner Facility & Address Book Value - ------------------------------- ------------------------------------------------ ------------------------------------------- Headwaters Incorporated Wellington Property ("Sunnyside") $45,000 Near 5171 S. Farnham Rd. Price, UT 84501 Carbon County - ------------------------------- ------------------------------------------------ ------------------------------------------- Headwaters Technology New Jersey Facility $766,662.17 Innovation Group 1501 New York Avenue Lawrenceville, NJ 08648 Mercer County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources ("ISG Centralia Storage $487,839.16 Resources") 1720 Lum Road Centralia, WA 98531 Lewis County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Irondale (Denver) Terminal $2,854,604.77 8850 Yosemite Street Henderson, CO 80640 Adams County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Ogden Storage Terminal $16,598.60 2911 Pacific Avenue Ogden, UT 844091 Weber County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Pomona Terminal $3,613,375.67 1345 - 1347 Philadelphia Street Pomona, CA 91766 Los Angeles County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Altavista $70,000 Near Virginia Secondary State Route #12 Altavista, VA 24517 Campbell County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Bull Run / Lost Ridge $699,716.80 104 Garden Road Clifton, TN 37716 Anderson County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Cape Fear $94,564.43 2250 Commerce Dr. Leland, NC 28451 Brunswick County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources MTRF (Testing Facility) $552,640.38 2650 Highway 113, SW Taylorsville, GA 30178 Bartow County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Pacolet Terminal $205,308.26 520 Calico Drive Pacolet, SC 29372 Spartanburg County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Best / Magna Wall - Bagging Plant & Testing $677,902.03 (combined value of both Materials / ACM Mortars & Facility Callaghan Road properties) Stucco 5033 Callaghan Road San Antonio, TX 78228 Bexar County - ------------------------------- ------------------------------------------------ ------------------------------------------- 13 - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Best Masonry - San Antonio Store See above Materials / ACM Mortars & 5014 Callaghan Road Stucco San Antonio, TX 78228 Bexar County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Best Masonry - South Houston Store $304,574.24 Materials / ACM Mortars & 14702 Jersey Shore Drive Stucco Houston, TX 77047 Harris County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Don's Building Supply - Dallas Store & Facility $592,940.90 Materials / ACM Mortars & 2327 Langford Street Stucco Dallas, TX 75208 Dallas County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction LW Osborne Plant / United Terrazzo $1,128,821.20 Materials / ACM Mortars & 16005 Phoebe Avenue Stucco La Mirada, CA 09638 Los Angeles County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick Palestine - Dallas Facility $2,465,875.03 2202 Chalk Hill Road Dallas, TX 75212 Dallas County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick Palestine - Palestine Facility $791,729.51 2500 W. Reagan Road Palestine, TX 75802 Anderson County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick, L.P. Corporate Office / Facility $1,826,700 (d/b/a Southwest Concrete 2088 FM 949 Products) ("ACM Block & Alleyton, TX 78935 Brick") Colorado County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick Magnolia $135,000 32906 and 32808 Riverwood Street Magnolia, TX 77354 Montgomery County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick San Antonio $2,920,400 2233 Ackerman Road San Antonio, TX 78219 Bexar County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone West Carnation $2,300,000 31610 NE 40th Street, Building B Carnation, WA 98014 King County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone Northwest Arlington (Northwest Stone & Brick) $1,150,000 5925 199th Street NE and 6906 Cemetery Road Arlington, WA 98223 Snohomish County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone Northwest Royal City $750,000 3997 Road 13.6 SW Royal City, WA 99357 Grant County - ------------------------------- ------------------------------------------------ ------------------------------------------- 14
Tapco: - ------------------------------- ------------------------------------------------ ------------------------------------------- Record Owner Facility & Address Book Value - ------------------------------- ------------------------------------------------ ------------------------------------------- 1. Metamora Products 4057 South Oak Street $1,063,298 Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 2. Metamora Products 4063-4073 South Oak Street Items (2) - (6): $3,684,690 Corporation Metamora, MI 48455 - ------------------------------- ------------------------------------------------ ------------------------------------------- 3. Metamora Products 4029 South Oak Street Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 4. Metamora Products 3.5 acre parcel on Dryden Road Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 5. Metamora Products 3951 Timbro Drive Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 6. Metamora Products 3939 Timbro Drive Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 7. Metamora Products Elkland Industrial Park $7,575,176 Corporation of Elkland Elkland, PA 16920 Tioga County - ------------------------------- ------------------------------------------------ ------------------------------------------- 8. Wamco Corporation 29797 Beck Road $3,310,576 Wixom, MI 48096 Oakland County - ------------------------------- ------------------------------------------------ ------------------------------------------- 9. Wamco Corporation 558 Morrice Blvd. $1,700,334 Imlay City, MI 48444 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 15
SCHEDULE 5.14(a)(ii) REAL PROPERTY LEASES Headwaters: - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Expiration Annual Base Address of Rental Property Space Lessee Lessor Date of Lease Rent - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 10653 S. River Front 29,122 sq ft Headwaters RiverPark One, LLC 8/01/07 $490,512 Pkwy, Ste 300 Incorporated South Jordan, UT 84095 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 11778 South Election 7,648 sq. ft. Headwaters Draper C.G., LLC 12/31/05 $49,712 Drive, 2 Floor Incorporated Salt Lake County Draper, UT 84020 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 9498 South 670 West 13,600 sq ft American David Blaylock 8/31/07 $78,000 Sandy, UT 84070 Construction Materials, Inc. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 2025 W. Hazelton 8.49 acres ISG Resources, Inc. Daphne Ann Munzer 10/04/13 $247,500 Stockton, CA 95203 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 951 Industry Drive 1,263 sq ft ISG Resources, Inc. Calwest Industrial 7/31/07 $17,364 Tukwila, WA 98188 Holdings, LLC - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 3045 W. 28th Street -- ISG Resources, Inc. Sizemore Properties, 9/31/05 $15,900 Pine Bluff, AR 71603 LLC - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 4043 North Euclid Ave. 2,566 sq ft ISG Resources, Inc. Raymond E. & Betty L. 8/31/04 $24,000 Bay City, MI 48706 Johnson - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 12150 Tribune Blvd. 2.09 acres ISG Resources, Inc. PGBK Properties, LC 11/12/07 $37,208 Punta Gorda, FL 33955 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 16 Hagerty Blvd. 20,000 sq ft VFL Technology D&L Development Co. 4/07 $186,000 West Chester, PA 19382 Corporation - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 48699 Franklin 275 10,000 sq ft VFL Technology Luburgh, Inc. 6/30/05 $30,000 Coshocton, OH 43812 Corporation - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 841 Juniper Crescent, 1,500 sq ft VFL Technology Vito Covino 2/28/05 $11,856 Ste 102 Corporation Chesapeake, VA 23320 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 16745 W. Hardy Rd. 20,000 sq ft Best Masonry & Tool Trust Management Co. 7/31/09 $86,400 Houston, TX 77060 Supply, Inc. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 3405 Martin Farm Rd. 16,000 sq ft Best Masonry & Tool Inland.Sims.Development,3/31/07 $104,000 Bldg 200 Supply, Inc. LLC Suwanee, GA 30024 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 300 N. Throckmorton #101 5,000 sq ft Don's Building Meyers Industrial Park 8/30/04 $13,200 McKinney, TX 75069 Supply, L.P. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1109 Upland Drive 5,000 sq ft ACM Block & Brick, Hartman real Estate 6/30/07 $30,000 Suite C LP (dba Southwest Investment trust Houston, TX 77043 Concrete Products) - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 16 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Expiration Annual Base Address of Rental Property Space Lessee Lessor Date of Lease Rent - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1605 Genoa Red Bluff 5,000 sq ft ACM Block & Brick, Jackson Industries 7/01/09 $72,000 Pasadena, TX 77504 LP (dba Southwest Concrete Products) - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1420 Grand Avenue 16,302 sq ft StoneCraft Allspace San Marcos 11/24/05 $133,020 San Marcos, CA 92062 Industries, Inc. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1370 Grand Avenue 14,000 sq ft StoneCraft Dewey Real Properties 9/30/06 $34,080 San Marcos, CA 92062 Industries, Inc. Management Company - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Lot 58, Pueblo Memorial 25,650 sq ft StoneCraft Pueblo Development 1/09/10 $138,468 Airport (Industrial Park Industries, Inc. Foundation Subdivision) Pueblo, CO 81001 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 9550 Hermosa Avenue 60,640 sq ft Eldorado Stone LLC Toth Enterprises 4/30/07 $362,827 Rancho Cucamonga, CA 91730 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 520 Zephyr Street 25,500 sq ft StoneCraft McCall Development LLC 4/30/07 $110,160 Stockton, CA 95206 Industries LLC - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1510 West Drake St. 50,700 sq ft Tempe Stone LCC Steven R. and Lorelei 5/01/06 $80,000 Tempe, AZ 85283 J. Coultrap as Trustees under the Joint Living Trust UDA - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 221 Mill Street 21,390 sq ft Eagle Stone & Brick Glenn Gielow & Debra 1/02/06 $54,999 Red Bud, IL 62278 LLC Gielow - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1001 South Reilly Rd. -- L&S Stone LLC Eugene R. Strite 6/30/05 $39,600 Fayetteville, NC 28314 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 9156 Molly Pitcher Highway -- L&S Stone LLC Eugene R. Strite & 6/30/05 $226,200 Greencastle, PA 17225 Karen J. Strite - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 8642 Molly Pitcher Highway -- L&S Stone LLC KJS Properties, L.L.C. 6/30/05 90,000 Greencastle, PA 17225 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 167 Maple Street 45,000 L-B Stone LLC Reusser Realty 12/30/05 $159,999 Apple Creek, OH 44606 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 15 Lorna Dorne Blvd. -- L&S Stone LLC The Estate of James 11/14/04 $34,980 Orlando, FL 32805 Dollar - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 18083 SW Lower Boones 11,750 sq ft Northwest Stone & Raymond R. Leagjeld, 3/18/05 $48,000 Ferry Rd. Brick Company, LLC Richard A. Leagjeld & Tigard, OR 97224 Dorothy T. Leagjeld - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 17
Tapco: - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Expiration Annual Base Address of Rental Property Space Lessee Lessor Date of Lease Rent - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1470 Imlay City Road 27,000 sq. Metamora Products Novak Industrial 10/31/04 $108,000 Lapeer, MI 48446 ft. Corporation Center, L.L.C. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 300 E. Second Street 16,000 sq. Metamora Products Mold Masters Co. 12/1/04 $50,400 Imlay City, MI 48444 ft. Corporation - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 31 First Street, Building 28,000 sq. Metamora Products Dresser-Rand Company 10/22/04 $63,000 36 ft. Corporation Painted Post, NY 14870 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Approx. 1 acre of vacant -- Metamora Products The Village of 2006 $1819.20 land adjacent to 4057 Corporation Metamora South Oak Street Metamora, MI 48455 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 3210 South Main Street 28,000 sq. MTP, Inc. PTM Properties, LLC 8/31/06 $72,348 Middletown, OH 45044 ft. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1301 Hook Drive 30,926 sq. MTP, Inc. Blake Enterprise, LLC 11/30/05 $92,778 Middletown, OH 45044 ft. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1715 Reinartz 18,500 sq. MTP, Inc. Perry Thatcher Month-to-month $24,456 Middletown, OH 45042 ft. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 413-415 Main Street 2,200 sq. ft. Tapco International South Main Partners Month-to-month $21,000 Pittsburgh, PA 15215 Corporation - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 3217 Highway 301 South 80,000 sq. Tapco International Cottingham Asset 5/19/05 $30,506.04 Latta, SC 29565 ft. Corporation Management, LLC - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Units 22 & 32, Tokenspire 17,500 sq. Tapco Europe, Ltd. P.A.T. (Pensions) 1/30/06 (pound)59,736 Business Park ft. Limited Hull Rd. Woodmansey Beverley Yorkshire HU17 0TB United Kingdom - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 18
SCHEDULE 5.14(a)(iii) TENANT LEASES Headwaters: - ------------------ ---------------------------------------- ---------------------- --------------------- -------------- LESSEE / SUBLESSEE ADDRESS LEASED EST. SPACE ANNUAL RENT - ----------------------------------------------------------------------------------------------------------------------- HEADWATERS CORPORATE HEADQUARTERS - ----------------------------------------------------------------------------------------------------------------------- O'Currance, Inc. 11778 South Election Drive, 2 Floor Lease 7,648 sq ft $47,799.96 Salt Lake County Exp. 12/31/05 Draper, UT 84020 - ----------------------------------------------------------------------------------------------------------------------- ISG RESOURCES, INC. - ----------------------------------------------------------------------------------------------------------------------- World Wide 1347 E. Philadelphia, Suite 200 Lease 40,000 sq ft. $82,750.20 Inflatables Pomona, CA 91766 Exp. 8/30/06 - ----------------------------------------------------------------------------------------------------------------------- STONECRAFT INDUSTRIES, LLC - ----------------------------------------------------------------------------------------------------------------------- Racetronics, Inc. 1420 Grand Avenue, Suites A&B Lease 1,512 sq ft $25,404.00 San Marcos, CA 92069 Exp. Mo to Mo. - ------------------ ---------------------------------------- ---------------------- --------------------- -------------- Lease 1,512 sq ft $12,708.00 Timothy W. Nash 1420 Grand Avenue, Suite C Exp. San Marcos, CA 92069 Mo. to Mo. - ------------------ ---------------------------------------- ---------------------- --------------------- -------------- Tapco: None. 19
SCHEDULE 5.14(b)(iii) OWNED REAL PROPERTY COLLATERAL - ------------------------------- ------------------------------------------------ ------------------------------------------- Record Owner Facility and Address Book Value - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Irondale (Denver) Terminal $2,854,604.77 8850 Yosemite Street Henderson, CO 80640 Adams County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Don's Building Supply - Dallas Store & Facility $592,940.90 Materials / ACM Mortars & 2327 Langford Street Stucco Dallas, TX 75208 Dallas County - ------------------------------- ------------------------------------------------ ------------------------------------------- Headwaters Technology New Jersey Facility $766,662.17 Innovation Group 1501 New York Avenue Lawrenceville, NJ 08648 Mercer County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction LW Osborne Plant / United Terrazzo $1,128,821.20 Materials / ACM Mortars & 16005 Phoebe Avenue Stucco La Mirada, CA 09638 Los Angeles County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Pomona Terminal $3,613,375.67 1345 - 1347 E. Philadelphia Street Pomona, CA 91766 Los Angeles County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick Palestine - Dallas Facility $2,465,875.03 2202 Chalk Hill Road Dallas, TX 75212 Dallas County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone West Carnation $2,300,000 31610 NE 40th Street, Building B Carnation, WA 98014 King County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone Northwest Arlington (Northwest Stone & Brick) $1,150,000 5925 199th Street NE and 6906 Cemetery Road Arlington, WA 98223 Snohomish County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone Northwest Royal City $750,000 3997 Road 13.6 SW Royal City, WA 99357 Grant County - ------------------------------- ------------------------------------------------ ------------------------------------------- Metamora Products Corporation 4057 South Oak Street $2,416,073 Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- Metamora Products Corporation 4029 South Oak Street $186,891 Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- Metamora Products Corporation 3.5 acre parcel on Dryden Road $75,120 Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- Metamora Products Corporation 3951 Timbro Drive $200,000 Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 20 - ------------------------------- ------------------------------------------------ ------------------------------------------- Metamora Products Corporation 3939 Timbro Drive $1,935652 Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- Metamora Products Corporation Elkland Industrial Park $10,263,694 of Elkland Elkland, PA 16920 Tioga County - ------------------------------- ------------------------------------------------ ------------------------------------------- Wamco Corporation 29797 Beck Road Wixom, MI 48096 Oakland County - ------------------------------- ------------------------------------------------ ------------------------------------------- Wamco Corporation 558 Morrice Blvd. Imlay City, MI 48444 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 21
SCHEDULE 6.10 PERMITTED RESTRICTED PAYMENTS Headwaters: Headwaters Heavy Oil, Inc. stock purchase Tapco: None. 22
SCHEDULE 6.13(A) EXISTING INVESTMENTS Headwaters: UBS One Commercial Place, 11th Floor Norfolk, VA 23510 - ------------------------- ------------------------------------------------------ ---------------------------- Approximate Account Description Current Value - ------------------------- ------------------------------------------------------ ---------------------------- VN23463 Government Securities, $25,100,000 Mortgage Backed Securities - ------------------------- ------------------------------------------------------ ---------------------------- VN23464 HDWTRS Common Stock $3,000,000 - ------------------------- ------------------------------------------------------ ---------------------------- VN24917 HDWTRS Common Stock $9,000,000 - ------------------------- ------------------------------------------------------ ---------------------------- VN25717 Foreign Equities $200,000 - ------------------------- ------------------------------------------------------ ---------------------------- VN25718 U. S. Equities $235,000 - ------------------------- ------------------------------------------------------ ---------------------------- VN28871 Money Market Funds, $275,000 Government Securities, Mortgage Backed Securities - ------------------------- ------------------------------------------------------ ---------------------------- See also all non-subsidiary investments listed on Schedule 6.13(B). Tapco: None. 23
SCHEDULE 6.13(B) NON-SUBSIDIARY INVESTMENTS Headwaters: Environmental Technologies Group, LLC - Headwaters Incorporated holds a 50% membership interest. FT Solutions, LLC - Headwaters Technology Innovation Group, Inc. holds a 50% membership interest. FlexCrete Building Systems, L.C. - ISG Resources, Inc. holds a 90% membership interest. Florida N-Viro Management, LLC - VFL Technology Corporation holds a 52% membership interest. Florida N-Viro, L.P. - VFL Technology Corporation holds a 51% partnership interest Tapco: None. 24
SCHEDULE 6.14(A) EXISTING INDEBTEDNESS Headwaters: Headwaters Incorporated August 31, 2004 - --------------------------------------------------------------------------------------------- --------------------- Approximate Description Amount Outstanding - --------------------------------------------------------------------------------------------- --------------------- 2 7/8% Convertible Senior Subordinated Notes Due 2016 $172,500,000 - --------------------------------------------------------------------------------------------- --------------------- Note payable to a bank, quarterly principal payments of $90,278 with interest at 1/2% above $5,687,500 LIBOR (interest rate floor of 4.5%) - --------------------------------------------------------------------------------------------- --------------------- Note payable to a bank, quarterly principal payments of $100,000 with interest at 1/2% below $1,100,000 the bank's rate (3.5% at August 31, 2004) - --------------------------------------------------------------------------------------------- --------------------- Note payable to a bank, quarterly principal payments of $107,143 beginning January 1, 2005 $3,000,000 with interest at 1/2% above LIBOR (interest rate floor of 4.5%). A balloon payment of approximately $1,285,000 is due November 2008. - --------------------------------------------------------------------------------------------- --------------------- Total $182,287,500 - --------------------------------------------------------------------------------------------- --------------------- Tapco: Capital / Equipment Leases of MPT, Inc.: - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- Lessor Leased Asset Contract # 2004 Remaining 2005 2006 2007 Total - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- Citicorp Del-Lease, Caterpillar 005-0014388-002 $1204 $3756 $3982 $3860 $12802 Inc. Lift Truck - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- Citicorp Del-Lease, Caterpillar 005-0014388-001 $1506 $3769 $1638 $6913 Inc. Lift Truck - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- M&I First National Material 0147880-000 $1326 $4337 $1977 $7640 Leasing Grinder - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- The CIT Group Barrel and 90076445 $4924 $15828 $16013 $36765 screw, conveyor, other various equipment - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- 25 - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- The CIT Group Additive 90080253 $3198 $10308 $10468 $23974 feeder, other various equipment - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- The CIT Group Form, trim 90093652 $8796 $26324 $29183 $21196 $85499 and punch station; conveyor; die - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- The CIT Group Chiller, 90094528 $2644 $8599 $9697 $8077 $29017 vacuum system, other various equipment - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- TOTAL $23,598 $72921 $72958 $33,133 $202,610 - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- 26
SCHEDULE 6.14(B) SUBORDINATION PROVISIONS RE. INTERCOMPANY INDEBTEDNESS Notwithstanding any provision contained in this [Note] to the contrary, the indebtedness (principal, interest (including, without limitation, any such interest accruing subsequent to the filing by or against the Headwaters Incorporated or any subsidiary (collectively, "Loan Parties") of any proceeding brought under any applicable bankruptcy or insolvency law, including, without limitation, Chapter 11 of the United States Bankruptcy Code (11 U.S.C. Section 100 et seq.), whether or not such interest is allowed as a claim pursuant to the provisions of any such applicable law), collection costs and expenses and other amounts) of [identify Borrower or Subsidiary] to the holder of this Note evidenced by or arising under or in respect of this Note (collectively, the "Subordinated Indebtedness") is and shall at all times be wholly subordinate and junior in right of payment to any and all other present and future indebtedness (principal, premium, if any, interest (including, without limitation, any such interest accruing subsequent to the filing by or against any Loan Party of any proceeding brought under any applicable bankruptcy or insolvency law, including, without limitation, Chapter 11 of the United States Bankruptcy Code (11 U.S.C. Section 100 et seq.), whether or not such interest is allowed as a claim pursuant to the provisions of any such applicable law), fees, collection costs and expenses and/or other amounts), liabilities and obligations (including, without limitation, letter of credit reimbursement obligations) of any Loan Party for or with respect to borrowed money, letters of credit and/or interest rate swaps and/or hedges which is incurred under or in connection with that certain Credit Agreement dated as of March 31, 2004 by and among Headwaters Incorporated, certain lenders party thereto and Bank One, NA as administrative agent, as the same may be amended, restated, supplemented or otherwise modified from time to time (collectively, the "Senior Indebtedness"), in the manner and with the force and effect hereinafter set forth: (a) in the event of (i) any liquidation, dissolution or other winding up of any Loan Party, voluntary or involuntary, (ii) any receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization, composition or other similar proceeding relative to any Loan Party or its property, (iii) any general assignment by any Loan Party for the benefit of creditors or (iv) any distribution, division, marshaling or application of any of the properties or assets of any Loan Party or the proceeds thereof to creditors, voluntary or involuntary, and whether or not involving legal proceedings, then and in any such event: (A) all principal, premium, if any, interest (including, without limitation, any such interest accruing subsequent to the filing by or against any Loan Party of any proceeding brought under any applicable bankruptcy or insolvency law, including, without limitation, Chapter 11 of the United States Bankruptcy Code (11 U.S.C. Section 100 et seq.)), whether or not such interest is allowed as a claim pursuant to the provisions of any such applicable law), fees, collection costs and expenses and other amounts owing on or in respect of any of the Senior Indebtedness shall first be paid in full in cash before any payment or distribution of any kind or character, whether in cash, property or securities (other 27 than in securities, including equity securities, or other evidences of indebtedness, the payment of which is unconditionally subordinated to the payment of all of the Senior Indebtedness which may at the time be outstanding) shall be made on any of the Subordinated Indebtedness; (B) all of the Subordinated Indebtedness shall forthwith become due and payable, and any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities, including equity securities or other evidences of indebtedness, the payment of which is unconditionally subordinated to the payment of all of the Senior Indebtedness which may at the time be outstanding), which would otherwise (but for the terms hereof) be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered, pro rata, directly to, or for the account of, the holders of the Senior Indebtedness, for application to the payment of the Senior Indebtedness until all of the Senior Indebtedness shall have been paid in full in cash, and the holder(s) of this Note irrevocably authorize, empower and direct all receivers, trustees, liquidators, conservators, fiscal agents and others having authority in the premises to effect all such payments and deliveries; and (C) notwithstanding the foregoing provisions, if for any reason whatsoever any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities, including equity securities or other evidences of indebtedness, the payment of which is unconditionally subordinated to the payment of all of the Senior Indebtedness which may at the time be outstanding), be received by a holder of this Note before all of the Senior Indebtedness is paid in full in cash, such payment or distribution shall be held in trust for the benefit of, and shall immediately paid or delivered by such holder to, as the case may be, the holders of such Senior Indebtedness remaining unpaid, pro rata, for application to the payment of the Senior Indebtedness until all of the Senior Indebtedness shall have been paid in full in cash; (b) in the event either (i) any default in respect of the payment of any principal of, premium on, if any, interest on or other amount owing with respect to any of the Senior Indebtedness shall have occurred and be continuing or (ii) any other default on or with respect to any of the Senior Indebtedness as a result of which the holder(s) thereof shall then be entitled to accelerate such Senior Indebtedness shall have occurred and be continuing or would be created by or result from a payment described in clause (A) or (B) below, then, unless and until all of the Senior Indebtedness shall have been paid in full in cash, no Loan Party will not, directly or indirectly, make or agree to make, and the holder(s) of this Note will not demand, accept or receive, (A) any payment in cash, property, securities (other than in securities, including equity securities or other evidences of indebtedness, the payment of which is unconditionally subordinated to the payment of all of the Senior Indebtedness which may at the time be outstanding) or otherwise, direct or indirect, of or on account of any principal of, interest on or other amount owing with respect to any of the Subordinated Indebtedness or (B) any payment for the purpose of any redemption, purchase or other acquisition, direct or indirect, of any of the Subordinated Indebtedness, and no such payments shall be due or payable; 28 (c) if any payment or distribution of any kind or character (whether in cash, securities or other property) or any security shall be received by any holder(s) of this Note in contravention of any of the terms of this Note, such payment or distribution or security shall be held in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Indebtedness, pro rata, for application to the payment of all of the Senior Indebtedness remaining unpaid, to the extent necessary to pay all such Senior Indebtedness in full in cash. In the event of the failure of any holder of this Note to endorse or assign any such payment, distribution or security, any holder of the Senior Indebtedness is hereby irrevocably authorized to endorse or assign the same; (d) without the prior written consent of each holder of Senior Indebtedness, the holder(s) of this Note shall have no right to enforce payment of any of the Subordinated Indebtedness against any Loan Party, or to otherwise take any action against any Loan Party or any property or assets of any Loan Party (including, without limitation, any property or assets of any Loan Party pledged as collateral to secure any of the Senior Indebtedness) unless and until all of the Senior Indebtedness shall have been paid in full in cash; (e) the holder(s) of this Note undertake and agree for the benefit of each holder of Senior Indebtedness to execute, verify, deliver and file any proofs of claim within fifteen (15) days before the expiration of the time to file the same which any holder of Senior Indebtedness may at any time require in order to prove and realize upon any rights or claims pertaining to the Subordinated Indebtedness and to effectuate the full benefit of the subordination contained herein; and upon failure of the holder(s) of this Note so to do, any such holder of Senior Indebtedness shall be deemed to be irrevocably appointed the agent and attorney-in-fact of the holder(s) of this Note to execute, verify, deliver and file any such proofs of claim; (f) the subordination effected by the foregoing provisions and the rights created thereby in favor of the holders of the Senior Indebtedness shall not be affected by (i) any amendment, modification, extension, renewal, restatement or replacement of, increase in or addition or supplement to any of the Senior Indebtedness or any instrument or agreement relating thereto, (ii) any exercise or nonexercise of any right, power or remedy under or in respect of any of the Senior Indebtedness or any instrument or agreement relating thereto or (iii) the giving or denial of any waiver, consent, release, indulgence, extension, renewal, modification or delay or the taking or nontaking of any other action, inaction or omission, in respect of any of the Senior Indebtedness or any instrument or agreement relating thereto or to any securities relating thereto or any guarantee thereof, whether or not any holder(s) of this Note shall have had notice or knowledge of any of the foregoing; (g) the foregoing provisions are solely for the purpose of defining the relative rights of the holders of the Senior Indebtedness on the one hand, and the holder(s) of this Note on the other hand, and nothing herein shall impair, as between any Loan Party and the holder(s) of this Note, the obligation of such Loan Party which is 29 unconditional and absolute, to pay the principal, interest and other amounts owing on or in respect of the Subordinated Indebtedness in accordance with the terms of this Note, nor shall anything herein prevent the holder(s) of this Note from exercising all remedies otherwise permitted by applicable law or under this Note, subject in all events to the rights of the holders of the Senior Indebtedness as herein provided for; and (h) the provisions of this sixth paragraph of this Note (i) may not be amended without the prior written consent of each holder of Senior Indebtedness, (ii) shall be continuing, irrevocable and binding on the holder(s) of this Note and their respective heirs, executors, personal representatives, successors and assigns and (iii) shall inure to the benefit of the holders of the Senior Indebtedness and their respective successors and assigns. 30
SCHEDULE 6.15 EXISTING LIENS Headwaters: - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- HEADWATERS - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Delaware Headwaters Incorporated Citicorp Leasing, Inc. 7/26/2004 42093112 Expires 7/26/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Headwaters Incorporated Revco Leasing 5/7/2001 01-714395 Expires 5/7/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Headwaters Incorporated Zions Credit Corporation 3/7/2003 211544200331 Expires 3/7/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Headwaters Incorporated Revco Leasing 5/16/2003 216588200335 Expires 5/16/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Headwaters Incorporated Revco Leasing 1/7/2004 234774200439 Expires 1/7/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Headwaters Incorporated De Lage Landen Financial 7/8/2004 248291200435 Services Expires 7/8/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Headwaters Incorporated Revco Leasing Company 5/20/2004 244962200438 Expires 5/20/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas ACM Block & Brick, LP Brown Brothers Harriman & Co. 7/6/2004 0073658487 Expires 7/6/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Best Masonry & Tool Supply NMHG Financial Services, Inc. 4/7/2000 471146 Inc. Expires 4/7/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 31 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Best Masonry & Tool Supply John Deere Construction 4/9/2002 20025827147 Inc. Equipment Company Expires 4/9/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Best Masonry & Tool Supply De Lage Landen Financial 6/16/2003 30031359650 Inc. Services, Inc. Expires 6/16/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Best Masonry & Tool Supply De Lage Landen Financial 6/16/2003 30031359872 Inc. Services, Inc. Expires 6/16/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Best Masonry & Tool Supply Wells Fargo Equipment Finance, 8/31/2001 2853200121 ISG Resources, Inc. Inc. Expires 8/31/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Best Masonry & Tool Supply Wells Fargo Equipment Finance, 8/31/2001 2854200122 ISG Resources, Inc. Inc. Expires 8/31/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Best Masonry & Tool Supply John Deere Construction & 5/10/2002 187186200235 Forestry Company Expires 5/10/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Don's Building Supply, Inc. Toyota Motor Credit Corporation 12/8/1999 9900243840 Expires 12/8/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Don's Building Supply, Inc. Toyota Motor Credit Corporation 12/8/1999 9900243845 Expires 12/8/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Delaware Eldorado Stone LLC Gelco Corporation dba Fleet 3/31/2004 40899122 Services Expires 3/31/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Delaware Eldorado Stone LLC Gelco Corporation dba Fleet 5/5/2004 41250564 Services Expires 5/5/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Delaware Eldorado Stone LLC Gelco Corporation dba Fleet 8/4/2004 42185314 Services Expires 8/4/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Environmental Technology Keycorp Leasing Ltd. 6/5/1995 95-441148 Group, LLC Expires 3/22/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 32 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Environmental Technology Keycorp Leasing Ltd. 8/10/1995 95-449066 Group, LLC Expires 3/27/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- New Jersey Hydrocarbon Technologies, ABB Structured Finance 9/18/2002 21225819 Inc. (Americas) Inc. Expires 9/18/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- New Jersey Hydrocarbon Technologies, Ricoh Business Systems, Inc. 2/10/2003 21432859 Inc. Expires 2/10/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Industrial Services Group Bank of America, N.A. (fka 6/6/2000 00-679710 NationsBank) Expires 6/6/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Industrial Services Group Dell Financial Services LP 5/2/2001 01-713962 Expires 5/2/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Industrial Services Group Dell Financial Services LP 6/21/2001 01-718734 Expires 6/21/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Industrial Services Group Dell Financial Services LP 8/16/2001 1370200115 Expires 8/16/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Industrial Services Group Dell Financial Services LP 10/1/2001 166446200134 Expires 10/1/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas ISG Partners, Ltd. H.E.B. Investment and 2/5/2001 100021279 Retirement Plan Trust Expires 2/6/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Arkansas ISG Resources, Inc Associates Leasing Inc 9/3/1999 1205855 Expires 9/3/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- California ISG Resources, Inc. Associates Leasing 6/1/2000 2000-16061028 Expires 6/1/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 33 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- California ISG Resources, Inc. Zions Credit Corporation 5/1/2001 2001-12760394 Expires 5/1/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Georgia ISG Resources, Inc. Wells Fargo Financial Leasing, 5/25/2000 330-2000-007256 Inc. Expires 5/25/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Michigan ISG Resources, Inc. Fidelity Leasing Inc. 4/4/2000 D638377 Expires 4/4/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Michigan ISG Resources Inc Williams Scotsman, Inc. 5/24/2000 D657601 Expires 5/24/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Minnesota ISG Resources, Inc. Progressive Rail Incorporated 11/30/2000 2278764 Associated Bank Minnesota Expires 11/30/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Mississippi ISG Resources Inc Associates Leasing Inc 9/25/2000 1466406 Expires 9/25/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Mississippi ISG Resources Inc Great Southern Tractor Company 10/20/2000 1473241 Expires 10/20/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Mississippi ISG Resources Inc Great Southern Tractor & Company 11/27/2000 1481984 Expires 11/27/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- North Dakota ISG Resources, Inc. Associates Leasing, Inc. 6/2/2000 00-000946256 Expires 6/2/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio ISG Resources Inc. Associates Leasing Inc 6/2/2000 AP0244587 Expires 6/2/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas ISG Resources, Inc. Associates Leasing, Inc. 5/11/1999 9900091664 Expires 5/12/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas ISG Resources, Inc. (Lessee) Associates Leasing, Inc. 9/20/1999 9900190551 (Lessor) Expires 9/20/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 34 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas ISG Resources, Inc. Associates Leasing, Inc. 6/1/2000 0000511569 Expires 6/1/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas ISG Resources, Inc. Komatsu Financial LP 7/28/2000 0000553217 Expires 7/28/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas ISG Resources, Inc. Associates Leasing, Inc. 9/25/2000 0000592478 Expires 9/26/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Deere Credit, Inc. 4/26/2000 00-677442 Expires 4/26/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Associates Leasing Inc 12/4/2000 00-699894 Expires 12/4/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Conseco Finance Vendor Services 1/17/2001 01-704031 Expires 1/17/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Conseco Finance Vendor Services 1/17/2001 01-704036 Expires 1/17/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Venserv Inc. 5/25/2001 01-716258 Expires 5/25/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Komatsu Financial LP 7/19/2001 01-720298 Expires 7/19/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Best Masonry & Tool Supply Wells Fargo Equipment Finance, 8/31/2001 2853200121 Inc. ISG Resources, Inc. Expires 8/31/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah Best Masonry & Tool Supply Wells Fargo Equipment Finance, 8/31/2001 2854200122 Inc. ISG Resources, Inc. Expires 8/31/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 35 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources Inc. William Scotsman Mobile Offices 10/30/2001 172255200126 Expires 10/30/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Tennant Financial Services 12/20/2001 17647200231 Expires 12/20/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 3/25/2002 183500200227 Expires 3/25/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Citicapital Commercial 4/3/2002 184215200233 Corporation Expires 4/3/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Citicapital Commercial 4/3/2002 184228200238 Corporation Expires 4/3/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Citicapital Commercial 4/3/2002 184230200232 Corporation Expires 4/3/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Citicapital Commercial 4/3/2002 184231200233 Corporation Expires 4/3/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 5/24/2002 188380200233 Expires 5/24/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Wells Fargo Financial Leasing 6/13/2002 190206200225 Expires 6/13/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Revco Leasing 6/13/2002 189684200242 Expires 6/13/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 7/22/2002 192780200235 Expires 7/22/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 9/12/2002 196021200225 Expires 9/12/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 36 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Bank of America, N.A. 10/18/2002 200317200222 Expires 10/18/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. General Electric Capital 1/30/2003 208748200341 Corporation Expires 1/30/2008 (In Lieu Of Filing for Georgia UCCs) - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 4/18/2003 214782200336 Expires 4/18/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 6/11/2003 218868200338 Expires 6/11/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 8/13/2003 223432200331 Expires 8/13/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Alter Moneta Corporation 18/8/2003 228134200331 Expires 10/8/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. The CIT Group/ Equipment 11/2618/2003 231927200336 Financing Expires 11/26/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 1/2/2004 234848200447 Expires 1/2/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah ISG Resources, Inc. Zions Credit Corporation 1/2/2004 234854200436 Expires 1/2/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources The CIT Group/ Equipment 1/6/1999 99-629908 Financing Expires 1/6/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Associates Leasing Inc. 5/19/1999 99-643050 Expires 5/19/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 37 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Associates Leasing Inc. 6/5/2000 00-681601 Expires 6/5/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Associates Leasing Inc. 10/10/2000 00-693246 Expires 10/10/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Associates Leasing Inc. 10/26/2000 00-696006 Expires 10/26/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Bank of New York 12/5/2000 00-700001 Expires 12/5/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Zions Credit Corporation 12/8/2000 00-700252 Expires 12/8/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Zions Credit Corporation 12/18/2000 00-701352 Expires 12/18/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Associated Bank Minnesota 12/20/2000 00-701514 Expires 12/20/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Caterpillar Financial Services 2/13/2001 01-706544 Expires 2/13/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Zions Credit Corporation 3/1/2001 01-707812 Expires 3/1/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah I S G Resources Zions Credit Corporation 4/2/2001 01-710788 Expires 4/2/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Wyoming ISG Resources, Inc. Associates Leasing, Inc. 6/26/2000 2000-11957430 Expires 6/26/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Arkansas J T M Inc. Community Bank of North 11/21/2000 1274911 Arkansas Expires 11/21/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 38 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Arkansas J T M Inc. Community Bank of North 5/23/2002 1423781 Arkansas Expires 5/23/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Florida JTM Incorporated First Union National Bank 3/1/2000 200000050526 Russell Michael Expires 3/1/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Florida JTM Incorporated First Union National Bank 12/19/2000 200000285061 Russell Michael Expires 12/19/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Florida J T M Inc Southtrust Bank 8/3/2001 200100169206 Expires 8/3/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Florida J.T.M. Inc. Southtrust Bank 10/12/2001 20019011258X Expires 10/12/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Illinois JTM Inc The First National Bank 10/19/1998 003925856 Expires 10/19/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Iowa JTM Inc. Security State Bank 9/15/2000 P128674 Johnson Carl R McNeilus Jim L Expires 9/15/2005 Taco John's - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Maryland J.T.M., Inc. White Oak Equipment, Inc. 2/10/1994 0000000140418125 Expires 2/10/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Maryland J.T.M., Inc. White Oak Equipment, Inc. 2/22/1994 0000000140538408 Expires 2/22/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Maryland JTM, Inc. dba A.C. Financial Corp 8/11/2000 0000000181055617 Timber Creek Restaurant GNB Financial Co. Expires 6/30/06 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Minnesota JTM, Inc. Midwest Diesel Service, Inc. 4/6/1998 2026290 Associates Commercial Expires 4/6/2008 Corporation - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 39 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Tennessee JTM Inc Insouth Bank 7/12/2000 200025978 Expires 7/12/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas J T M Inc. Internal Revenue Service 7/15/1983 8300157214 Federal Tax Lien - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Utah JTM, Inc. Greater Business Administration 3/19/1996 96-512472 Expires 3/19/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Virginia JTM Industries Inc NationsBank, N.A. 10/15/2002 02-10230578 Expires 10/15/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Indiana KBK Enterprises West End Savings Bank 2/11/2002 0200001235156 Expires 2/11/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- New York KBK Enterprises, L.L.C. Bank of Smithtown 11/29/2002 0211292673575 Expires 11/29/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Delaware L&S Stone LLC Citicapital Commercial Leasing 3/24/2004 40825630 Corp. Expires 3/24/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- California Lewis W. Osborne, Inc. NMHG Financial Services Inc. 1/31/2002 0203160624 Expires 1/31/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- California Lewis W. Osborne, Inc. Cupertino National Bank 11/20/2002 2002-32560283 Expires 11/20/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- California Osborne Building Supply, Orix Credit Alliance, Inc. 3/11/1996 1996-07360554 Incorporated Expires 3/13/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Palestine Concrete Tile Yale Financial Service, Inc. 12/18/1995 9500241605 Company Expires 12/19/2005 Texas Industries, Inc. - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 40 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Palestine Concrete Tile Yale Financial Services, Inc. 4/8/1996 9600067627 Company Expires 4/10/2006 Texas Industries, Inc. - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Palestine Concrete Tile Yale Financial Services, Inc. 5/13/1996 9600093794 Company Expires 5/15/2006 Texas Industries, Inc. - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Palestine Concrete Tile Yale Financial Services, Inc. 6/10/1996 9600114232 Company Expires 6/12/2006 Texas Industries, Inc. - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Palestine Concrete Tile The CIT Group/ Equipment 6/29/2000 532376 Company Financing, Inc. Expires 6/29/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Palestine Concrete Tile Safeco Credit Co. 7/6/2001 100129877 Company Inc.dba Safeline Leasing Expires 7/6/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Texas Palestine Concrete Tile Safeco Credit Co. Inc. 10/26/2001 20007699205 Company dba Safeline Leasing Expires 10/26/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Caterpillar Financial Services 3/26/2004 20040317818 Corporation Expires 3/26/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Caterpillar Financial Services 3/29/2004 20040321003 Corporation Expires 3/29/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Zions Credit Corporation 7/22/2004 20040759677 Expires 7/22/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Zions Credit Corporation 7/22/2004 20040759687 Expires 7/22/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 41 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Zions Credit Corporation 7/22/2004 1003745 Expires 7/22/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Zions Credit Corporation 7/22/2004 1003746 Expires 7/22/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Ace Transportation Inc. 6/3/1998 Judgment #98-4647 Chester County $23,331.49 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation The CIT Group 2/20/1996 ST960424 Chester County Expires 2/20/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation General Electric Capital 10/9/1996 ST962836 Corporation Chester County Expires 10/9/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Caterpillar Financial Services 3/31/1999 ST991043 Corp. Chester County Expires 3/31/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Caterpillar Financial Services 3/31/1999 ST991046 Corp. Chester County Expires 3/31/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Caterpillar Financial Services 4/5/1999 ST991088 Corp. Chester County Expires 4/5/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Caterpillar Financial Services 5/21/1999 ST991694 Corp. Chester County Expires 5/21/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation The CIT Group 12/6/1999 ST994002 Chester County Expires 12/6/2004 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation The CIT Group 2/11/2000 ST000413 Chester County Expires 2/10/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Orix Credit Alliance, Inc. 2/17/2000 ST000476 Chester County Expires 2/17/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Orix Credit Alliance, Inc. 2/28/2000 ST000571 Chester County Expires 2/28/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 42 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Associates Commercial Corp. 3/13/2000 ST000744 Chester County Expires 3/13/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Center Capital Corp. 3/15/2000 ST000775 Chester County Expires 3/15/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Orix Financial Services, Inc. 1/23/2001 ST010206 Chester County Expires 1/23/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Caterpillar Financial Services 4/17/2001 ST011008 Corp. Chester County Expires 4/17/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Associates Commercial Corp. 4/27/2001 ST011138 Chester County Expires 4/27/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania VFL Technology Corporation Caterpillar Financial Services 5/31/2001 ST011470 Corp. Chester County Expires 5/31/2006 - ------------------------------------------------------------------------------------------------------------------------------------ TAPCO - ------------------------------------------------------------------------------------------------------------------------------------ Pennsylvania Builder's Edge U.S. Bancorp 5/8/2002 36220383 Expires 5/8/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/1/2004 20040216447 Corporation of Elkland Expires 3/1/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/1/2004 20040216457 Corporation of Elkland Expires 3/1/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/1/2004 20040216467 Corporation of Elkland Expires 3/1/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 43 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/1/2004 20040216479 Corporation of Elkland Expires 3/1/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/1/2004 20040216489 Corporation of Elkland Expires 3/1/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/1/2004 20040216499 Corporation of Elkland Expires 3/1/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/8/2004 20040243059 Corporation of Elkland Expires 3/8/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/8/2004 20040243079 Corporation of Elkland Expires 3/8/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 3/8/2004 20040243099 Corporation of Elkland Expires 3/8/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Pennsylvania Metamora Products Engel Canada 4/29/2004 20040453938 Corporation of Elkland Expires 4/29/2009 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. Balboa Capital 3/19/2001 AP319837 Expires 3/19/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. Citicorp Del Lease, Inc. 4/27/2001 AP330858 Expires 4/27/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. The CIT Group 9/24/2001 OH00038951392 Expires 9/24/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. The CIT Group 11/28/2001 OH00041849734 Expires 11/28/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. U.S. Bancorp Equipment Finance, 5/30/2002 OH00049958490 Inc. Expires 5/30/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. The CIT Group 8/30/2002 OH00053767421 Expires 8/30/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- 44 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- STATE DEBTOR CREDITOR FILE DATE FILE NUMBER - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. The CIT Group 9/27/2002 OH00054725474 Expires 9/27/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. Citicorp Del Lease, Inc. 10/8/2002 OH00055126213 Expires 10/8/2007 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. First Financial Bank, NA 7/21/2003 OH00066518732 Expires 7/21/2008 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. First National Bank of 4/6/2000 1506 Southwestern Ohio Butler County Expires 4/6/2005 - -------------------- ------------------------------ --------------------------------- ------------------------- -------------------- Ohio MTP, Inc. Citicorp Del Lease, Inc. 4/30/2001 1886 Butler County Expires 4/30/2006 - -------------------- ------------------------------ --------------------------------- ------------------------- --------------------
Headwaters Escrow Accounts 1. Escrow Amount $6,000,000 ABA: 091000022 FBO: U.S. Bank Trust, N.A. DDA Acct: 1801 2116 7365 FFC Acct: 786794000 REF: Tapco Holdings, Inc. Escrow 2. Escrow Amount: $14,000,000 ABA: 091000022 FBO: U.S. Bank Trust, N.A. DDA Acct: 1801 2116 7365 FFC Acct: 786794001 REF: Tapco Holdings, Inc. Tax Benefit Account 45 3. Escrow Amount: $1,100,000 Chase Manhattan Bank ABA: 021000021 For Account of Brown Brothers Harriman & Co. Acct: 920-1-033231 Further Credit to: Headwaters Incorporated Acct: 8457046 4. Escrow Amount : $5,200,000 J.P. Morgan Chase Bank ABA: 113000609 Account: 00103409257 REF: ACM Block & Brick / Southwest Escrow 46 SCHEDULE 6.23 EXCEPTED CAPITAL EXPENDITURES 1. The purchase by the Borrower, or a Subsidiary thereof, of that certain piece of real property and improvements thereon located at Franklin, Ohio, for an amount not to exceed $3,600,000. 2. Capital Expenditures which are incurred in connection with the construction of fly ash storage facilities used by customers of the relevant Borrower or Subsidiary and which are to be repaid by such customer upon or after completion of the project, in an aggregate amount not to exceed $20,000,000 over the term of this Agreement. 47 EXHIBIT A-1 FORM OF BORROWER'S COUNSEL'S OPINION Attached 48 September 8, 2004 Morgan Stanley Senior Funding, Inc., as Administrative Agent Morgan Stanley & Co., as Collateral Agent Each of the LC Issuers and the Lenders party to the Agreement, as defined below Re: Credit Agreement, dated as of September 8, 2004 (the "Agreement"), by and among Headwaters Incorporated, the Lenders from time to time parties thereto, the Initial LC Issuers, Morgan Stanley Senior Funding, Inc., as joint lead arranger and joint bookrunner and as Administrative Agent, Morgan Stanley & Co., Incorporated, as Collateral Agent, J.P. Morgan Securities Inc., as joint lead arranger and as joint bookrunner, and JP Morgan Chase Bank, as syndication agent - -------------------------------------------------------------------------------- Ladies and Gentlemen: We have acted as special New York (the "State") counsel to Headwaters Incorporated, a Delaware corporation (the "Company"), and to each of the corporations listed on Annex A to this opinion letter (collectively, the "Guarantors"), in connection with the Agreement. The definitions of terms contained in Annex B apply to this opinion letter and the definitions of terms contained in the Agreement apply to terms that are used and not otherwise defined herein or in Annex B. This opinion is delivered to you pursuant to Section 4.1.5 of the Agreement, at the request of the Company. In rendering this opinion, we have reviewed the following documents, each made, entered into or dated as of the date of this opinion: A. the Agreement; B. the Guaranty, made by each Guarantor in favor of the Administrative Agent (the "Guaranty"; C. the First Lien Pledge and Security Agreement, by and among the Company, the Guarantors and the Collateral Agent (the "Pledge and Security Agreement"); 49 D. the Intellectual Property Security Agreement, by and among the Company, the Guarantors and the Collateral Agent (the "Intellectual Property Security Agreement" and, together with the Pledge and Security Agreement, the "Collateral Agreements"); E. the Intercreditor Agreement, by and among the Company, the Administrative Agent, the Second Lien Administrative Agent, the Collateral Agent and the Second Lien Collateral Agent; F. the Notes delivered on the date of the opinion (the "Delivered Notes"); G. the UCC-1 financing statements attached hereto as Schedules 1A, 1B, 1C, 1D, 1E, 1F, 1G, 1H, 1I, 1J, 1K, 1L, 1M, 2A, 2B, 3A, 3B, 3C, 3D, 3E and 3F; H. the current charters, articles of incorporation, certificates of incorporation, articles of organization, certificates of formation, certificates of limited partnership, certificate of partnership, by-laws, partnership agreements, limited liability company agreements and operating agreements, as applicable, of the Company and the California and Texas Guarantors; and I. such other documents as we have deemed necessary as a basis for the opinions we express below. On the basis of the assumptions and subject to the qualifications and limitations set forth below, we are of the opinion that: 1. (a) The Company is duly incorporated, validly existing and in good standing under Delaware General Corporation Law and has the corporate power to own and hold under lease the properties it purports to own and hold under lease and to conduct the business in which it is engaged. (b) The Company has the corporate power to execute and deliver, and to perform its obligations under the Agreement, the Delivered Notes, the Intercreditor Agreement and the Collateral Agreements and for the Company's incurrence of the indebtedness in the amount of the Aggregate Revolving Loan Commitment and the Aggregate Term B Loan Commitment (as in effect on the date hereof) and the repayment of such indebtedness, with interest, in accordance with the terms of the Agreement, and for the grant by the Company of the security interest in its Collateral described in Section 1.2 of the Pledge and Security Agreement. (c) Each California Guarantor is duly incorporated, validly existing and in good standing under the law of California and has the corporate power to own and hold under lease the properties it purports to own and hold under lease and to conduct the business in which it is engaged. 50 (d) Each Texas Guarantor is duly incorporated, validly existing and in good standing under the law of Texas and has the corporate power to own and hold under lease the properties it purports to own and hold under lease and to conduct the business in which it is engaged. (e) Each California and Texas Guarantor has the corporate power to execute and deliver, and to perform its obligations under, the Guaranty and for the grant by such Guarantor of the security interest in its Collateral described in Section 1.2 of the Pledge and Security Agreement. 2. Each of the Agreement, the Intercreditor Agreement and the Collateral Agreements constitutes a valid and legally binding agreement of the Company, and each Delivered Note will, upon disbursement of the loans evidenced by such Note, constitute a valid and legally binding obligation of the Company, in each case enforceable against the Company in accordance with its terms. 3. Each of the Guaranty and the Collateral Agreements (a) has been duly authorized, executed and delivered by each of the Texas and California Guarantors and (b) constitutes a valid and legally binding agreement of each Guarantor, in each case enforceable against such Guarantor in accordance with its terms. 4. The execution and delivery of, and the performance of its obligations under, the Agreement, the Delivered Notes, the Intercreditor Agreement and the Collateral Agreements by the Company do not and will not violate or conflict with, result in a breach of, constitute a default under, or result in the creation of any Lien upon any property of the Company under, the federal law of the United States of America ("Federal Law") or the law of the State. 5. The execution and delivery of, and the performance of its obligations under, the Guaranty and the Collateral Agreements by each Guarantor do not and will not violate or conflict with, result in a breach of, constitute a default under, or result in the creation of any Lien upon any property of such Guarantor under, Federal Law or the law of the State or, in the case of the California Guarantors, the law of California or, in the case of the Texas Guarantors, the law of Texas. 6. Under Federal Law and the law of the State and, in the case of the California Guarantors, the law of California and, in the case of the Texas Guarantors, the law of Texas, no Governmental Approvals are required to have been obtained, and no Governmental Registrations are required to have been made: (a) by the Company, (i) for the valid execution and delivery by the Company of the Agreement, the Delivered Notes, the Intercreditor Agreement or the Collateral Agreements, (ii) for the Company's incurrence of the indebtedness in the amount of the Aggregate Revolving Loan Commitment and the Aggregate Term B Loan Commitment (as in effect 51 on the date hereof) and the repayment of such indebtedness, with interest, in accordance with the terms of the Agreement, or (iii) for the grant by the Company of the security interest in its Collateral described in Section 1.2 of the Pledge and Security Agreement (such security interests, collectively, the "Company Security Interests"); or (b) by any Guarantor, (i) for the valid execution and delivery by such Guarantor of the Guaranty or the Collateral Agreements, or (ii) for the grant by such Guarantor of the security interest in its Collateral described in Section 1.2 of the Pledge and Security Agreement (such security interests, collectively, the "Guarantor Security Interests" and, together with the Company Security Interests, the "Security Interests"). 7. (a) Each of the Security Interests is an enforceable security interest in the collateral to which it applies. (b) (i) If financing statements in the form attached hereto as Schedule 1A through Schedule 1M are communicated to the Delaware Secretary of State by a method of document delivery authorized under Section 106 of the Administrative Rules of the Delaware Secretary of State and an amount equal to the applicable filing fee is tendered to such filing office, such filing office will have an obligation to accept such financing statements. (ii) Upon acceptance of such financing statements by said filing office, the Company Security Interests and Guarantor Security Interests granted by the Delaware Guarantor in so much of the Collateral as consists of (in each case as defined in the Uniform Commercial Code) accounts (other than accounts described in Section 9-102(a)(6)(B) of the Uniform Commercial Code), general intangibles, goods, chattel paper, investment property, negotiable documents and instruments will be perfected. (iii) Such financing statements are all of the filings, and are in the form, required to effect such perfection. (iv) Except for the filings and fees referred to in clause (i), no other action, including the payment of any recording or other taxes or fees, is required by law to effect such perfection. (c) (i) If financing statements in the form attached hereto as Schedule 2A and Schedule 2B are communicated to the Office of the Secretary of State of California by a method of document delivery authorized under the filing rules of that Office and an amount equal to the applicable filing fee is tendered to such filing office, such filing office will have an obligation to accept such financing statements. 52 (ii) Upon acceptance of such financing statements by said filing office, the Guarantor Security Interests granted by the California Guarantors in so much of the Collateral as consists of (in each case as defined in the Uniform Commercial Code) accounts (other than accounts described in Section 9-102(a)(6)(B) of the Uniform Commercial Code), general intangibles, goods, chattel paper, investment property, negotiable documents and instruments will be perfected. (iii) Such financing statements are all of the filings, and are in the form, required to effect such perfection. (iv) Except for the filings and fees referred to in clause (i), no other action, including the payment of any recording or other taxes or fees, is required by law to effect such perfection. (d) (i) If financing statements in the form attached hereto as Schedule 3A through Schedule 3F, are communicated to the Texas Secretary of State by a method of document delivery authorized under Rule Section 95.106 of the Texas Administrative Code and an amount equal to the applicable filing fee is tendered to such filing office, such filing office will have an obligation to accept such financing statements. (ii) Upon acceptance of such financing statements by said filing office, the Guarantor Security Interests granted by the Texas Guarantors in so much of the Collateral as consists of (in each case as defined in the Uniform Commercial Code) accounts (other than accounts described in Section 9-102(a)(6)(B) of the Uniform Commercial Code), general intangibles, goods, chattel paper, investment property, negotiable documents and instruments will be perfected. (iii) Such financing statements are all of the filings, and are in the form, required to effect such perfection. (iv) Except for the filings and fees referred to in clause (i), no other action, including the payment of any recording or other taxes or fees, is required by law to effect such perfection. (e) (i) The delivery to the Collateral Agent in New York of the certificates (and related stock powers executed in blank) evidencing the Securities listed on Schedule 4 will be effective to perfect the Security Interest in such Securities. (ii) The Security Interest in the Securities listed on Schedule 4, when such certificates are so delivered, will be free of any adverse claim, as defined in Section 8-102(a)(1) of the New York Uniform Commercial Code. 53 8. To our knowledge, neither the Company nor any Guarantor is a party in any action, suit or proceeding in which the pleadings request as relief that (a) any of the obligations of the Company, or any of the rights of the Administrative Agent, the LC Issuer or the Lenders, under the Agreement, the Delivered Notes, the Intercreditor Agreement or the Collateral Agreements, or (b) any of the obligations of any Guarantor, or any of the rights of the Administrative Agent, the LC issuer or the Lenders, under the Guaranty or the Collateral Agreements, be declared invalid or subordinated or their performance be enjoined. Our opinion is subject to the following qualifications and limitations: 1. Our opinion is subject to the effect of (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance and other similar laws affecting creditors' rights generally, (ii) general equitable principles, (iii) requirements of reasonableness, good faith and fair dealing and (iv) additionally in the case of (A) indemnities, a requirement that facts, known to the indemnitee but not the indemnitor, in existence at the time the indemnity becomes effective that would entitle the indemnitee to indemnification be disclosed to the indemnitor, (B) waivers, Sections 9-602 and 9-603 of the Uniform Commercial Code, (C) indemnities, waivers and exculpatory provisions, public policy and (D) restrictions on, or remedies in the event of, assignment or transfer of rights or interests or the creation, attachment, perfection or enforcement of security interests, Sections 9-401(b), 9-406, 9-407, 9-408 and 9-409 of the Uniform Commercial Code. Our opinion with respect to the Guaranty is subject to the further qualification that the Guarantor may be exonerated as to a guaranteed party if such guaranteed party fails to inform the Guarantor of material, adverse information, known to it and not to the Guarantor, concerning the Company or any Collateral. 2. The opinions expressed in paragraphs 1(a), 1(c) and 1(d) as to the due incorporation, valid existence and good standing of the Company, the California Guarantors and the Texas Guarantors, respectively, are based on recent good standing certificates and verbal confirmations of good standing as of September 7, 2004. 3. Certain remedial provisions of the Loan Documents as to which we are opining may be unenforceable in whole or in part, but the inclusion of such provisions does not affect the validity of the balance of such Loan Documents, and the practical realization of the benefits created by such Loan Documents taken as a whole will not be materially impaired by the unenforceability of those particular provisions. In addition, certain remedial provisions of such Loan Documents may be subject to procedural requirements not set forth therein. 4. The Security Interests (i) will not be enforceable with respect to, or attach to, any Collateral until value has been given and the Grantor thereof has rights in such Collateral or (ii) be enforceable with respect to any Collateral (other than the Securities that are the subject of our opinion in paragraph 7(e)) against the competing interests of those third parties (other than the Grantor thereof) who would, in accordance with the provisions of Applicable Law, take free of, or have priority over, such Security Interest in such Collateral, notwithstanding its perfection. 54 5. Our opinion is limited to the law of the State and Federal Law, in each case as in effect on the date hereof, except that our opinions expressed in paragraphs 7(b), 7(c) and 7(d) are limited to the Delaware Uniform Commercial Code, the California Commercial Code and the Texas Uniform Commercial Code, respectively, and, in each case, to Federal Law. 6. Our opinion is intended for the sole benefit of the Administrative Agent, the LC Issuer and the Lenders, and their permitted successors and assignees and permitted participants in or purchasers of the obligations of the Company under the Loan Documents and no other Person is entitled to rely on it for any purpose without our prior written consent. 7. We express no opinion with respect to: a. the Company's or the Guarantors' rights in, title to or legal or beneficial ownership of any of the Collateral or any Collateral acquired after the date hereof; b. the perfection of the Security Interest in any dividends or other distributions of any Securities that are not the subject of our opinion in paragraph 7(e); c. the priority of the Security Interests in any Collateral or the effect of perfection or nonperfection of the Security Interests in any Collateral of a type referred to in Section 9-301(c) of the New York Uniform Commercial Code (or the equivalent section of the Delaware, California or Texas Uniform Commercial Code) that is not located in the State, the State of California, the State of Delaware, or the State of Texas, as applicable; d. any Collateral that (A) is not governed by Article 8 or 9 of the Uniform Commercial Code (and not, in the case of Article 9, excluded therefrom by Section 9-109(c) or (d)) or (B) is subject to a certificate of title or (C) is a trademark; e. Section 15.2 of the Agreement and the equivalent sections in the other Loan Documents insofar as said sections relate to federal courts (except as to the personal jurisdiction thereof); and f. the definition of Collateral contained in the Pledge and Security Agreement to the extent the same purports to make (A) commercial tort claims part of the Collateral by using general terms such as "currently existing commercial tort claims" or (B) any other assets part of the Collateral by using general terms such as "any property of the Grantors", in each case without further specificity; provided that the foregoing shall not in any way limit our opinions in 55 paragraphs 7(b), 7(c) and 7(d) in respect of (i) commercial tort claims which are specifically listed in the definition of Collateral (directly or by reference to a schedule or exhibit) or (ii) any property which is specifically referenced by type in the definition of Collateral. In rendering our opinion: 1. We have, without independent verification, relied, with respect to factual matters, statements and conclusions, on certificates and statements of governmental officials and officials of the Company and the Guarantors and on the representations made by the Company and the Guarantors in the Loan Documents. 2. We have examined originals, or copies of originals certified, conformed or otherwise identified to our satisfaction, of such agreements, documents and records as we have considered relevant and necessary as a basis for this opinion. 3 We have assumed the accuracy and completeness of all, and the authenticity of all original, certificates, agreements, documents, records and other materials submitted to us, the conformity with the originals of any copies submitted to us, the genuineness of all signatures and the legal capacity of all natural persons. 4. We have assumed that: (a) (i) the execution and delivery of, and the performance of its obligations under, the Agreement and the Collateral Agreements by the Company do not and will not (A) require any Governmental Approval or Governmental Registration or (B) violate or conflict with, result in a breach of, or constitute a default under, (1) any agreement or instrument to which the Company or any of its Affiliates is a party or by which the Company or any of its Affiliates or any of their respective properties may be bound, (2) any Governmental Approval or Governmental Registration that may be applicable to the Company or any of its Affiliates or any of their respective properties, (3) any order, decision, judgment or decree that may be applicable to the Company or any of its Affiliates or any of their respective properties, or (4) any law; (ii) the execution and delivery of, and the performance of the obligations of each Guarantor under, the Guaranty and the Collateral Agreements by such Guarantor do not and will not (A) require any Governmental Approval or Governmental Registration or (B) violate or conflict with, result in a breach of, or constitute a default under, (1) any agreement or instrument to which such Guarantor or any of its Affiliates is a party or by which such Guarantor or any of its Affiliates or any of their respective properties may be bound, (2) any Governmental Approval or Governmental Registration that may be applicable to such Guarantor or any of its Affiliates or any of their respective properties, (3) any order, decision, judgment or decree that may be applicable to such Guarantor or any of its Affiliates or any of their respective properties, or (4) any law; except that the 56 foregoing assumptions do not apply to, (x) in the case of the Governmental Approvals and Governmental Registrations referred to in subclauses (a)(i)(A) and (a)(ii)(A), the Governmental Approvals and Governmental Registrations that are the subject of our opinion expressed in paragraph 6 above, and (y) in the case of the law referred to in subclauses (a)(ii)(B)(4) and (a)(ii)(B)(4), Federal Law, the law of the State, the Delaware General Corporation Law, the Delaware Uniform Commercial Code, the law of California and the law of Texas, in each case as in effect on the date hereof, except as to any Governmental Approvals and Governmental Registrations required under Federal Law, the law of the State, the Delaware General Corporation Law, the Delaware Uniform Commercial Code, the law of California and the law of Texas that are not the subject of our opinion expressed in paragraph 6 above; (b) the Loan Documents constitute (subject to the same qualifications as are contained in subparagraph (a) of the immediately preceding paragraph) the valid, legally binding and enforceable agreements of the parties thereto under all applicable law (other than, in the case of the Company, and the Guarantors, Federal Law and the law of the State, except as to any Governmental Approvals and Governmental Registrations required under Federal Law or the law of the State that are not the subject of our opinion expressed in paragraph 6 above); (c) for so much of our opinions expressed in paragraphs 2 and 3 as relates to Section 15.1 of the Agreement and the equivalent sections in the other Loan Documents relating to the selection of New York law as the governing law of the agreements, that such sections would be enforced by a court in strict conformity to the provisions of New York General Obligations Law Section 5-1401; (d) (i) the Collateral Agent (on behalf of the Holders of the Secured Obligations) hold the Securities (A) within the State and (B) without notice of any adverse claim, as defined in Section 8-102(a)(1) of the Uniform Commercial Code; and (ii) the Collateral Agent complies with the provisions of, and continuously holds such Securities for the benefit of the Holders of the Secured Obligations in the manner provided for in, the Pledgor Security Agreement; (e) each of the Delaware Guarantors is a corporation or limited liability company, as applicable, organized solely under the laws of the State of Delaware; (f) each of the Company, the Texas Guarantors and the California Guarantors has knowingly, voluntarily and intelligently waived its right to a trial by jury in any proceeding involving the Loan Documents; and 57 (g) the Company and the Guarantors are engaged only in the businesses described in the Company's Annual Report on Form 10-K for its fiscal year ended September 30, 2003 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. Very truly yours, 58 Annex A Subsidiaries of Headwaters Incorporated ACM Block & Brick General, Inc. ACM Block & Brick Partner, LLC ACM Block & Brick, LLC ACM Block & Brick, LP ACM FlexCrete, LP ACM Georgia, Inc. American Construction Materials, Inc. Best Masonry & Tool Supply, Inc. Chihuahua Stone LLC Comaco, Inc. Covol Engineered Fuels, LC Covol Services Corporation Don's Building Supply, L.P. Eagle Stone & Brick LLC Eldorado Acquisition, LLC Eldorado Funding Co. Eldorado G-Acquisition Co. Eldorado SC-Acquisition Co. Eldorado Stone Acquisition Co., LLC Eldorado Stone Corporation Eldorado Stone Funding Co., LLC Eldorado Stone LLC Eldorado Stone Operations LLC Global Climate Reserve Corporation Headwaters Clean Coal Corp. Headwaters Heavy Oil, Inc. Headwaters NanoKinetix, Inc. Headwaters Olysub Corporation Headwaters Technology Innovation Group, Inc. HTI Chemical Subsidiary, Inc. Hydrocarbon Technologies, Inc. ISG Manufactured Products, Inc. ISG Partner, Inc. ISG Resources, Inc. ISG Services Corporation ISG Swift Crete, Inc. 59 L&S Stone LLC L-B Stone LLC Lewis W. Osborne, Inc. Magna Wall, Inc. Northwest Properties LLC Northwest Stone & Brick Co., Inc. Northwest Stone & Brick LLC Palestine Concrete Tile Company, L.P. StoneCraft Industries LLC Tempe Stone LLC United Terrazzo Supply Co., Inc. VFL Technology Corporation Tapco Holdings, Inc. Tapco International Corporation Vantage Building Products Corporation MTP, Inc. Atlantic Shutter Systems, Inc. Metamora Products Corporation Metamora Products Corporation of Elkland Wamco Corporation Builders Edge, Inc. 60 Annex B The following definitions apply to the opinion to which this Annex B is attached: "Applicable Law" means (a) all applicable common law and principles of equity and (b) all applicable provisions of all (i) constitutions, statutes, rules, regulations and orders of governmental bodies, (ii) Governmental Approvals and (iii) orders, decisions, judgments and decrees of all courts (whether at law or in equity or admiralty) and arbitrators. "California Guarantors" means Lewis W. Osborne Inc. and United Terrazzo Supply Co., Inc. "Delaware Guarantors" means Headwaters Olysub Corporation, Chihuaha Stone LLC, Eagle Stone & Brick LLC, Eldorado Stone Acquisition Co., LLC, Eldorado Stone LLC, Eldorado Stone Operations LLC, L&S Stone LLC, L-B Stone LLC, Northwest Properties LLC, Northwest Stone & Brick LLC, StoneCraft Industries LLC, and Tempe Stone LLC. "Governmental Approval" means any authorization, consent, approval, license or exemption (or the like) of or from any governmental unit. "Governmental Registration" means any registration or filing (or the like) with, or report or notice (or the like) to, any governmental unit. "Grantor" means, with respect to any Security Interest, the grantor thereof. "Loan Documents" means each of the Agreement, the Guaranty and the Collateral Agreement, collectively. "Security" means, with respect to any Person, (a) any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all similar ownership interests in a Person (other than a corporation) and (b) any option, warrant or other right to acquire, any such shares, interests, participations, equivalents or similar ownership interests of such Person. "Texas Guarantors" means Best Masonry & Tool Supply, Inc., Don's Building Supply, L.P., Palestine Concrete Tile Company, L.P., Magna Wall, Inc., ACM Block & Brick LP, and ACM FlexCrete, LP. "Uniform Commercial Code" means the Delaware Uniform Commercial Code, Division 9 of the California Commercial Code, or the Texas Uniform Commercial Code, whichever is applicable. 61 EXHIBIT A-2 FORM OF OPINION OF LOCAL COUNSEL Attached FORM OF OPINION OF LOCAL COUNSEL WITH RESPECT TO REAL ESTATE MATTERS __________, 2004 To: The Lenders under the Credit Agreements referred to below and to Morgan Stanley Senior Funding, Inc., as Administrative Agent, and Morgan Stanley & Co. Incorporated, as Collateral Agent Re: Headwaters Incorporated [and [**Name of Subsidiary Fee Owner**]] Ladies and Gentlemen: We have acted as special [name of State] (the "State") counsel to Headwaters Incorporated, a Delaware corporation ("Borrower") [and [**Insert name of fee owner and state and organization type**) ("Mortgagor")] in connection with the execution and delivery of the [Mortgages/Deeds of Trust] referenced below pursuant to that certain Credit Agreement dated as of September 8, 2004 (the "First Lien Credit Agreement") by and among Borrower, the Lenders (as defined therein), Morgan Stanley Senior Funding, Inc., as administrative agent (in such capacity, "Administrative Agent") for the Lenders, Morgan Stanley & Co. Incorporated, as collateral agent (in such capacity, "Collateral Agent") for the Lenders and certain other parties named therein, and that certain Second Lien Credit Agreement dated as of September 8, 2004 (the "Second Lien Credit Agreement") by and among Borrower, the Lenders (as defined therein), Administrative Agent, Collateral Agent, and certain other parties named therein. The First Lien Credit Agreement and Second Lien Credit Agreement are collectively referred to herein as the "Credit Agreements". This opinion is rendered at the request of Borrower pursuant to Section 6.26(b)(G) of the First Lien Credit Agreement and Section 6.18(b)(G) of the Second Lien Credit Agreement. Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in the [Mortgages/Deeds of Trust], or if not defined therein, in the Credit Agreements. In our capacity as such counsel, we have examined originals, or copies identified to our satisfaction as being true copies, of such records, documents or other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below, including such corporate records and documents of [Borrower/Mortgagor] and such certificates of public officials and officers of [Borrower/Mortgagor] as we have deemed necessary or appropriate for purposes of this opinion. These records, documents and instruments also included execution copies or counterparts of the following documents (collectively, the "Subject Documents"): 1. The Credit Agreements; 2. The [Mortgage/Deed of Trust], Assignment of Rents and Leases, Security Agreement and Fixture Filing dated as of ________, 2004 from [Borrower//Mortgagor], as [mortgagor/grantor], to [__________________, as trustee ("Trustee"), for the benefit of] Collateral Agent, as [mortgagee/beneficiary] (the "[First Lien Mortgage/First Lien Deed of Trust]"), encumbering the "Mortgaged Property" described therein; 3. The [Mortgage/Deed of Trust], Assignment of Rents and Leases, Security Agreement and Fixture Filing dated as of __________, 2004 from [Borrower//Mortgagor], as [mortgagor/grantor], to [______________, as trustee ("Trustee"), for the benefit of] Collateral Agent, as [mortgagee/beneficiary] (the "[Second Lien Mortgage/Second Lien Deed of Trust]" and, collectively with the First Lien Mortgage/First Lien Deed of Trust, the "Mortgages/Deeds of Trust"), encumbering the "Mortgaged Property" described therein[.][; and] 4. [** FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: The Uniform Commercial Code Fixture Filings naming [Borrower//Mortgagor] as debtor and Collateral Agent as secured party, relating to the Mortgaged Property (the "Fixture Filings").**] Assumptions In rendering this opinion we have assumed, without having made any independent investigation of the facts, except with respect to matters of State and federal law on which we have opined below, the following: (i) the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies; (ii) to the extent that the obligations of [Borrower/Mortgagor] may be dependent upon such matters, other than with respect to [Borrower/Mortgagor], that each party to the agreements and contracts referred to herein is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation; that each such other party has the requisite corporate or other organizational power and authority to perform its obligations under such agreements and contracts, as applicable; and that such agreements and contracts have been duly authorized, executed and delivered by, and each of them constitutes the legally valid and binding obligations of, such other parties, as applicable, enforceable against such other parties in accordance with their respective terms; (iii) that [Borrower/Mortgagor] is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation; 63 (iv) that [Borrower/Mortgagor] has the requisite corporate power and authority to enter into and perform its obligations under the Subject Documents to which it is a party; (v) the due authorization, execution and delivery by [Borrower/Mortgagor] of the Subject Documents to which [Borrower/Mortgagor] is a party; (vi) that a part or all of the loan proceeds to be advanced pursuant to the Credit Agreements will have been advanced on or before the date hereof; (vii) that all material factual matters, including without limitation, representations and warranties, contained in the Subject Documents, are true and correct as set forth therein; (viii) that [Borrower/Mortgagor], at the time of recordation of the [Mortgages/Deeds of Trust][**FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: and filing of the Fixture Filings**], held an interest of record in the real property portions of the Mortgaged Property owned by [Borrower/Mortgagor]; [and] (ix) [**FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: that the portions of the Fixtures (as defined below) that are or are to become fixtures with respect to the Mortgaged Property are and will be located on the Mortgaged Property; and**] (x) that the Subject Documents will be governed by and construed in accordance with the internal laws of the State, notwithstanding the provisions of the Subject Documents to the contrary. Opinions On the basis of such examination, our reliance upon the assumptions contained herein and our consideration of those questions of law we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that: 1. Each [Mortgage/Deed of Trust] constitutes the legal, valid and binding obligation of [Borrower/Mortgagor], enforceable against [Borrower/Mortgagor] in accordance with its terms. 2. The execution and delivery of the Subject Documents, the performance by [Borrower/Mortgagor] of its obligations thereunder and the compliance with the terms and conditions thereof by [Borrower/Mortgagor] are not in contravention of or in conflict with any law, rule or regulation of the State applicable to [Borrower/Mortgagor]. 64 3. The execution and delivery by [Borrower/Mortgagor] of the Subject Documents to which it is a party and the performance of [Borrower/Mortgagor]'s obligations thereunder do not require any governmental consents, approvals, authorizations, permits, registrations, declarations or filings or other action or any notices to, consents of, orders of or filings with any governmental authority or regulatory body of the State (including those having jurisdiction over the enforcement of the environmental laws of the State), except for the recordation of the [Mortgages/Deeds of Trust] [** FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: and the Fixture Filings**] in the respective recording offices described herein. 4. Each [Mortgage/Deed of Trust] (including the acknowledgement, attestation, seal and witness requirements) is in appropriate form for recordation in the State. 5. Each [Mortgage/Deed of Trust] is in proper form sufficient to create a valid [mortgage/deed of trust lien] in favor of Collateral Agent on, and to vest [Trustee and] Agent with power of sale in, such of the Mortgaged Property described therein that constitutes real property (including fixtures, to the extent the same constitute real property). The recordation of the [Mortgages/Deeds of Trust] in the [** NAME APPROPRIATE COUNTY RECORDING OFFICE**] are the only recordation, filings or registrations necessary to perfect the liens on the Mortgaged Property created by the [Mortgages/Deeds of Trust] [** FOR MICHIGAN, GEORGIA AND NORTH CAROLINA:, except for the filing with the ** NAME APPROPRIATE COUNTY RECORDING OFFICE** of the Fixture Filings regarding that portion of the Mortgaged Property constituting fixtures**]. Upon recordation of the [Mortgages/Deeds of Trust] in the [** NAME APPROPRIATE COUNTY RECORDING OFFICE**], [Trustee/Collateral Agent] will have valid and perfected [mortgage/deed of trust liens] on the Mortgaged Property described therein. No other recordation, filing, re-recordation or re-filing is necessary in order to perfect or to maintain the priority of the liens created by the [Mortgages/Deeds of Trust]. 6. The real property descriptions attached to the [Mortgages/Deeds of Trust] are in form legally sufficient for the purpose of subjecting that portion of the Mortgaged Property that constitutes real property to the liens evidenced by the [Mortgages/Deeds of Trust] [** FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: and the Fixture Filings**]. 7. Each [Mortgage/Deed of Trust] is in proper form sufficient to constitute a valid and effective fixture filing with respect to the Premises under Article 9 of the Uniform Commercial Code as in effect in the State naming [Borrower/Mortgagor] as debtor and Agent as secured party. 8. Collateral Agent is not required to qualify to transact business in the State nor will Collateral Agent incur any tax imposed by the State (including, without limitation, any tax imposed by the 65 State on interest or on revenue paid in respect of the Credit Agreements), solely as the result of the ownership or recordation of the [Mortgages/Deeds of Trust]. 9. [**FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: The Fixture Filings are in appropriate form for recordation in the State.**] 10. [**FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: With respect to that portion of the Mortgaged Property in which a security interest may be perfected by the recordation of a fixture filing in the State (the "Fixtures"), the proper place to file the Fixture Filings is in the [LIST APPROPRIATE COUNTY RECORDING OFFICE] (the "Filing Office"), and no filing or recordation in any other place is necessary under the UCC to perfect a security interest in the Fixtures. Upon the recordation of the Fixture Filings with the Filing Office, Agent will have a perfected security interest in the Fixtures. Subsequent to the recordation of the Fixture Filings in accordance with the procedures set forth above, no other, further or subsequent filing, recordation, registration, re-filing, re-recordation or re-registration of the Fixture Filings or any additional financing statements or any other instrument and no other actions will be necessary or advisable to perfect or continue the perfection of the lien created thereby, except that Article 9 of the UCC requires the recordation of continuation statements within the period of six (6) months prior to the expiration of five (5) years from the date of the original recordation or the recordation of any continuation statement in order to maintain the effectiveness each of the Fixture Filings.**] 11. [Except as specifically set forth on Schedule 1 hereto, no] [No] taxes or other charges, including, without limitation, intangible, documentary, stamp, mortgage, transfer or recording taxes or similar charges are payable to the State or to any governmental authority or regulatory body located therein on account of the execution or delivery of the [Mortgages/Deeds of Trust], or the creation of the liens and security interests thereunder, or the filing, recordation or registration of the [Mortgages/Deeds of Trust], except for nominal filing or recording fees. 66 Qualifications The foregoing opinions are subject to the following qualifications, limitations and exceptions: 1. Qualifying paragraph 1 above, the enforceability of the [Mortgages/Deeds of Trust] and the liens created thereby may be limited or affected by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. The aforesaid opinion as to enforceability of the [Mortgages/Deeds of Trust] is also subject to the qualification that certain provisions contained therein may not be enforceable, but (subject to the limitations set forth in the foregoing sentence) such unenforceability will not render the [Mortgages/Deeds of Trust] invalid as a whole or substantially interfere with realization of the principal benefits and/or security provided thereby. 2. In rendering the opinions expressed in this opinion letter, we have made no examination of and express no opinion with respect to: (i) title to or, except as to adequacy of form, descriptions of the Mortgaged Property described in the [Mortgages/Deeds of Trust]; (ii) the nature or extent of [Borrower/Mortgagor]'s rights in, or title to, the Mortgaged Property; (iii) the existence or non-existence of liens, security interests, charges or encumbrances thereon or therein actually of record; or (iv) the priority of any liens on any part of the Mortgaged Property. We have not independently certified the existence, condition, location or ownership of any of the Mortgaged Property. This opinion is given as of the date hereof, and we disclaim any obligation to update this opinion letter for events occurring after the date of this opinion letter. The foregoing opinion applies only with respect to the laws of the State and the federal laws of the United States of America and we express no opinion with respect to the laws of any other jurisdiction. This opinion is rendered only to Administrative Agent, the Collateral Agent and the Lenders and their respective successors and assigns (including any participant in any Secured Party's interest) and is solely for their benefit in connection with the transactions contemplated by the Subject Documents and may not be relied upon by Administrative Agent, Collateral Agent or any Lender or any of their respective successors or assigns for any other purpose without our prior written consent. Very truly yours, 67 SCHEDULE 1 Mortgage Recording Taxes, Documentary Stamp Taxes and other similar Taxes and Fees [**INSERT DESCRIPTION OF AND METHOD OF CALCULATING ALL MORTGAGE RECORDING TAXES, DOCUMENTARY STAMP TAXES AND SIMILAR TAXES AND FEES**] EXHIBIT A-3 FORM OF CORPORATE FORMALITIES OPINION Attached FORM OF OPINION OF LOCAL COUNSEL WITH RESPECT TO CORPORATE FORMALITIES _________, 2004 To: The Lenders under the Credit Agreements referred to below and to Morgan Stanley Senior Funding, Inc., as Administrative Agent, and Morgan Stanley & Co. Incorporated, as Collateral Agent Re: Headwaters Incorporated [and [**Name of Subsidiary Fee Owner**]] Ladies and Gentlemen: We have acted as special [name of State] (the "State") counsel to Headwaters Incorporated, a Delaware corporation ("Borrower"), [and [**Insert name of fee owner and state and organization type**] ("Mortgagor"),] in connection with the execution and delivery of (i) the First Lien [Mortgage/Deed of Trust] referenced below pursuant to that certain Credit Agreement dated as of September 8, 2004 (the "First Lien Credit Agreement") by and among Borrower, the lenders referred to therein (the "First Lien Lenders"), Morgan Stanley Senior Funding, Inc. ("MSSF"), as administrative agent (in such capacity, "First Lien Administrative Agent") for the First Lien Lenders, Morgan Stanley & Co. Incorporated ("MSCI"), as collateral agent (in such capacity, "First Lien Collateral Agent") for the First Lien Lenders and certain other parties named therein, and (ii) the Second Lien [Mortgage/Deed of Trust] referenced below pursuant to that certain Second Lien Credit Agreement dated as of September 8, 2004 (the "Second Lien Credit Agreement"; collectively with the First Lien Credit Agreement, the "Credit Agreements") by and among Borrower, the lenders referred to therein (the "Second Lien Lenders"; collectively with the First Lien Lenders, the "Lenders"), MSSF, as administrative agent (in such capacity, "Second Lien Administrative Agent"; collectively with First Lien Administrative Agent, "Administrative Agent") for the Second Lien Lenders, MSCI, as collateral agent (in such capacity, "Second Lien Collateral Agent"; collectively with First Lien Collateral Agent, "Collateral Agent") for the Second Lien Lenders, and certain other parties named therein. This opinion is rendered at the request of Borrower pursuant to Section 6.26(b)(G) of the First Lien Credit Agreement and Section 6.18(b)(G) of the Second Lien Credit Agreement. Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in the [Mortgages/Deeds of Trust], or if not defined therein, in the Credit Agreements. In our capacity as such counsel, we have examined originals, or copies identified to our satisfaction as being true copies, of such records, documents or other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below, including such corporate records and documents of [Borrower/Mortgagor] and such certificates of public officials and officers of [Borrower/Mortgagor] as we have deemed necessary or appropriate for purposes of this opinion. These records, documents and instruments also included execution copies or counterparts of the following documents (collectively, the "Subject Documents"): 1. The Credit Agreements; 2. The [Mortgage/Deed of Trust], Assignment of Rents and Leases, Security Agreement and Fixture Filing ([State]) dated as of _________, 2004 from [Borrower//Mortgagor], as [mortgagor/grantor], to [_______________, as trustee ("Trustee"), for the benefit of] First Lien Collateral Agent, as [mortgagee/beneficiary] (the "[First Lien Mortgage/Deed of Trust]"), encumbering the "Mortgaged Property" described therein; and 3. The [Mortgage/Deed of Trust], Assignment of Rents and Leases, Security Agreement and Fixture Filing ([State]) dated as of ________, 2004 from [Borrower//Mortgagor], as [mortgagor/grantor], to [__________________, as trustee ("Trustee"), for the benefit of] Second Lien Collateral Agent, as [mortgagee/beneficiary] (the "[Second Lien Mortgage/Deed of Trust]" and, collectively with the First Lien Mortgage/Deed of Trust, the "Mortgages/Deeds of Trust"), encumbering the Mortgaged Property. Assumptions In rendering this opinion we have assumed, without having made any independent investigation of the facts, except with respect to matters of State and federal law on which we have opined below, the following: (i) the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies; (ii) to the extent that the obligations of [Borrower/Mortgagor] may be dependent upon such matters, other than with respect to [Borrower/Mortgagor], that each party to the agreements and contracts referred to herein is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation; that each such other party has the requisite corporate or other organizational power and authority to perform its obligations under such agreements and contracts, as applicable; and that such agreements and contracts have been duly authorized, executed and delivered by, and each of them constitutes the legally valid and binding obligations of, such other parties, as applicable, enforceable against such other parties in accordance with their respective terms; and (iii) that all material factual matters, including without limitation, representations and warranties, contained in the Subject Documents, are true and correct as set forth therein. Opinions On the basis of such examination, our reliance upon the assumptions contained herein and our consideration of those questions of law we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that: 1. [Borrower/Mortgagor] is duly organized, validly existing and in good standing under the laws of the State. 2. [Borrower/Mortgagor] has the requisite corporate power and authority to enter into and perform its obligations under the Subject Documents to which it is a party. 3. The Subject Documents to which [Borrower/Mortgagor] is a party have been duly authorized, executed and delivered by [Borrower/Mortgagor]. 4. The execution, delivery and performance by [Borrower/Mortgagor] of the Subject Documents to which it is a party do not contravene its certificate or articles of incorporation, by-laws or other organizational documents. Qualifications The foregoing opinions are subject to the following qualifications, limitations and exceptions: This opinion is given as of the date hereof, and we disclaim any obligation to update this opinion letter for events occurring after the date of this opinion letter. The foregoing opinion applies only with respect to the laws of the State and the federal laws of the United States of America and we express no opinion with respect to the laws of any other jurisdiction. This opinion is rendered only to Administrative Agent, Collateral Agent and the Lenders and their respective successors and assigns (including any participant in any Lender's interest) and is solely for their benefit in connection with the transactions contemplated by the Subject Documents and may not be relied upon by Administrative Agent, Collateral Agent or any Lender or any of their respective successors or assigns for any other purpose without our prior written consent. Very truly yours, EXHIBIT B FORM OF COMPLIANCE CERTIFICATE To: The Lenders under the Credit Agreement described below This Compliance Certificate is furnished pursuant to that certain Credit Agreement, dated as of September 8, 2004 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Headwaters Incorporated, a Delaware corporation, as the Borrower (the "Borrower"), the Lenders and Morgan Stanley Senior Funding, Inc., as Administrative Agent (the "Administrative Agent") for the Lenders. Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the meanings ascribed thereto in the Credit Agreement. THE UNDERSIGNED HEREBY CERTIFIES THAT: 1. I am the duly elected __________ of the Borrower;(2) 2. I have reviewed the terms of the Credit Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower and its Subsidiaries during the accounting period ending on ________ __, 20__ and covered by the attached financial statements; 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Default or Unmatured Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; 4. Schedule I attached hereto sets forth financial data and computations evidencing the Borrower's compliance with certain covenants of the Credit Agreement, all of which data and computations are true, complete and correct; 5. (a) Schedule II attached hereto sets forth any new applications to register patentable inventions, trademarks and copyrights filed by the Borrower or any Domestic Subsidiary which have not been previously disclosed to the Administrative Agent and (b) attached hereto is an intellectual property security agreement supplement in the form of Annex A executed as of the date hereof by the Borrower or such Domestic Subsidiary that has filed such new applications to register patentable inventions, trademarks and copyrights; and 6. (a) Schedule III attached hereto set forth any new commercial tort claims (the "Commercial Tort Claims") belonging to the Borrower or any Domestic Subsidiary which have not been previously disclosed to the Administrative Agent and (b) attached hereto is a pledge and security agreement supplement in the form of Annex B executed as of the date hereof by the Borrower or such Domestic Subsidiary to whom such new commercial tort claims belong. - -------------------- (2) Per Section 6.1.3 of the Credit Agreement, this certificate is to be completed and executed by the chief financial officer or treasurer. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event: --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- --------------------------------------------------------------- The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this ___ day of ____________, 20__. HEADWATERS INCORPORATED, as Borrower By: Name: Title: SCHEDULE I TO COMPLIANCE CERTIFICATE Compliance as of _________, ____ (the "Compliance Date") with Provisions of Sections 6.21, 6.22, 6.23 and certain other Sections of the Credit Agreement (3) I. FINANCIAL COVENANTS A. TOTAL LEVERAGE RATIO (Section 6.21.1) (1) Consolidated Funded Indebtedness (a) Outstanding funded Consolidated Indebtedness $___________ (b) Undrawn amount of all standby Letters of Credit + $___________ (c) Principal component of all Capitalized Lease Obligations + $___________ (d) Aggregate amount of Off-Balance Sheet Liabilities + $___________ (e) Contingent Obligations with respect to A(1)(a) through A(1)(d) + $___________ (f) Consolidated Funded Indedebtedness (Sum of A)(1)(a) through A(1)(e)) $___________ (2) Consolidated EBITDA(4) (a) Consolidated Net Income $___________ (b) Consolidated Interest Expense + $___________ (c) Expense for taxes paid or accrued + $___________ (d) Depreciation + $___________ (e) Amortization + $___________ (f) Non-cash charges for impairments of goodwill and intangible assets + $___________ (g) Tax credits under Section 29 of the Code as a result of Permitted Alternative Fuel Acquisition [Maximum: $20,000,000 in any fiscal year] + $___________ (h) Interest income - $___________ (i) Consolidated EBITDA (Sum of A)(2)(a) through A(2)(h)) = $___________ (3) Total Leverage Ratio (Ratio of A(1)(d) to A(2)(i)) ____ to 1.00 (4) Maximum Total Leverage Ratio for the applicable period ____ to 1.00 B. SENIOR LEVERAGE RATIO (Section 6.21.2) (1) Consolidated Funded Indebtedness (A(1)(f) above) $___________ (2) Subordinated Indebtedness - $___________ (3) (B)(1) minus (B)(2) $___________ (4) Consolidated EBITDA (A(2)(i) above) $___________ (5) Senior Leverage Ratio (Ratio of B(3) to B(4)) $___________ (6) Maximum Senior Leverage Ratio for the applicable period ____ to 1.00 - ---------------------- (3) In case of any inconsistency between the provisions of this Schedule and the provisions of the Credit Agreement, the Credit Agreement shall prevail. (4) For the periods indicated on Schedule I to the Credit Agreement, Consolidated EBITDA shall be deemed to be the amounts set forth therein. C. FIXED CHARGE COVERAGE RATIO (Section 6.22) (1) (a) Consolidated EBITDA (A(2)(i) above) $___________ (b) Rentals + $___________ (c) Consolidated EBITDAR (Sum of C(1)(a) and C(1)(b)): $___________ (d) Consolidated Capital Expenditures + $___________ (e) Expenses for taxes paid in cash or taxes accrued $___________ (f) Total: $___________ (2) (a) Consolidated Interest Expense $___________ (b) Consolidated Future Maturities (including, without limitation, Capitalized Lease Obligations) + $___________ (c) Rentals to be paid + $___________ (d) Total: $___________ (3) Fixed Charge Coverage Ratio (Ratio of C(1)(f) to C(2)(d)) _____ to 1.00 (4) Maximum Fixed Charge Coverage Ratio for any Fiscal Quarter 2.00 to 1.00 II. OTHER MISCELLANEOUS PROVISIONS A. SALE OF ASSETS (Section 6.12) (1) State whether any asset sales (other than asset sales permitted pursuant to Sections 6.12.1 through 6.12.5, inclusive) have occurred. Yes/No B. INDEBTEDNESS (Section 6.14.4) Aggregate outstanding principal amount of Indebtedness (excluding Capitalized Leases) incurred in connection with purchase money security interests [Maximum: $1,000,000] $___________ C. CAPITAL EXPENDITURES (Section 6.23). (1) The Capital Expenditures incurred during the previous fiscal year on a non-cumulative basis in the aggregate for the Borrower and its Subsidiaries [Maximum: $_______](5) $___________ D. RENTALS (Section 6.24). (1) The aggregate amount of obligations resulting from Rentals during the most recent fiscal year on a cumulative basis for the Borrower and its Subsidiaries. [Maximum 5% of Consolidated Total Assets] $___________ - ------------------ (5) See Section 6.23 of the Credit Agreement for the appropriate value. SCHEDULE II TO COMPLIANCE CERTIFICATE New Applications to Register Patentable Inventions, Trademarks and Copyrights SCHEDULE III TO COMPLIANCE CERTIFICATE New Commercial Tort Claims [Describe parties, case number (if applicable), nature of dispute] ANNEX A TO COMPLIANCE CERTIFICATE FORM OF INTELLECTUAL PROPERTY SECURITY AGREEMENT SUPPLEMENT This INTELLECTUAL PROPERTY SECURITY AGREEMENT SUPPLEMENT (this "IP Security Agreement Supplement") dated ________, _____, is made by the Person listed on the signature page hereof (the "Grantor") in favor of MORGAN STANLEY & CO. INCORPORATED ("MSI"), as collateral agent (the "Collateral Agent") for the Holders of Secured Obligations (as defined in the Credit Agreement referred to below). WHEREAS, HEADWATERS INCORPORATED, a Delaware corporation, has entered into a Credit Agreement dated as of September 8, 2004 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), with, among others, MORGAN STANLEY SENIOR FUNDING, INC., as Administrative Agent, MSI, as Collateral Agent, and the Lenders party thereto. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as defined in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Grantor and certain other Persons have executed and delivered that certain First Lien Pledge and Security Agreement dated September 8, 2004 made by the Grantor and such other Persons to the Collateral Agent (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Security Agreement") and that certain Intellectual Property Security Agreement dated September 8, 2004 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "IP Security Agreement"). WHEREAS, under the terms of the Security Agreement, the Grantor has granted to the Collateral Agent, for the ratable benefit of the Holders of Secured Obligations, a security interest in the Additional Collateral (as defined in Section 1 below) of the Grantor and has agreed as a condition thereof to execute this IP Security Agreement Supplement for recording with the U.S. Patent and Trademark Office, the United States Copyright Office and other governmental authorities. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor agrees as follows: SECTION 1. Grant of Security. Each Grantor hereby grants to the Collateral Agent, for the ratable benefit of the Holders of Secured Obligations, a security interest in all of such Grantor's right, title and interest in and to the patents, trademarks, copyrights and license agreements set forth in Schedule A hereto (the "Additional Collateral"). SECTION 2. Supplement to Security Agreement. Exhibit B to the Security Agreement is, effective as of the date hereof, hereby supplemented to add to such Schedule the Additional Collateral. SECTION 3. Security for Obligations. The grant of a security interest in the Additional Collateral by the Grantor under this IP Security Agreement Supplement secures the payment of all Obligations of the Grantor now or hereafter existing under or in respect of the Loan Documents, whether direct or indirect, absolute or contingent, and whether for principal, reimbursement obligations, interest, premiums, penalties, fees, indemnifications, contract causes of action, costs, expenses or otherwise. Upon the termination of the pledge and security interest granted under the Security Agreement in accordance with Section 7.4 of the Security Agreement, the Collateral Agent shall execute, acknowledge, and deliver to the Grantor an instrument in writing releasing the security interest in Additional Collateral acquired under this IP Security Agreement Supplement. SECTION 4. Recordation. The Grantor authorizes and requests that the Register of Copyrights, the Commissioner for Patents and the Commissioner for Trademarks and any other applicable government officer to record this IP Security Agreement Supplement. SECTION 5. Grants, Rights and Remedies. This IP Security Agreement Supplement has been entered into in conjunction with the provisions of the Security Agreement. The Grantor does hereby acknowledge and confirm that the grant of the security interest hereunder to, and the rights and remedies of, the Collateral Agent with respect to the Additional Collateral are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated herein by reference as if fully set forth herein. SECTION 6. Governing Law. This IP Security Agreement Supplement shall be governed by, and construed in accordance with, the laws of the State of New York. WITNESS WHEREOF, the Grantor has caused this IP Security Agreement Supplement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. [NAME OF GRANTOR] By Name: Title: Address for Notices: ANNEX B TO COMPLIANCE CERTIFICATE FORM OF PLEDGE AND SECURITY AGREEMENT SUPPLEMENT This PLEDGE AND SECURITY AGREEMENT SUPPLEMENT (this "Supplement") dated ________, ____, is made by the Person listed on the signature page hereof (the "Grantor") in favor of MORGAN STANLEY & CO. INCORPORATED, as collateral agent (the "Collateral Agent") for the Holders of Secured Obligations (as defined in the Credit Agreement referred to below). WHEREAS, HEADWATERS INCORPORATED, a Delaware corporation, has entered into a Credit Agreement dated as of September 8, 2004 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), with among others, MORGAN STANLEY SENIOR FUNDING, INC., as administrative agent, the Collateral Agent, and the Lenders party thereto. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as defined in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Grantor and certain other Persons have executed and delivered that certain First Lien Pledge and Security Agreement dated September 8, 2004 made by the Grantor and such other Persons to the Collateral Agent (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Security Agreement"). WHEREAS, the Grantor has identified a new commercial tort claim that is listed and described on Schedule I hereto as belonging to it (the "Additional Collateral"). WHEREAS, under the terms of the Security Agreement, the Grantor has agreed to execute and deliver to the Collateral Agent a supplement to the Security Agreement to evidence the grant of a security interest in the Additional Collateral. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor agrees as follows: SECTION 1. Security. The Grantor hereby grants to the Collateral Agent, on behalf of and for the ratable benefit of the Holders of Secured Obligations, a security interest in all of the Grantor's right, title and interest, in and to the Additional Collateral. SECTION 2. Supplement to Security Agreement. Exhibit E to the Security Agreement is, effective as of the date hereof, hereby supplemented to add to such Exhibit the Additional Collateral. SECTION 3. Security for Obligations. The grant of a security interest in the Additional Collateral by the Grantor under this Supplement secures the payment of all Obligations of the Grantor now or hereafter existing under or in respect of the Loan Documents, whether direct or indirect, absolute or contingent, and whether for principal, reimbursement obligations, interest, premiums, penalties, fees, indemnifications, contract causes of action, costs, expenses or otherwise. Upon the termination of the pledge and security interest granted under the Security Agreement in accordance with Section 7.4 of the Security Agreement, the Collateral Agent shall execute, acknowledge, and deliver to the Grantor an instrument in writing releasing the security interest in Additional Collateral acquired under this Supplement. SECTION 4. Perfection. The Grantor agrees to perform all acts necessary to perfect the Collateral Agent's security interest in the Additional Collateral, including the filing of a UCC-1 naming the Collateral Agent as secured party and describing the collateral in a manner sufficient to perfect the Collateral Agent's security interest in the Additional Collateral under the Uniform Commercial Code. SECTION 5. Grants, Rights and Remedies. This Supplement has been entered into in conjunction with the provisions of the Security Agreement. The Grantor does hereby acknowledge and confirm that the grant of the security interest hereunder to, and the rights and remedies of, the Collateral Agent with respect to the Additional Collateral are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated herein by reference as if fully set forth herein. SECTION 6. Governing Law. This Supplement shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the Grantor has caused this Supplement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. [NAME OF GRANTOR] By Name: Title: SCHEDULE I TO THE FORM OF PLEDGE AND SECURITY AGREEMENT SUPPLEMENT [Described Commercial Tort Claim] EXHIBIT C FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT This Assignment and Assumption (the "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full. For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below, the interest in and to all of the Assignor's rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto that represents the amount and percentage interest identified below of all of the Assignor's outstanding rights and obligations under the respective facilities identified below (including, without limitation, any letters of credit, guaranties and swingline loans included in such facilities and, to the extent permitted to be assigned under applicable law, all claims (including without limitation contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity), suits, causes of action and any other right of the Assignor against any Person whether known or unknown arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby) (the "Assigned Interest"). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor. 1. Assignor:____________________________________________________________________ 2. Assignee:_____________________________________ [and is an Affiliate/Approved Fund of [identify Lender](6) 3. Borrower: HEADWATERS INCORPORATED 4. Agent: Morgan Stanley Senior Funding, Inc. as the Administrative Agent under the Credit Agreement _____________________________________________________________________________ 5. Credit Agreement: The Credit Agreement dated as of September 8, 2004 among the Borrower, the Lenders, and the Administrative Agent. 6. Assigned Interest:
- ------------------ ------------------------ ----------------- ----------------------- Aggregate Amount of Amount of Commitment/Loans for all Commitment/Loans Percentage Assigned of Facility Assigned Lenders* Assigned* Commitment/Loans(7) - ------------------ ------------------------ ----------------- ----------------------- ____________(8) $ $ _______% ____________ $ $ _______% ____________ $ $ _______% - ------------------ ------------------------ ----------------- -----------------------
7. Trade Date: (9)______________________________________________________________ Effective Date: ____________, 20__ [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER BY THE ADMINISTRATIVE AGENT.] The terms set forth in this Assignment and Assumption are hereby agreed to: ASSIGNOR [NAME OF ASSIGNOR] By: -------------------------------------- Title: ASSIGNEE [NAME OF ASSIGNEE] By: -------------------------------------- Title: [Consented to and](10) Accepted: MORGAN STANLEY SENIOR FUNDING, INC., as Administrative Agent By: ___________________________ Title: [Consented to:](11) [HEADWATERS INCORPORATED, as Borrower] By: ___________________________ Title: - ---------------------- (6) Select as applicable. *Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. (7) Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder. (8) Fill in the appropriate terminology for the types of facilities under the Credit Agreement that are being assigned under this Agreement (e.g. Revolving Loan Commitment, Term Loan B Commitment, etc.). (9) Insert if satisfaction of minimum amounts is to be determined as of the Trade Date. (10) To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement. (11) To be added only if the consent of the Borrower is required by the terms of the Credit Agreement. ANNEX 1 TERMS AND CONDITIONS FOR ASSIGNMENT AND ASSUMPTION 1. Representations and Warranties. 1.1 Assignor. The Assignor represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency, perfection, priority, collectibility, or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document, (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document, (v) inspecting any of the property, books or records of the Borrower, or any guarantor, or (vi) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loans or the Loan Documents. 1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iii) agrees that its payment instructions and notice instructions are as set forth in Schedule 1 to this Assignment and Assumption, (iv) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be "plan assets" under ERISA, (v) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment and Assumption, (vi) it has received a copy of the Credit Agreement, together with copies of financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (vii) attached as Schedule 1 to this Assignment and Assumption is any documentation required to be delivered by the Assignee with respect to its tax status pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. 2. Payments. The Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date. 3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the internal law of the State of New York. SCHEDULE 1 ADMINISTRATIVE QUESTIONNAIRE (Schedule to be supplied by Closing Unit or Trading Documentation Unit) US AND NON-US TAX INFORMATION REPORTING REQUIREMENTS (Schedule to be supplied by Closing Unit or Trading Documentation Unit) EXHIBIT D FORM OF LOAN/ CREDIT RELATED MONEY TRANSFER INSTRUCTIONS To Morgan Stanley Senior Funding, Inc., as Administrative Agent (the "Administrative Agent") under the Credit Agreement described below. Re: Credit Agreement, dated as of September 8, 2004 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Headwaters Incorporated (the "Borrower"), the Lenders, and the Administrative Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. The Administrative Agent is specifically authorized and directed to act upon the following standing money transfer instructions with respect to the proceeds of Advances or other extensions of credit from time to time until receipt by the Administrative Agent of a specific written revocation of such instructions by the Borrower, provided, however, that the Administrative Agent may otherwise transfer funds as hereafter directed in writing by the Borrower in accordance with Section 13.1 of the Credit Agreement or based on any telephonic notice made in accordance with Section 2.14 of the Credit Agreement. Facility Identification Number(s)______________________________________________ Customer/Account Name Headwaters Incorporated Transfer Funds To _____________________________________________________________ For Account No.________________________________________________________________ Reference/Attention To_________________________________________________________ Authorized Officer (Customer Representative) Date __________________ _____________________________________________ ____________________________ (Please Print) Signature Bank Officer Name Date________________________ _____________________________________________ ____________________________ (Please Print) Signature EXHIBIT E-1 FORM OF PROMISSORY NOTE FOR REVOLVING LOAN $________________ September [__], 2004 HEADWATERS INCORPORATED, a Delaware corporation (the "Borrower"), promises to pay to the order of [LENDER] or its registered assigns (the "Lender") the aggregate unpaid principal amount of all Revolving Loans made by the Lender to Borrower pursuant to the Agreement (as hereinafter defined), in immediately available funds at the place specified pursuant to Article II of the Agreement, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay, in Dollars, the principal of and accrued and unpaid interest on the Revolving Loans in full on the Revolving Loan Termination Date and shall make such mandatory payments as are required to be made under the terms of Article II of the Agreement. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Revolving Loan and the date and amount of each principal payment hereunder. This Revolving Loan Note (this "Note") is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement, dated as of September 8, 2004 (which, as it may be amended, restated, supplemented or otherwise modified and in effect from time to time, is herein called the "Agreement"), among the Borrower, the Lenders and Morgan Stanley Senior Funding, Inc., as Administrative Agent (the "Administrative Agent"), to which Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. This Note is equally and ratably secured by the Collateral Documents. Reference is hereby made to the Collateral Documents for a description of the collateral thereby mortgaged, warranted, bargained, sold, releases, conveyed, assigned, transferred, pledged and hypothecated, the nature and extent of the security for this Note, the rights of the holder of this Note, the Administrative Agent in respect of such security and otherwise. This Note shall be governed by, and construed in accordance with, the internal laws, but without regard to the conflict of law provisions, of the State of New York, but giving effect to federal laws applicable to national banks. HEADWATERS INCORPORATED, as Borrower By: ________________________________ Name: Title: SCHEDULE OF REVOLVING LOANS AND PAYMENTS OF PRINCIPAL TO REVOLVING LOAN NOTE OF HEADWATERS INCORPORATED DATED [___________] Principal Principal Amount of Amount Unpaid Date Revolving Loan Paid Balance - ---------------- ---------------------- -------------------- ------------------- EXHIBIT E-2 FORM OF TERM LOAN NOTE $_____________ September [__], 2004 HEADWATERS INCORPORATED, a Delaware corporation (the "Borrower"), promises to pay to the order of [LENDER] or its registered assigns (the "Lender") the aggregate unpaid principal amount of the Term Loan made by the Lender to Borrower pursuant to Article II of the Agreement (as hereinafter defined), in immediately available funds at the main office of Morgan Stanley Senior Funding, Inc., as Administrative Agent (the "Administrative Agent"), together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay, in Dollars, the principal of and accrued and unpaid interest on the Term Loan in full on the Term Loan Maturity Date. The principal indebtedness evidenced hereby shall be payable in installments as set forth in Article II of the Agreement with a final installment payable on the Term Loan Maturity Date. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of the Term Loan and the date and amount of each principal payment hereunder. This Term Loan Note (this "Note") is one of the Notes issued pursuant to, and is entitled to the benefits of, the Credit Agreement, dated as of September 8, 2004 (which, as it may be amended, restated, supplemented or otherwise modified and in effect from time to time, is herein called the "Agreement"), among the Borrower, the Lenders and the Administrative Agent, to which Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. This Note is secured by the Collateral Documents. Reference is hereby made to the Collateral Documents for a description of the collateral thereby mortgaged, warranted, bargained, sold, releases, conveyed, assigned, transferred, pledged and hypothecated, the nature and extent of the security for this Note, the rights of the holder of this Note, the Administrative Agent in respect of such security and otherwise. This Note shall be governed by, and construed in accordance with, the internal laws, but without regard to the conflict of law provisions, of the State of New York, but giving effect to federal laws applicable to national banks. HEADWATERS INCORPORATED, as the Borrower By: ________________________________ Name: Title: SCHEDULE OF TERM LOANS AND PAYMENTS OF PRINCIPAL TO TERM LOAN NOTE OF HEADWATERS INCORPORATED DATED [________] Principal Maturity Principal Amount of of Interest Amount Unpaid Date Term Loan Period Paid Balance - -------------- ----------------- ----------------- --------------- ------------- EXHIBIT F FORM OF OFFICER'S CERTIFICATE OFFICER'S CERTIFICATE I, the undersigned, hereby certify to the Administrative Agent and the Lenders (each as defined below) that I am the _________________ of HEADWATERS INCORPORATED, a corporation duly organized and existing under the laws of the State of Delaware (the "Borrower"). Capitalized terms used herein and not otherwise defined herein are as defined in that certain Credit Agreement dated as of September 8, 2004 by and among the Borrower, the institutions from time to time parties thereto as Lenders (the "Lenders") and Morgan Stanley Senior Funding, Inc., as the "Administrative Agent" (as the same may be amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"). Capitalized terms used herein shall have the meanings set forth in the Credit Agreement. I further certify to the Administrative Agent and the Lenders, as such officer and not individually, that, pursuant to Section 6.1.3 of the Credit Agreement, as of the date hereof: 1. No Default or Unmatured Default exists [other than the following (describe the nature of the Default or Unmatured Default and the status thereof)]. IN WITNESS WHEREOF, I hereby subscribe my name on behalf of the Borrower on this ____ day of ___________, 200_. HEADWATERS INCORPORATED, as Borrower By:_________________________ [Insert Name of Officer] EXHIBIT G CLOSING DOCUMENTS NOT OTHERWISE LISTED IN SECTION 4.1 Capitalized terms used herein shall have the meaning ascribed to them in the Credit Agreement (the "Credit Agreement") by and among Headwaters Incorporated, a Delaware corporation (the "Borrower"), the institutions from time to time parties thereto as Lenders (the "Lenders"), Morgan Stanley Senior Funding, Inc., as Administrative Agent, Joint Lead Arranger, and Joint Book Runner, Morgan Stanley & Co. Incorporated as Collateral Agent and JPMorgan Chase Bank as Syndication Agent, Joint Lead Arranger and Joint Lead Bookrunner. 1. Guaranty made by each Guarantor (each such Guarantor and the Borrower, herein being the "U.S. Credit Parties") in favor of the Agent for the benefit of the Holders of Secured Obligations. 2. First Lien Pledge and Security Agreement executed by each U.S. Credit Party evidencing its grant of a security interest in substantially all of its respective personal property in favor of the Agent for the benefit of the Holders of Secured Obligations, together with: (a) To the extent they exist, certificates representing the pledged Securities referred to therein accompanied by undated stock powers executed in blank; (b) The originals of all Instruments referred to therein indorsed in blank; (c) UCC, tax and judgment lien search reports naming each U.S. Credit Party from the appropriate offices in those jurisdictions deemed necessary or advisable by the Administrative Agent, and copies of all effective financing statements filed in such jurisdictions that list any of the U.S. Credit Parties as debtors; (d) UCC Financing Statements naming each U.S. Credit Party as debtor and the Agent as secured party as filed with the appropriate offices in those jurisdictions deemed necessary or advisable by the Administrative Agent in order to perfect and protect the first priority liens and security interests created under the Pledge and Security Agreement; (e) Evidence of the terms of the insurance required by the Credit Agreement; and (f) Evidence of completion of all other filings of or with respect to the Pledge and Security Agreement that the Collateral Agent may deem necessary or desirable in order to perfect and protect the Liens created thereby. (3) Intercreditor Agreement executed by the Borrower, the First Lien Administrative Agent, the Second Lien Administrative Agent, the First Lien Collateral Agent and the Second Lien Collateral Agent. (4) Intellectual Property Security Agreement made by the U.S. Credit Parties, in favor of the Agent for the benefit of the Holders of Secured Obligations. (5) Good Standing Certificates (or the equivalent thereof) for each U.S. Credit Party from its respective jurisdiction of organization and those other jurisdictions where its ownership, lease or operation of properties or the conduct of its business requires it to be qualified to do business and in good standing, dated near the closing date together with bring downs dated the Closing Date. (6) Opinion letters of the Borrower's and the other US Credit Parties' domestic counsel Pillsbury Winthrop LLP, addressed to the Agent and the Lenders, relating to, among other things, enforceability, creation and perfection of security interests (with respect to US Credit Parties organized under the laws of the States of Delaware, Texas and California), and non-contravention of applicable laws or of the indenture in respect of Tapco's 12 1/2% notes. (7) Opinion letters of local counsel to the U.S. Credit Parties addressed to the Agent and the Lenders, relating to, among other things, perfection of security interests, good standing, incorporation, due authorization and non-contravention of laws or organizational documents, etc. with respect to U.S. Credit Parties organized in states other than Delaware, Texas and California, as agreed between the Borrower and the Lenders, except as may be otherwise provided in the opinion referred to in paragraph 8 below. (8) Opinion letter of in-house counsel to the U.S. Credit Parties (other than Tapco and its Subsidiaries) addressed to the Agent and the Lenders, relating to, among other things, good standing, incorporation, due authorization and non-contravention of organizational documents. EXHIBIT H DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING ([____________]) by and from [ ], "Grantor" to [_____________], "Trustee" for the benefit of MORGAN STANLEY & CO. INCORPORATED, in its capacity as Agent, "Beneficiary" Dated as of [_______________], 2004 Location: [____________] Municipality: [____________] County: [____________] State: [____________] THE SECURED PARTY (BENEFICIARY) DESIRES THIS FIXTURE FILING TO BE INDEXED AGAINST THE RECORD OWNER OF THE REAL ESTATE DESCRIBED HEREIN. PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: Shearman & Sterling LLP 599 Lexington Avenue New York, New York 10022-6069 Attention: Malcolm M. Kratzer, Esq. File #5822/2942 DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING ([____________]) THIS DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING ([____________]) (this "Deed of Trust") is dated as of [______], 2004 by and from [_____________], a [___________] [corporation][limited partnership] ("Grantor"), whose address is [__________________], to [__________________], a [__________________] ("Trustee"), with an address at [________________________], for the benefit of MORGAN STANLEY & CO. INCORPORATED, a ________, as collateral agent (in such capacity, "Agent" or "Collateral Agent") for the Lenders as defined in the Credit Agreement (defined below), having an address at 1633 Broadway, 25th Floor, New York, New York 10019 (Agent, together with its successors and assigns, "Beneficiary"). ARTICLE 1 DEFINITIONS Section 1.1 Definitions. All capitalized terms used herein without definition shall have the respective meanings ascribed to them in that certain Credit Agreement dated as of September 8, 2004 as the same may be amended, amended and restated, supplemented or otherwise modified from time to time (the "Credit Agreement"), among Headwaters Incorporated ("Borrower"), Agent, Morgan Stanley Senior Funding, Inc., ("Administrative Agent"), the Lenders identified therein and certain other parties named therein. As used herein, the following terms shall have the following meanings: (a) "Event of Default": An Event of Default under and as defined in the Credit Agreement. (b) "Guaranty": That certain Guaranty Agreement by and from Grantor and the other guarantors referred to therein for the benefit of the Lender Parties dated as of even date herewith, as the same may hereafter be amended, amended and restated, supplemented or otherwise modified from time to time. (c) "Indebtedness": (1) All indebtedness of Grantor to Beneficiary or any of the other Lender Parties under the Credit Agreement or any other Loan Document, including, without limitation (except as otherwise set forth in Section 2(b) of the Guaranty Agreement), the sum of all (a) principal, interest and other amounts owing under or evidenced or secured by the Loan Documents, (b) principal, interest and other amounts which may hereafter be lent by Beneficiary or any of the other Lender Parties under or in connection with the Credit Agreement or any of the other Loan Documents, whether evidenced by a promissory note or other instrument which, by its terms, is secured hereby, and (c) obligations and liabilities of any nature now or hereafter existing under or arising in connection with Facility LCs and other extensions of credit under the Credit Agreement or any of the other Loan Documents and reimbursement obligations in respect thereof, together with interest and other amounts payable with respect thereto, and (2) all other indebtedness, obligations and liabilities now or hereafter existing of any kind of Grantor to Beneficiary or any of the other Lender Parties under documents which recite that they are intended to be secured by this Deed of Trust. The Indebtedness secured hereby includes, without limitation, all interest and expenses accruing after the commencement by or against Grantor or any of its affiliates of a proceeding under the Bankruptcy Code (defined below) or any similar law for the relief of debtors. The Credit Agreement contains a revolving credit facility which permits Borrower to borrow certain principal amounts, repay all or a portion of such principal amounts, and reborrow the amounts previously paid to the Lender Parties, all upon satisfaction of certain conditions stated in the Credit Agreement. This Deed of Trust secures all advances and re-advances under the Credit Agreement, including, without limitation, those under the revolving credit facility contained therein. (d) "Lender Parties": Any Lender, Administrative Agent and Collateral Agent. (e) "Mortgaged Property": The fee interest in the real property described in Exhibit A attached hereto and incorporated herein by this reference, together with any greater estate therein as hereafter may be acquired by Grantor (the "Land"), and all of Grantor's right, title and interest in and to (1) all improvements now owned or hereafter acquired by Grantor, now or at any time situated, placed or constructed upon the Land (the "Improvements"; the Land and Improvements are collectively referred to as the "Premises"), (2) all materials, supplies, equipment, apparatus and other items of personal property now owned or hereafter acquired by Grantor and now or hereafter attached to, installed in or used in connection with any of the Improvements or the Land, and water, gas, electrical, telephone, storm and sanitary sewer facilities and all other utilities whether or not situated in easements (the "Fixtures"), (3) all goods, accounts, inventory, general intangibles, instruments, documents, contract rights and chattel paper, including all such items as defined in the UCC (defined below), now owned or hereafter acquired by Grantor and now or hereafter affixed to, placed upon, used in connection with, arising from or otherwise related to the Premises (the "Personalty"), (4) all reserves, escrows or impounds required under the Credit Agreement or any of the other Loan Documents and all deposit accounts maintained by Grantor with respect to the Mortgaged Property (the "Deposit Accounts"), (5) all leases, licenses, concessions, occupancy agreements or other agreements (written or oral, now or at any time in effect) which grant to any Person a possessory interest in, or the right to use, all or any part of the Mortgaged Property, together with all related security and other deposits (the "Leases"), (6) all of the rents, revenues, royalties, income, proceeds, profits, accounts receivable, security and other types of deposits, and other benefits paid or payable by parties to the Leases for using, leasing, licensing possessing, operating from, residing in, selling or otherwise enjoying the Mortgaged Property (the "Rents"), (7) all other agreements, such as construction contracts, architects' agreements, engineers' contracts, utility contracts, maintenance agreements, management agreements, service contracts, listing agreements, guaranties, warranties, permits, licenses, certificates and entitlements in any way relating to the construction, use, occupancy, operation, maintenance, enjoyment or ownership of the Mortgaged Property (the "Property Agreements"), (8) all rights, privileges, tenements, hereditaments, rights-of-way, easements, appendages and appurtenances appertaining to the foregoing, (9) all property tax refunds payable with respect to the Mortgaged Property (the "Tax Refunds"), (10) all accessions, replacements and substitutions for any of the foregoing and all proceeds thereof (the "Proceeds"), (11) all insurance policies, unearned premiums therefor and proceeds from such policies covering any of the above property now or hereafter acquired by Grantor (the "Insurance"), and (12) all awards, damages, remunerations, reimbursements, settlements or compensation heretofore made or hereafter to be made by any governmental authority pertaining to any condemnation or other taking (or any purchase in lieu thereof) of all or any portion of the Land, Improvements, Fixtures or Personalty (the "Condemnation Awards"). As used in this Deed of Trust, the term "Mortgaged Property" shall mean all or, where the context permits or requires, any portion of the above or any interest therein. (f) "Obligations": All of the agreements, covenants, conditions, warranties, representations and other obligations of Grantor (including, without limitation, the obligation to repay the Indebtedness) under the Credit Agreement and the other Loan Documents to which it is a party. (g) "Permitted Liens": Liens described in Section 6.15 of the Credit Agreement other than those Liens described in Sections 6.15.9 and 6.15.17. (h) "Security Agreement": That certain Security Agreement by and from Grantor and the other grantors referred to therein to Agent and the other Lender 2 Parties dated as of even date herewith, as the same may hereafter be amended, amended and restated, supplemented or otherwise modified from time to time. (i) "UCC": The Uniform Commercial Code of [________________] or, if the creation, perfection and enforcement of any security interest herein granted is governed by the laws of a state other than [___________________], then, as to the matter in question, the Uniform Commercial Code in effect in that state. ARTICLE 2 GRANT SECTION 2.1 Grant. To secure the full and timely payment of the Indebtedness and the full and timely performance of the Obligations, Grantor GRANTS, BARGAINS, ASSIGNS, SELLS, CONVEYS and CONFIRMS, to Trustee the Mortgaged Property, subject, however, only to the matters that are set forth on Exhibit B attached hereto (the "Permitted Encumbrances") and to Permitted Liens, TO HAVE AND TO HOLD the Mortgaged Property, IN TRUST, WITH POWER OF SALE, and Grantor does hereby bind itself, its successors and assigns to WARRANT AND FOREVER DEFEND the title to the Mortgaged Property unto Trustee. ARTICLE 3 WARRANTIES, REPRESENTATIONS AND COVENANTS Grantor warrants, represents and covenants to Beneficiary as follows: SECTION 3.1 Title to Mortgaged Property and Lien of this Instrument. Grantor owns the Mortgaged Property free and clear of any liens, claims or interests, except the Permitted Encumbrances and the Permitted Liens. This Deed of Trust creates valid, enforceable first priority liens and security interests against the Mortgaged Property. SECTION 3.2 First Lien Status. Grantor shall preserve and protect the first lien and security interest status of this Deed of Trust and the other Loan Documents. If any lien or security interest other than a Permitted Encumbrance or a Permitted Lien is asserted against the Mortgaged Property, Grantor shall promptly, and at its expense, (a) give Beneficiary a detailed written notice of such lien or security interest (including origin, amount and other terms), and (b) pay the underlying claim in full or take such other action so as to cause it to be released or contest the same in compliance with the requirements of the Credit Agreement (including the requirement of providing a bond or other security satisfactory to Beneficiary). SECTION 3.3 Payment and Performance. Grantor shall pay the Indebtedness when due under the Credit Agreement and the other Loan Documents and shall perform the Obligations in full when they are required to be performed. SECTION 3.4 Replacement of Fixtures and Personalty. Grantor shall not, without the prior written consent of Beneficiary, permit any of the Fixtures or Personalty owned or leased by Grantor to be removed at any time from the Land or Improvements, unless the removed item is removed temporarily for maintenance and repair or is permitted to be removed by the Credit Agreement. 3 SECTION 3.5 Inspection. Grantor shall permit Beneficiary and the other Lender Parties and their respective agents, representatives and employees, upon reasonable prior notice to Grantor, to inspect the Mortgaged Property and all books and records of Grantor located thereon, and to conduct such environmental and engineering studies as Beneficiary or the other Lender Parties may require, provided that such inspections and studies shall not materially interfere with the use and operation of the Mortgaged Property. SECTION 3.6 Other Covenants. All of the covenants in the Credit Agreement are incorporated herein by reference and, together with covenants in this Article 3, shall be covenants running with the Land. SECTION 3.7 Insurance; Condemnation Awards and Insurance Proceeds. (a) Insurance. Grantor shall maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to the Mortgaged Property against loss or damage of the kinds customarily carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses. Each such policy of insurance shall name Beneficiary as the loss payee (or, in the case of liability insurance, an additional insured) thereunder for the ratable benefit of the Lender Parties, shall (except in the case of liability insurance) name Beneficiary as the "mortgagee" under a so-called "New York" long form non-contributory endorsement and shall provide for at least 30 days' prior written notice of any material modification or cancellation of such policy. In addition to the foregoing, if any portion of the Mortgaged Property is located in an area identified by the Federal Emergency Management Agency as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968 (or any amendment or successor act thereto), then Grantor shall maintain, or cause to be maintained, with a financially sound and reputable insurer, flood insurance in an amount sufficient to comply with all applicable rules and regulations promulgated pursuant to such Act. (b) Condemnation Awards. Grantor assigns all Condemnation Awards to Beneficiary and authorizes Beneficiary to collect and receive such Condemnation Awards and to give proper receipts and acquittances therefor, subject to the terms of the Credit Agreement (including, without limitation, Section 2.2(b) thereof). (c) Insurance Proceeds. Grantor assigns to Beneficiary all proceeds of any insurance policies insuring against loss or damage to the Mortgaged Property. Subject to the terms of the Credit Agreement (including, without limitation, Section 2.2(b) thereof), Grantor authorizes Beneficiary to collect and receive such proceeds and authorizes and directs the issuer of each of such insurance policies to make payment for all such losses directly to Beneficiary, instead of to Grantor and Beneficiary jointly. ARTICLE 4 [Intentionally Omitted] 4 ARTICLE 5 DEFAULT AND FORECLOSURE SECTION 5.1 Remedies. Upon the occurrence and during the continuance of an Event of Default, Beneficiary may, at Beneficiary's election and by or through Trustee or otherwise, exercise any or all of the following rights, remedies and recourses: (a) Acceleration. Subject to any provisions of the Loan Documents providing for the automatic acceleration of the Indebtedness upon the occurrence of certain Events of Default, declare the Indebtedness to be immediately due and payable, without further notice, presentment, protest, notice of intent to accelerate, notice of acceleration, demand or action of any nature whatsoever (each of which hereby is expressly waived by Grantor), whereupon the same shall become immediately due and payable. (b) Entry on Mortgaged Property. Enter the Mortgaged Property and take exclusive possession thereof and of all books, records and accounts relating thereto or located thereon. If Grantor remains in possession of the Mortgaged Property following the occurrence and during the continuance of an Event of Default and without Beneficiary's prior written consent, Beneficiary may invoke any legal remedies to dispossess Grantor. (c) Operation of Mortgaged Property. Hold, lease, develop, manage, operate or otherwise use the Mortgaged Property upon such terms and conditions as Beneficiary may deem reasonable under the circumstances (making such repairs, alterations, additions and improvements and taking other actions, from time to time, as Beneficiary deems necessary or desirable), and apply all Rents and other amounts collected by Trustee or Beneficiary in connection therewith in accordance with the provisions of Section 5.7. (d) Foreclosure and Sale. Institute proceedings for the complete foreclosure of this Deed of Trust by judicial action or by power of sale, in which case the Mortgaged Property may be sold for cash or credit in one or more parcels as Beneficiary may determine. With respect to any notices required or permitted under the UCC, Grantor agrees that ten (10) days' prior written notice shall be deemed commercially reasonable. At any such sale by virtue of any judicial proceedings, power of sale, or any other legal right, remedy or recourse, the title to and right of possession of any such property shall pass to the purchaser thereof, and to the fullest extent permitted by law, Grantor shall be completely and irrevocably divested of all of its right, title, interest, claim, equity, equity of redemption, and demand whatsoever, either at law or in equity, in and to the property sold and such sale shall be a perpetual bar both at law and in equity against Grantor, and against all other Persons claiming or to claim the property sold or any part thereof, by, through or under Grantor. Beneficiary or any of the other Lender Parties may be a purchaser at such sale. If Beneficiary or such other Lender Party is the highest bidder, Beneficiary or such other Lender Party may credit the portion of the purchase price that would be distributed to Beneficiary or such other Lender Party against the Indebtedness in lieu of paying cash. In the event this Deed of Trust is foreclosed by judicial action, appraisement of the Mortgaged Property is waived. (e) Receiver. Make application to a court of competent jurisdiction for, and obtain from such court as a matter of strict right and without notice to Grantor or regard to the adequacy of the Mortgaged Property for the repayment of the Indebtedness, the appointment of a receiver of the Mortgaged Property, and Grantor irrevocably consents to such appointment. Any such receiver shall have all the usual powers and duties of receivers in similar cases, including the full power to rent, maintain and otherwise operate the Mortgaged Property upon such terms as may be approved by the court, and shall apply such Rents in accordance with the provisions of Section 5.7. 5 (f) Other. Exercise all other rights, remedies and recourses granted under the Loan Documents or otherwise available at law or in equity. SECTION 5.2 Separate Sales. The Mortgaged Property may be sold in one or more parcels and in such manner and order as Trustee in its sole discretion may elect. The right of sale arising out of any Event of Default shall not be exhausted by any one or more sales. SECTION 5.3 Remedies Cumulative, Concurrent and Nonexclusive. Trustee, Beneficiary and the other Lender Parties shall have all rights, remedies and recourses granted in the Loan Documents and available at law or equity (including the UCC), which rights (a) shall be cumulative and concurrent, (b) may be pursued separately, successively or concurrently against Grantor or others obligated under the Loan Documents, or against the Mortgaged Property, or against any one or more of them, at the sole discretion of Trustee, Beneficiary or such other Lender Party, as the case may be, (c) may be exercised as often as occasion therefor shall arise, and the exercise or failure to exercise any of them shall not be construed as a waiver or release thereof or of any other right, remedy or recourse, and (d) are intended to be, and shall be, nonexclusive. No action by Trustee, Beneficiary or any other Lender Party in the enforcement of any rights, remedies or recourses under the Loan Documents or otherwise at law or equity shall be deemed to cure any Event of Default. SECTION 5.4 Release of and Resort to Collateral. Beneficiary may release, regardless of consideration and without the necessity for any notice to or consent by the holder of any subordinate lien on the Mortgaged Property, any part of the Mortgaged Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interest created in or evidenced by the Loan Documents or their status as a first and prior lien and security interest in and to the Mortgaged Property. For payment of the Indebtedness, Beneficiary may resort to any other security in such order and manner as Beneficiary may elect. SECTION 5.5 Waiver of Redemption, Notice and Marshalling of Assets. To the fullest extent permitted by law, Grantor hereby irrevocably and unconditionally waives and releases (a) all benefit that might accrue to Grantor by virtue of any present or future statute of limitations or law or judicial decision exempting the Mortgaged Property from attachment, levy or sale on execution or providing for any stay of execution, exemption from civil process, redemption or extension of time for payment, (b) all notices of any Event of Default or of any election by Trustee or Beneficiary to exercise or the actual exercise of any right, remedy or recourse provided for under the Loan Documents, and (c) any right to a marshalling of assets or a sale in inverse order of alienation. SECTION 5.6 Discontinuance of Proceedings. If Trustee, Beneficiary or any other Lender Party shall have proceeded to invoke any right, remedy or recourse permitted under the Loan Documents and shall thereafter elect to discontinue or abandon it for any reason, Trustee, Beneficiary or such other Lender Party, as the case may be, shall have the unqualified right to do so and, in such an event, Grantor, Trustee, Beneficiary and the other Lender Parties shall be restored to their former positions with respect to the Indebtedness, 6 the Obligations, the Loan Documents, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Trustee, Beneficiary and the other Lender Parties shall continue as if the right, remedy or recourse had never been invoked, but no such discontinuance or abandonment shall waive any Event of Default which may then exist or the right of Trustee, Beneficiary or any other Lender Party thereafter to exercise any right, remedy or recourse under the Loan Documents for such Event of Default. SECTION 5.7 Application of Proceeds. The proceeds of any sale of, and the Rents and other amounts generated by the holding, leasing, management, operation or other use of the Mortgaged Property, shall be applied by Beneficiary or Trustee (or the receiver, if one is appointed) in the following order unless otherwise required by applicable law: (a) to the payment of the costs and expenses of taking possession of the Mortgaged Property and of holding, using, leasing, repairing, improving and selling the same, including, without limitation (1) trustee's and receiver's fees and expenses, including the repayment of the amounts evidenced by any receiver's certificates, (2) court costs, (3) attorneys' and accountants' fees and expenses, and (4) costs of advertisement; (b) he payment of the Indebtedness and performance of the Obligations in such manner and order of preference as Beneficiary in its sole discretion may determine; and (c) balance, if any, to the Persons legally entitled thereto. SECTION 5.8 Occupancy After Foreclosure. Any sale of the Mortgaged Property or any part thereof in accordance with Section 5.1(d) will divest all right, title and interest of Grantor in and to the property sold. Subject to applicable law, any purchaser at a foreclosure sale will receive immediate possession of the property purchased. If Grantor retains possession of such property or any part thereof subsequent to such sale, Grantor will be considered a tenant at sufferance of the purchaser, and will, if Grantor remains in possession after demand to remove, be subject to eviction and removal, forcible or otherwise, with or without process of law. SECTION 5.9 Additional Advances and Disbursements; Costs of Enforcement. (a) Upon the occurrence and during the continuance of any Event of Default, Beneficiary and each of the other Lender Parties shall have the right, but not the obligation, to cure such Event of Default in the name and on behalf of Grantor. All sums advanced and expenses incurred at any time by Beneficiary or any other Lender Party under this Section 5.9, or otherwise under this Deed of Trust or any of the other Loan Documents or applicable law, shall bear interest from the date that such sum is advanced or expense incurred, to and including the date of reimbursement, computed at the highest rate at which interest is then computed on any portion of the Indebtedness, and all such sums, together with interest thereon, shall be secured by this Deed of Trust. (b) Grantor shall pay all expenses (including reasonable attorneys' fees and expenses) of or incidental to the perfection and enforcement of this Deed of Trust and the other Loan Documents, or the enforcement, compromise or settlement of the Indebtedness or any claim under this Deed of Trust and the other Loan Documents, and for the curing thereof, or for defending or asserting the rights and claims of Beneficiary in respect thereof, by litigation or otherwise. 7 SECTION 5.10 No Mortgagee in Possession. Neither the enforcement of any of the remedies under this Article 5, the assignment of the Rents and Leases under Article 6, the security interests under Article 7, nor any other remedies afforded to Beneficiary under the Loan Documents, at law or in equity shall cause Trustee, Beneficiary or any other Lender Party to be deemed or construed to be a mortgagee in possession of the Mortgaged Property, to obligate Trustee, Beneficiary or any other Lender Party to lease the Mortgaged Property or attempt to do so, or to take any action, incur any expense, or perform or discharge any obligation, duty or liability whatsoever under any of the Leases or otherwise. ARTICLE 6 ASSIGNMENT OF RENTS AND LEASES SECTION 6.1 Assignment. In furtherance of and in addition to the assignment made by Grantor in Section 2.1 of this Deed of Trust, Grantor hereby absolutely and unconditionally assigns, sells, transfers and conveys to Trustee (for the benefit of Beneficiary) and to Beneficiary all of its right, title and interest in and to all Leases, whether now existing or hereafter entered into, and all of its right, title and interest in and to all Rents. This assignment is an absolute assignment and not an assignment for additional security only. So long as no Event of Default shall have occurred and be continuing, Grantor shall have a revocable license from Trustee and Beneficiary to exercise all rights extended to the landlord under the Leases, including the right to receive and collect all Rents and to hold the Rents in trust for use in the payment and performance of the Obligations and to otherwise use the same. The foregoing license is granted subject to the conditional limitation that no Event of Default shall have occurred and be continuing. Upon the occurrence and during the continuance of an Event of Default, whether or not legal proceedings have commenced, and without regard to waste, adequacy of security for the Obligations or solvency of Grantor, the license herein granted shall automatically expire and terminate, without notice to Grantor by Trustee or Beneficiary (any such notice being hereby expressly waived by Grantor to the extent permitted by applicable law). SECTION 6.2 Perfection Upon Recordation. Grantor acknowledges that Beneficiary and Trustee have taken all actions necessary to obtain, and that upon recordation of this Deed of Trust Beneficiary and Trustee shall have, to the extent permitted under applicable law, a valid and fully perfected, first priority, present assignment of the Rents arising out of the Leases and all security for such Leases. Grantor acknowledges and agrees that upon recordation of this Deed of Trust Trustee's and Beneficiary's interest in the Rents shall be deemed to be fully perfected, "choate" and enforced as to Grantor and to the extent permitted under applicable law, all third parties, including, without limitation, any subsequently appointed trustee in any case under Title 11 of the United States Code (the "Bankruptcy Code"), without the necessity of commencing a foreclosure action with respect to this Deed of Trust, making formal demand for the Rents, obtaining the appointment of a receiver or taking any other affirmative action. SECTION 6.3 Bankruptcy Provisions. Without limitation of the absolute nature of the assignment of the Rents hereunder, Grantor, Trustee and Beneficiary agree that (a) this Deed of Trust shall constitute a "security agreement" for purposes of Section 552(b) of the Bankruptcy Code, (b) the security interest created by this Deed of Trust extends to property of Grantor 8 acquired before the commencement of a case in bankruptcy and to all amounts paid as Rents and (c) such security interest shall extend to all Rents acquired by the estate after the commencement of any case in bankruptcy. SECTION 6.4 No Merger of Estates. So long as part of the Indebtedness and the Obligations secured hereby remain unpaid and undischarged, the fee and leasehold estates to the Mortgaged Property shall not merge, but shall remain separate and distinct, notwithstanding the union of such estates either in Grantor, Beneficiary, any tenant or any third party by purchase or otherwise. ARTICLE 7 SECURITY AGREEMENT SECTION 7.1 Security Interest. This Deed of Trust constitutes a "security agreement" on personal property within the meaning of the UCC and other applicable law and with respect to the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards. To this end, Grantor grants to Beneficiary a first and prior security interest in the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance, Condemnation Awards and all other Mortgaged Property which is personal property to secure the payment of the Indebtedness and performance of the Obligations, and agrees that Beneficiary shall have all the rights and remedies of a secured party under the UCC with respect to such property. Any notice of sale, disposition or other intended action by Beneficiary with respect to the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards sent to Grantor at least ten (10) days prior to any action under the UCC shall constitute reasonable notice to Grantor. In the event of any inconsistency between the terms of this Deed of Trust and the terms of the Security Agreement with respect to the collateral covered both therein and herein, the Security Agreement shall control and govern to the extent of any such inconsistency. SECTION 7.2 Financing Statements. Grantor shall prepare and deliver to Beneficiary such financing statements, and shall execute and deliver to Beneficiary such other documents, instruments and further assurances, in each case in form and substance satisfactory to Beneficiary, as Beneficiary may, from time to time, reasonably consider necessary to create, perfect and preserve Beneficiary's security interest hereunder. Grantor hereby irrevocably authorizes Beneficiary to cause financing statements (and amendments thereto and continuations thereof) and any such documents, instruments and assurances to be recorded and filed, at such times and places as may be required or permitted by law to so create, perfect and preserve such security interest. Grantor represents and warrants to Beneficiary that Grantor's jurisdiction of organization is the State of [________________]. After the date of this Deed of Trust, Grantor shall not change its name, type of organization, organizational identification number (if any), jurisdiction of organization or location (within the meaning of the UCC) without giving at least thirty (30) days' prior written notice to Beneficiary. SECTION 7.3 Fixture Filing. This Deed of Trust shall also constitute a "fixture filing" for the purposes of the UCC against all of the Mortgaged Property which is or is to become fixtures. The information provided in this Section 7.3 is provided so that this Deed of Trust shall comply with the requirements of the UCC for a mortgage instrument to be filed as a financing 9 statement. Grantor is the "Debtor" and its name and mailing address are set forth in the preamble of this Deed of Trust immediately preceding Article 1. Beneficiary is the "Secured Party" and its name and mailing address from which information concerning the security interest granted herein may be obtained are also set forth in the preamble of this Deed of Trust immediately preceding Article 1. A statement describing the portion of the Mortgaged Property comprising the fixtures hereby secured is set forth in Section 1.1(c) of this Deed of Trust. Grantor represents and warrants to Beneficiary that Grantor is the record owner of the Mortgaged Property, the employer identification number of Grantor is [_____________] and the organizational identification number of Grantor is [____________]. ARTICLE 8 CONCERNING THE TRUSTEE SECTION 8.1 Certain Rights. With the approval of Beneficiary, Trustee shall have the right to select, employ and consult with counsel. Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by it hereunder, believed by it in good faith to be genuine. Trustee shall be entitled to reimbursement for actual, reasonable expenses incurred by it in the performance of its duties and to reasonable compensation for Trustee's services hereunder as shall be rendered. Grantor shall, from time to time, pay the compensation due to Trustee hereunder and reimburse Trustee for, and indemnify, defend and save Trustee harmless against, all liability and reasonable expenses which may be incurred by it in the performance of its duties, including those arising from joint, concurrent, or comparative negligence of Trustee; provided, however, that Grantor shall not be liable under such indemnification to the extent such liability or expenses result solely from Trustee's gross negligence or willful misconduct. Grantor's obligations under this Section 8.1 shall not be reduced or impaired by principles of comparative or contributory negligence. SECTION 8.2 Retention of Money. All moneys received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other moneys (except to the extent required by law), and Trustee shall be under no liability for interest on any moneys received by Trustee hereunder. SECTION 8.3 Successor Trustees. If Trustee or any successor Trustee shall die, resign or become disqualified from acting in the execution of this trust, or Beneficiary shall desire to appoint a substitute Trustee, Beneficiary shall have full power to appoint one or more substitute Trustees and, if preferred, several substitute Trustees in succession who shall succeed to all the estates, rights, powers and duties of Trustee. Such appointment may be executed by any authorized agent of Beneficiary and as so executed, such appointment shall be conclusively presumed to be executed with authority, valid and sufficient, without further proof of any action. SECTION 8.4 Perfection of Appointment. Should any deed, conveyance or instrument of any nature be required from Grantor by any successor Trustee to more fully and certainly vest in and confirm to such successor Trustee such estates, rights, powers and duties, then, upon request by such Trustee, all such deeds, conveyances and instruments shall be made, executed, acknowledged and delivered and shall be caused to be recorded and/or filed by Grantor. 10 SECTION 8.5 Trustee Liability. In no event or circumstance shall Trustee or any substitute Trustee hereunder be personally liable under or as a result of this Deed of Trust, either as a result of any action by Trustee (or any substitute Trustee) in the exercise of the powers hereby granted or otherwise. ARTICLE 9 MISCELLANEOUS SECTION 9.1 Notices. Any notice required or permitted to be given under this Deed of Trust shall be given in accordance with Section 13.1 of the Credit Agreement. SECTION 9.2 Covenants Running with the Land. All Obligations contained in this Deed of Trust are intended by Grantor, Beneficiary and Trustee to be, and shall be construed as, covenants running with the Land. As used herein, "Grantor" shall refer to the party named in the first paragraph of this Deed of Trust and to any subsequent owner of all or any portion of the Mortgaged Property. All Persons who may have or acquire an interest in the Mortgaged Property shall be deemed to have notice of, and be bound by, the terms of the Credit Agreement and the other Loan Documents; provided, however, that no such party shall be entitled to any rights thereunder without the prior written consent of Beneficiary. SECTION 9.3 Attorney-in-Fact. Grantor hereby irrevocably appoints Beneficiary as its attorney-in-fact, which agency is coupled with an interest and with full power of substitution, with full authority in the place and stead of Grantor and in the name of Grantor or otherwise (a) to execute and/or record any notices of completion, cessation of labor or any other notices that Beneficiary deems appropriate to protect Beneficiary's interest, if Grantor shall fail to do so within ten (10) days after written request by Beneficiary, (b) upon the issuance of a deed pursuant to the foreclosure of this Deed of Trust or the delivery of a deed in lieu of foreclosure, to execute all instruments of assignment, conveyance or further assurance with respect to the Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards in favor of the grantee of any such deed and as may be necessary or desirable for such purpose, (c) to prepare and file or record financing statements and continuation statements, and to prepare, execute and file or record applications for registration and like papers necessary to create, perfect or preserve Beneficiary's security interests and rights in or to any of the Mortgaged Property, and (d) after the occurrence and during the continuance of any Event of Default, to perform any obligation of Grantor hereunder; provided, however, that (1) Beneficiary shall not under any circumstances be obligated to perform any obligation of Grantor; (2) any sums advanced by Beneficiary in such performance shall be added to and included in the Indebtedness and shall bear interest at the highest rate at which interest is then computed on any portion of the Indebtedness; (3) Beneficiary as such attorney-in-fact shall only be accountable for such funds as are actually received by Beneficiary; and (4) Beneficiary shall not be liable to Grantor or any other person or entity for any failure to take any action which it is empowered to take under this Section 9.3. SECTION 9.4 Successors and Assigns. This Deed of Trust shall be binding upon and inure to the benefit of Beneficiary, the Lender Parties, Trustee and Grantor and their respective successors and assigns. Grantor shall not, without the prior written consent of Beneficiary, assign any rights, duties or obligations hereunder. 11 SECTION 9.5 No Waiver. Any failure by Beneficiary, the other Lender Parties or Trustee to insist upon strict performance of any of the terms, provisions or conditions of the Loan Documents shall not be deemed to be a waiver of same, and Beneficiary, the other Lender Parties and Trustee shall have the right at any time to insist upon strict performance of all of such terms, provisions and conditions. SECTION 9.6 Credit Agreement. If any conflict or inconsistency exists between this Deed of Trust and the Credit Agreement, the Credit Agreement shall govern. SECTION 9.7 Release or Reconveyance. Upon payment in full of the Indebtedness and performance in full of the Obligations or upon a sale or other disposition of the Mortgaged Property permitted by the Credit Agreement, Beneficiary, at Grantor's request and expense, shall release the liens and security interests created by this Deed of Trust or reconvey the Mortgaged Property to Grantor. SECTION 9.8 Waiver of Stay, Moratorium and Similar Rights. Grantor agrees, to the full extent that it may lawfully do so, that it will not at any time insist upon or plead or in any way take advantage of any stay, marshalling of assets, extension, redemption or moratorium law now or hereafter in force and effect so as to prevent or hinder the enforcement of the provisions of this Deed of Trust or the Indebtedness or Obligations secured hereby, or any agreement between Grantor and Beneficiary or any rights or remedies of Trustee, Beneficiary or any other Lender Party. SECTION 9.9 Applicable Law. The provisions of this Deed of Trust regarding the creation, perfection and enforcement of the liens and security interests herein granted shall be governed by and construed under the laws of the state in which the Mortgaged Property is located. All other provisions of this Deed of Trust shall be governed by the laws of the State of New York (including, without limitation, Section 5-1401 of the General Obligations Law of the State of New York). SECTION 9.10 Headings. The Article, Section and Subsection titles hereof are inserted for convenience of reference only and shall in no way alter, modify or define, or be used in construing, the text of such Articles, Sections or Subsections. SECTION 9.11 Severability. If any provision of this Deed of Trust shall be held by any court of competent jurisdiction to be unlawful, void or unenforceable for any reason, such provision shall be deemed severable from and shall in no way affect the enforceability and validity of the remaining provisions of this Deed of Trust. SECTION 9.12 Entire Agreement. This Deed of Trust and the other Loan Documents embody the entire agreement and understanding between Grantor and Beneficiary relating to the subject matter hereof and thereof and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. 12 SECTION 9.13 Beneficiary as Agent; Successor Agents. (a) Agent has been appointed to act as Agent hereunder by the other Lender Parties. Agent shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of the Mortgaged Property) in accordance with the terms of the Credit Agreement, any related agency agreement among Agent and the other Lender Parties (collectively, as amended, amended and restated, supplemented or otherwise modified or replaced from time to time, the "Agency Documents") and this Deed of Trust. Grantor and all other Persons shall be entitled to rely on releases, waivers, consents, approvals, notifications and other acts of Agent, without inquiry into the existence of required consents or approvals of the Lender Parties therefor. (b) Beneficiary shall at all times be the same Person that is Agent under the Agency Documents. Written notice of resignation by Agent pursuant to the Agency Documents shall also constitute notice of resignation as Agent under this Deed of Trust. Removal of Agent pursuant to any provision of the Agency Documents shall also constitute removal as Agent under this Deed of Trust. Appointment of a successor Agent pursuant to the Agency Documents shall also constitute appointment of a successor Agent under this Deed of Trust. Upon the acceptance of any appointment as Agent by a successor Agent under the Agency Documents, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Agent as the Beneficiary under this Deed of Trust, and the retiring or removed Agent shall promptly (i) assign and transfer to such successor Agent all of its right, title and interest in and to this Deed of Trust and the Mortgaged Property, and (ii) execute and deliver to such successor Agent such assignments and amendments and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Agent of the liens and security interests created hereunder, whereupon such retiring or removed Agent shall be discharged from its duties and obligations under this Deed of Trust. After any retiring or removed Agent's resignation or removal hereunder as Agent, the provisions of this Deed of Trust and the Agency Documents shall inure to its benefit as to any actions taken or omitted to be taken by it under this Deed of Trust while it was Agent hereunder. ARTICLE 10 LOCAL LAW PROVISIONS [To Come] [The remainder of this page has been intentionally left blank] 13 IN WITNESS WHEREOF, Grantor has on the date set forth in the acknowledgement hereto, effective as of the date first above written, caused this instrument to be duly EXECUTED AND DELIVERED by authority duly given. GRANTOR: [ ] a __________ [corporation/limited partnership] By: _____________________________ Name: Title: S-1 [Insert form of notary acknowledgement for applicable state] State of _________ ) ) ss. County of _____________ ) On [___], 2004, before me, personally appeared ____________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. [SEAL] __________________________________ Notary Public My Commission expires: ______________________________ N-1 EXHIBIT A LEGAL DESCRIPTION Legal Description of premises located at [_______________________________]: [See Attached Page(s) For Legal Description] Exh. A-1 EXHIBIT B PERMITTED ENCUMBRANCES Those exceptions set forth in Schedule B of that certain policy of title insurance issued to Beneficiary by [___________] on or about the date hereof pursuant to commitment number [________]. Exh. A-2 EX-10.92 4 ex1092k093004.txt SECOND LIEN CREDIT AGREEMENT Exhibit 10.92 EXECUTION COPY SECOND LIEN CREDIT AGREEMENT DATED AS OF SEPTEMBER 8, 2004 AMONG HEADWATERS INCORPORATED THE LENDERS FROM TIME TO TIME PARTIES HERETO MORGAN STANLEY SENIOR FUNDING, INC., AS ADMINISTRATIVE AGENT MORGAN STANLEY & CO. INCORPORATED, AS COLLATERAL AGENT JPMORGAN CHASE BANK, AS SYNDICATION AGENT ___________________________________________________________________________ MORGAN STANLEY SENIOR FUNDING, INC. AND J.P. MORGAN SECURITIES INC., AS JOINT LEAD ARRANGERS AND JOINT BOOK RUNNERS _____________________________________________________________________________ TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.........................................................1 1.1. Certain Defined Terms................................................1 1.2. Plural Forms........................................................27 ARTICLE II THE LOANS.........................................................27 2.1. Loans...............................................................27 2.2. Repayments..........................................................27 2.3. Ratable Loans; Types of Advances....................................28 2.4. Minimum Amount of Each Advance......................................28 2.5. Optional Principal Payments.........................................28 2.6. Method of Selecting Types and Interest Periods for New Advances.....28 2.7. Conversion and Continuation of Outstanding Advances; No Conversion or Continuation of Eurodollar Advances After Default.....................................................29 2.8. Changes in Interest Rate, Etc.......................................29 2.9. Rates Applicable After Default......................................30 2.10. Method of Payment...................................................30 2.11. Noteless Agreement; Evidence of Indebtedness........................30 2.12. Telephonic Notices..................................................31 2.13. Interest Payment Dates; Interest and Fee Basis......................31 2.14. Notification of Advances, Interest Rates, Prepayments...............32 2.15. Lending Installations...............................................32 2.16. Non-Receipt of Funds by the Administrative Agent....................32 2.17. Replacement of Lender...............................................32 2.18. Defaulting Lenders..................................................33 i ARTICLE III YIELD PROTECTION; TAXES..........................................35 3.1. Yield Protection....................................................35 3.2. Changes in Capital Adequacy Regulations.............................36 3.3. Availability of Types of Advances...................................37 3.4. Funding Indemnification.............................................37 3.5. Taxes...............................................................37 3.6. Lender Statements; Survival of Indemnity............................39 3.7. Alternative Lending Installation....................................40 ARTICLE IV CONDITIONS PRECEDENT..............................................40 4.1. Initial Advance.....................................................40 ARTICLE V REPRESENTATIONS AND WARRANTIES.....................................43 5.1. Existence and Standing..............................................43 5.2. Authorization and Validity..........................................43 5.3. No Conflict; Government Consent.....................................44 5.4. Financial Statements................................................44 5.5. Material Adverse Change.............................................45 5.6. Taxes...............................................................45 5.7. Litigation and Contingent Obligations...............................45 5.8. Subsidiaries........................................................45 5.9. ERISA...............................................................46 5.10. Accuracy of Information.............................................46 5.11. Regulation U........................................................46 5.12. Material Agreements.................................................46 5.13. Compliance with Laws................................................46 5.14. Ownership of Properties.............................................47 ii 5.15. Plan Assets; Prohibited Transactions................................47 5.16. Environmental Matters...............................................48 5.17. Investment Company Act..............................................48 5.18. Public Utility Holding Company Act..................................48 5.19. Insurance...........................................................48 5.20. No Default or Unmatured Default.....................................48 5.21. SDN List Designation................................................48 5.22. Solvency............................................................48 ARTICLE VI COVENANTS.........................................................48 6.1. [Reserved.].........................................................48 6.2. Limitation on Indebtedness..........................................48 6.3. Limitation on Restricted Payments...................................51 6.4. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries.................................54 6.5. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries...........................................55 6.6. Guarantees by Restricted Subsidiaries...............................56 6.7. Limitation on Transactions with Shareholders and Affiliates.........56 6.8. Limitation on Liens.................................................57 6.9. Limitation on Sale-Leaseback Transactions...........................59 6.10. Limitation on Asset Sales...........................................60 6.11. Existence...........................................................61 6.12. Payment of Taxes and Other Claims...................................61 6.13. Maintenance of Properties and Insurance.............................61 6.14. Notice of Defaults..................................................62 6.15. Reporting...........................................................62 iii 6.16. Mergers, Consolidations and Sales of Assets.........................63 6.17. Total Leverage Ratio................................................64 6.18. Collateral; Environmental Reports...................................64 6.19. Use of Proceeds.....................................................67 ARTICLE VII DEFAULTS.........................................................68 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES..................69 8.1. Acceleration........................................................69 8.2. Amendments..........................................................70 8.3. Preservation of Rights..............................................71 ARTICLE IX GENERAL PROVISIONS................................................71 9.1. Survival of Representations.........................................71 9.2. Governmental Regulation.............................................72 9.3. Headings............................................................72 9.4. Entire Agreement....................................................72 9.5. Several Obligations; Benefits of This Agreement.....................72 9.6. Expenses; Indemnification...........................................72 9.7. Numbers of Documents................................................73 9.8. Accounting..........................................................73 9.9. Severability of Provisions..........................................73 9.10. Nonliability of Lenders.............................................74 9.11. Confidentiality.....................................................74 9.12. Nonreliance.........................................................74 9.13. Disclosure..........................................................75 9.14. Performance of Obligations..........................................75 iv 9.15. USA Patriot Act Notification........................................75 ARTICLE X THE ADMINISTRATIVE AGENT...........................................76 10.1. Appointment; Nature of Relationship.................................76 10.2. Powers..............................................................76 10.3. General Immunity....................................................76 10.4. No Responsibility for Loans, Recitals, Etc..........................77 10.5. Action on Instructions of Lenders...................................77 10.6. Employment of Agents and Counsel....................................77 10.7. Reliance on Documents; Counsel......................................77 10.8. Agents' Reimbursement and Indemnification...........................78 10.9. Notice of Default...................................................78 10.10. Rights as a Lender..................................................78 10.11. Lender Credit Decision..............................................79 10.12. Successor Agents....................................................79 10.13. Administrative Agent and Lead Arrangers Fees........................80 10.14. Delegation to Affiliates............................................80 10.15. Co-Agents, Documentation Agent, Syndication Agent, Etc..............81 10.16. Collateral Documents................................................81 10.17. Supplemental Collateral Agent.......................................82 ARTICLE XI SETOFF; RATABLE PAYMENTS..........................................82 11.1. Setoff..............................................................82 11.2. Ratable Payments....................................................83 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS................83 12.1. Successors and Assigns..............................................83 v 12.2. Participations......................................................84 12.3. Assignments.........................................................84 12.4. Dissemination of Information........................................86 12.5. Tax Treatment.......................................................86 ARTICLE XIII NOTICES.........................................................87 13.1. Notices; Effectiveness; Electronic Communication....................87 13.2. Change of Address, Etc..............................................88 ARTICLE XIV COUNTERPARTS; INTEGRATION; EFFECTIVENESS; ELECTRONIC EXECUTION.............................................88 14.1. Counterparts; Effectiveness.........................................88 14.2. Electronic Execution of Assignments.................................88 ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL......88 15.1. CHOICE OF LAW.......................................................88 15.2. CONSENT TO JURISDICTION.............................................88 15.3. WAIVER OF JURY TRIAL................................................89 vi SCHEDULES Commitment Schedule Schedule I [Intentionally omitted.] Schedule II Southwest Concrete Escrow and Deposit Accounts Schedule III Permitted Alternative Fuel Acquisition Schedule 5.7 - Litigation Schedule 5.8 - Subsidiaries Schedule 5.14(a)(i) - Owned Real Property Schedule 5.14(a)(ii) - Real Property Leases Schedule 5.14(a)(iii) - Tenant Leases Schedule 5.14(b)(iii) - Real Property Collateral Schedule 6.2(b)(ii) - Subordination Terms for Intercompany Indebtedness Schedule 6.2(b)(iv) - Existing Indebtedness Schedule 6.3 - Existing Minority Investments Schedule 6.7 - Existing Affiliate Transactions EXHIBITS Exhibit A-1 - Form of Borrower's Counsel's Opinion Exhibit A-2 - Form of Opinion of Local Counsel Exhibit A-3 - Form of Corporate Formalities Opinion Exhibit B - Form of Compliance Certificate Exhibit C - Form of Assignment and Assumption Agreement Exhibit D - Form of Money Transfer Instruction Exhibit E - Form of Promissory Note (if requested) i Exhibit F - Form of Officer's Certificate Exhibit G - List of Closing Documents (including Collateral Documents) Exhibit H - Form of Mortgage ii SECOND LIEN CREDIT AGREEMENT This Second Lien Credit Agreement, dated as of September 8, 2004, is entered into by and among Headwaters Incorporated, a Delaware corporation, the Lenders, Morgan Stanley Senior Funding, Inc. ("MSSF"), as Administrative Agent, and MSSF and J.P. Morgan Securities Inc., as joint lead arrangers and joint bookrunners, JPMorgan Chase Bank, as syndication agent and Morgan Stanley & Co. Incorporated, as Collateral Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1. Certain Defined Terms. As used in this Agreement: "Accounting Changes" is defined in Section 9.8 hereof. "ACM Block & Brick" means ACM Block & Brick, LP. "Acquisition" means any transaction, or any series of related transactions, consummated on or after the Closing Date, by which the Borrower or any of its Restricted Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or limited liability company, or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage of voting power) of the outstanding ownership interests of a partnership or limited liability company of any Person. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of the Borrower and its Restricted Subsidiaries determined in conformity with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income (or loss) of any Person that is not a Restricted Subsidiary, except that the Borrower's equity in the net income of any such Person for such period (to the extent not otherwise excluded pursuant to clauses (ii) through (vi) below) will be included up to the aggregate amount of cash actually distributed by such Person during such period to the Borrower or to its Restricted Subsidiaries (less minority interest therein) as a dividend or other distribution; (ii) the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Borrower or any of its Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Borrower or any of its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary, that is not a Guarantor, to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis) attributable to sales of assets outside the ordinary course of business of the Borrower and its Restricted Subsidiaries; (v) solely for purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of Section 6.3, any amount paid or accrued as dividends on Preferred Stock of the Borrower owned by Persons other than the Company and any of the Company's Restricted Subsidiaries; and (vi) all extraordinary gains. "Administrative Agent" means MSSF in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, as Administrative Agent, and any successor Administrative Agent appointed pursuant to Article X. "Advance" means a borrowing hereunder consisting of the aggregate amount of several Loans, as the case may be (i) made by some or all of the Lenders on the same Borrowing Date, or (ii) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Loans of the same Type and, in the case of Eurodollar Loans, for the same Interest Period. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person is the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting securities, by contract or otherwise. "Agents" means the Administrative Agent and the Collateral Agent. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as may be reduced from time to time pursuant hereto. The initial Aggregate Commitment is One-Hundred Fifty Million and 00/100 Dollars ($150,000,000). "Agreement" means this Credit Agreement, as it may be amended, restated, supplemented or otherwise modified and as in effect from time to time. "Agreement Accounting Principles" means generally accepted accounting principles as in effect in the United States, applied in a manner consistent with that used in preparing the financial statements of the Borrower referred to in Section 5.4, except as amended from time to time to incorporate Accounting Changes pursuant to Section 9.8 hereof. "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Base Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum. 2 "Applicable Margin" means, (a) with respect to Floating Rate Loans, 5.00% and (b) with respect to Eurodollar Loans, 6.00%. "Applicable Pledge Percentage" means 100%, but 65% in the case of a pledge of Equity Interests of a Foreign Subsidiary to the extent a 100% pledge would cause a Deemed Dividend Problem or a Financial Assistance Problem. "Approved Fund" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender. "Article" means an article of this Agreement unless another document is specifically referenced. "Asset Sale" means any sale, lease, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transaction) in one transaction or a series of related transactions by the Borrower or any of its Restricted Subsidiaries to any Person other than the Borrower or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially all of the property and assets of an operating unit or business of the Borrower or any of its Restricted Subsidiaries or (iii) any other property and assets (other than the Capital Stock or other Investment in an Unrestricted Subsidiary) of the Borrower or any of its Restricted Subsidiaries outside the ordinary course of business of the Borrower or such Restricted Subsidiary and, in each case, that is not governed by Section 6.16; provided that "Asset Sale" shall not include (a) sales of Property in the ordinary course of business and the granting of any option or other right to purchase, lease or otherwise acquire such Property, but excluding Property (other than fixtures or personal Property) subject to a Lien under a Mortgage, (b) sales, transfers or other dispositions of assets constituting a Permitted Investment or Restricted Payment permitted to be made under Section 6.3, (c) sales, leases, transfers or other dispositions of Property that, together with all other Property of the Borrower and its Subsidiaries previously leased, sold or disposed of (other than dispositions otherwise permitted pursuant to this definition) do not exceed 1% of Consolidated Total Assets in the aggregate for any fiscal year, (d) any sale, transfer, assignment or other disposition of any property or equipment that has become damaged, worn out, obsolete or otherwise unsuitable for use in connection with the business of the Borrower or its Restricted Subsidiaries but excluding in each case Property (other than fixtures and personal Property) subject to a Lien under a Mortgage, (e) the sale of Cash Equivalent Investments, (f) an issuance of Capital Stock by a Restricted Subsidiary to the Borrower or to a Wholly-Owned Restricted Subsidiary, (g) a disposition or transfer of Property by a Restricted Subsidiary to the Borrower, by the Borrower to a Restricted Subsidiary, or by a Restricted Subsidiary to another Restricted Subsidiary, (h) a sale or grant of licenses of intellectual property entered into in the ordinary course of business, (i) leases of assets in the ordinary course of business reasonably determined by the Borrower or its Subsidiaries to be in the best interests of the Borrower and its Subsidiaries, as applicable, or (j) to the extent consummated as Tax-Free Exchange 3 Transactions, sales or dispositions of real Property with an aggregate fair market value not to exceed, in any fiscal year of the Borrower, 1% of Consolidated Total Assets. "Assignment Agreement" is defined in Section 12.3.1. "Authorized Officer" means any of the Chief Executive Officer, Chief Financial Officer, Treasurer or General Counsel of the Borrower, or such other officer of the Borrower as may be designated by the Borrower in writing to the Administrative Agent from time to time, acting singly. "Average Life" means, at any date of determination with respect to any Indebtedness, the quotient obtained by dividing (1) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such Indebtedness and (b) the amount of such principal payment by (2) the sum of all such principal payments. "Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of: (a) the rate of interest published by the Wall Street Journal, from time to time, as the prime rate; and (b) 1/2 of 1% per annum above the Federal Funds Effective Rate. "BBH Debt" means the existing indebtedness of ACM Block & Brick owing to Brown Brothers Harriman & Co. "Borrower" means Headwaters Incorporated, a Delaware corporation, and its permitted successors and assigns (including, without limitation, a debtor in possession on its behalf). "Borrower Incentive Plans" means the Borrower's 1995 Stock Option Plan, the 2000 Employee Stock Purchase Plan, the 2002 Stock Incentive Plan, the 2003 Stock Incentive Plan and any similar or successor incentive plans as shall from time to time be in effect with respect to the Borrower or any Subsidiary. "Borrowing Date" means a date on which an Advance is made hereunder. "Borrowing Notice" is defined in Section 2.6. "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in New York City for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in Dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in New York City for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether outstanding on the 4 Closing Date or issued thereafter, including, without limitation, all Common Stock and Preferred Interests. "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Cash Equivalent Investments" means (i) short-term obligations of, or fully guaranteed by, the United States of America, (ii) commercial paper rated A-1 or better by S&P or P-1 or better by Moody's, (iii) demand deposit accounts maintained in the ordinary course of business, and (iv) certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000; provided in each case that the same provides for payment of both principal and interest (and not principal alone or interest alone) and is not subject to any contingency regarding the payment of principal or interest. "Change of Control" means (i) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 35% or more of the outstanding shares of voting stock of the Borrower; (ii) other than pursuant to a transaction permitted hereunder, the Borrower shall cease to own, directly or indirectly and free and clear of all Liens or other encumbrances, a majority of the outstanding shares of voting stock of the Guarantors on a fully diluted basis; or (iii) the majority of the Board of Directors of the Borrower fails to consist of Continuing Directors. "Closing Date" means September 8, 2004. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time, and any rule or regulation issued thereunder. "Collateral" means all Property and interests in Property now owned or hereafter acquired by the Borrower or any of its Subsidiaries in or upon which a security interest, lien, mortgage, leasehold mortgage, deed of trust, leasehold deed of trust or trust deed is granted to the Administrative Agent, for the benefit of the Holders of the Obligations, whether under the Pledge and Security Agreement, under any of the other Collateral Documents or under any of the other Loan Documents. "Collateral Agent" means MS&Co. Incorporated in its capacity as Collateral Agent for the Lenders, and any successor Collateral Agent appointed pursuant to Article X. "Collateral Documents" means all agreements, instruments and documents executed in connection with this Agreement that are intended to create or evidence Liens to secure the Obligations, including, without limitation, the Pledge and Security Agreement, the Intellectual Property Security Agreements, the Mortgages and all other security agreements, mortgages, leasehold mortgages, 5 deeds of trust, leasehold deeds of trust, trust deeds, loan agreements, notes, guarantees, subordination agreements, pledges, powers of attorney, consents, assignments, contracts, fee letters, notices, leases, financing statements and all other written matter whether heretofore, now, or hereafter executed by the Borrower or any of its Subsidiaries and delivered to the Administrative Agent. "Commitment" means, as to each Lender, its obligation to make a Loan to the Borrower pursuant to Section 2.1 in an aggregate principal amount set forth for such Lender on the Commitment Schedule. "Commitment Schedule" means the Schedule identifying each Lender's Commitment as of the Closing Date attached hereto and identified as such. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's equity, other than Preferred Interests of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of such common stock. "Consolidated EBITDA" means Consolidated Net Income plus, to the extent deducted from revenues in determining Consolidated Net Income, (i) Consolidated Interest Expense, (ii) expense for taxes paid or accrued, (iii) depreciation, (iv) amortization, (v) non-cash charges for impairments of goodwill and intangible assets and (vi) an amount equal to the tax credits under Section 29 of the Code during such period as a result of the Permitted Alternative Fuel Acquisition up to an amount not to exceed $20,000,000 in any fiscal year minus, to the extent included in Consolidated Net Income, (i) interest income, all calculated for the Borrower and its Restricted Subsidiaries on a consolidated basis and (ii) deferred license fees recognized in the fiscal quarter ending March 31, 2004 in an amount equal to $24,755,000.00; provided that for the twelve months ended June 30, 2004, Consolidated EBITDA shall be deemed to be $202,828,000.00. Notwithstanding anything herein, in any financial statements of the Borrower or in Agreement Accounting Principles to the contrary, for purposes of calculating and determining Consolidated EBITDA, any Acquisition made by the Borrower or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the period for which such Consolidated EBITDA was calculated shall be deemed to have occurred on the first day of the relevant period for which such Consolidated EBITDA was calculated on a pro forma basis reasonably acceptable to the Administrative Agent, but without giving effect to any projected synergies resulting from such Acquisition. "Consolidated Funded Indebtedness" means, at any time, with respect to any Person, the sum of, without duplication, (i) the aggregate Dollar amount of Consolidated Indebtedness owing by such Person or for which such Person is liable which has actually been funded and is outstanding at such time, whether or not such amount is due or payable at such time, plus (ii) the aggregate stated or face amount of all Letters of Credit at such time for which such Person is the account party or is otherwise liable, plus (iii) the aggregate amount of Capitalized Lease Obligations owing by such Person or for which such Person is otherwise liable, plus (iv) the aggregate amount of Off-Balance Sheet Liabilities of such Person, plus (v) Contingent Obligations of any of the Indebtedness described in the foregoing clauses (i), (ii), (iii) and (iv). "Consolidated Indebtedness" means at any time, with respect to any Person, the Indebtedness of such Person and its Subsidiaries calculated on a consolidated basis as of such time. 6 "Consolidated Interest Expense" means, with reference to any period, the interest expense of the Borrower and its Restricted Subsidiaries calculated on a consolidated basis for such period, in accordance with Agreement Accounting Principles, including without limitation, any Off-Balance Sheet Liability that would constitute interest if the transaction giving rise to such Off-Balance Sheet Liability were re-characterized as a loan transaction. "Consolidated Net Income" means, with reference to any period, the net income (or loss) of the Borrower and its Restricted Subsidiaries calculated on a consolidated basis for such period in accordance with Agreement Accounting Principles. "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of the Borrower and its Restricted Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation, and which shall not take into account Unrestricted Subsidiaries), plus, to the extent not included, any Preferred Stock of the Borrower, less any amounts attributable to Disqualified Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Borrower or any of its Restricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses (other than for collection or deposit in the ordinary course of business), contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or the obligations of any such Person as general partner of a partnership with respect to the liabilities of the partnership, other than indemnity obligations that do not relate to Indebtedness of third parties. "Continuing Director" means, with respect to any Person as of any date of determination, any member of the board of directors of such Person who (i) was a member of such board of directors on the Closing Date, or (ii) was nominated for election or elected to such board of directors with the approval of the required majority of the Continuing Directors who were members of such board at the time of such nomination or election; provided that any individual who is so elected or nominated in connection with a merger, consolidation, acquisition or similar transaction shall not be a Continuing Director unless such individual was a Continuing Director prior thereto. 7 "Controlled Group" means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Conversion/Continuation Notice" is defined in Section 2.7. "Credit Party" means, at any time, any of the Borrower and any Person which is a Guarantor at such time. "Deemed Dividend Problem" means, with respect to any Foreign Subsidiary, such Foreign Subsidiary's accumulated and undistributed earnings and profits being deemed to be repatriated to the Borrower or the applicable parent Domestic Subsidiary for U.S. federal income tax purposes and the effect of such repatriation causing adverse tax consequences to the Borrower or such parent Domestic Subsidiary, in each case as determined by the Borrower in its commercially reasonable judgment acting in good faith and in consultation with its legal and tax advisors. "Default" means an event described in Article VII. "Defaulted Amount" means, with respect to any Lender at any time, any amount required to be paid by such Lender to any Agent or any other Lender hereunder or under any other Loan Document at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Lender to (a) the Administrative Agent pursuant to Section 2.16 to reimburse the Administrative Agent for the amount of any Loan made by the Administrative Agent for the account of such Lender, (b) any other Lender pursuant to Section 11.2 to purchase any participation in Loans owing to such other Lender and (c) any Agent pursuant to Section 10.8 to reimburse such Agent for such Lender's ratable share of any amount required to be paid by the Lenders to such Agent as provided therein. In the event that a portion of a Defaulted Amount shall be deemed paid pursuant to Section 2.19(b), the remaining portion of such Defaulted Amount shall be considered a Defaulted Amount originally required to be paid hereunder or under any other Loan Document on the same date as the Defaulted Amount so deemed paid in part. "Defaulting Lender" means, at any time, any Lender that, at such time, (a) owes a Defaulted Loan or a Defaulted Amount or (b) shall take any action or be the subject of any action or proceeding of a type described in Section 7.8 or 7.9. "Defaulted Loan" means, with respect to any Lender at any time, the portion of any Loan required to be made by such Lender to the Borrower pursuant to Section 2.1 at or prior to such time that has not been made by such Lender or by the Administrative Agent for the account of such Lender pursuant to Section 2.16 as of such time. In the event that a portion of a Defaulted Loan shall be deemed made pursuant to Section 2.18(a), the remaining portion of such Defaulted Loan shall be considered a Defaulted Loan originally required to be made pursuant to Section 2.1 on the same date as the Defaulted Loan so deemed made in part. 8 "Disinterested Members" mean members of the board of directors of the Borrower who are not employed by the Borrower or any Affiliate thereof. "Disqualified Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (1) required to be redeemed prior to the Maturity Date, (2) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Maturity Date or (3) convertible into or exchangeable for Capital Stock referred to in clause (1) or (2) above or Indebtedness having a scheduled maturity prior to the Maturity Date; provided that only the portion of Capital Stock which so matures or is mandatorily redeemable, is so convertible or exchangeable or is so redeemable at the option of the holder thereof prior to such date will be deemed to be Disqualified Stock; provided further that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Maturity Date shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Section 6.10 and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Borrower's repayment of such Loans as are required to be repaid pursuant to Section 6.10. "Dollar", "dollar" and "$" means the lawful currency of the United States of America. "Domestic Subsidiary" means any Subsidiary of any Person organized under the laws of a jurisdiction located in the United States of America. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, injunctions, permits, concessions, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof. "Environmental Permit" means any permit, approval, identification number, license or other authorization required under any Environmental Law. "Equipment" means all of the Borrower's and each Subsidiary's present and future (i) equipment, including, without limitation, machinery, manufacturing, distribution, data processing and office equipment, assembly systems, tools, molds, dies, fixtures, appliances, furniture, furnishings, vehicles, vessels, aircraft, aircraft engines, and trade fixtures, (ii) other tangible personal property (other than inventory), and (iii) any and all accessions, parts and appurtenances attached to any of the foregoing or used in connection therewith, and any substitutions therefor and replacements, products and proceeds thereof. "Equity Interests" means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such 9 Person, and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or non-voting, and whether or not such shares, warrants, options, rights or other interests are authorized or otherwise existing on any date of determination. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rules or regulations promulgated thereunder. "Escrow Bank" is defined in Section 2.18(c). "Eurodollar Advance" means an Advance consisting of Eurodollar Loans. "Eurodollar Base Rate" means, for any Interest Period, an interest rate per annum equal to the rate per annum obtained by dividing (a) the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on the page of the Telerate screen (or any successor page) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 A.M. (London time) two Business Days before the first day of such Interest Period (provided that, if for any reason such rate does not appear on such page or service or such page or service shall not be available, the term "Eurodollar Base Rate" shall mean the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the rate determined by the Administrative Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period) by (b) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period. "Eurodollar Loan" means a Loan which, except as otherwise provided in Section 2.9, bears interest at the applicable Eurodollar Rate. "Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the sum of the Eurodollar Base Rate applicable to such Interest Period, plus the Applicable Margin then in effect, changing as and when the Applicable Margin changes. "Eurodollar Rate Reserve Percentage" for any Interest Period for all Eurodollar Loans comprising part of the same Advance means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Loans is determined) having a term equal to such Interest Period. "Excess Proceeds" has the meaning provided in Section 6.10. 10 "Excluded Taxes" means, in the case of each Lender or applicable Lending Installation and the Administrative Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Lender or the Administrative Agent is incorporated or organized or any political combination or subdivision or taxing authority thereof or (ii) the jurisdiction in which the Administrative Agent's or such Lender's principal executive office or such Lender's applicable Lending Installation is located. "Exempt Property" means (i) in the case of the Real Property, all such Real Property other than the Real Property Collateral, (ii) all vehicles and other Collateral subject to state certificate of title statutes, (iii) all Deposit Accounts (as defined in the Security Agreement) which are not maintained with the Collateral Agent and that with respect to which Account Control Agreements (as defined in the Pledge and Security Agreement) are not required to be entered into pursuant to the terms of the Pledge and Security Agreement and (iv) the escrow and deposit accounts established in connection with Permitted Acquisitions or set forth on Schedule II hereto. "Exhibit" refers to an exhibit to this Agreement, unless another document is specifically referenced. "Existing Credit Agreement" means that certain Credit Agreement dated as of March 31, 2004 between the Borrower, certain of its subsidiaries, the lenders party thereto and Bank One, NA (Main Office Chicago) as administrative agent, as the same has been amended or supplemented prior to the Closing Date. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (New York City time) on such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent in its sole discretion. "Financial Contract" of a Person means (i) any exchange-traded or over-the-counter futures, forward, swap or option contract or other financial instrument with similar characteristics or (ii) any Rate Management Transaction. "Financial Assistance Problem" means, with respect to any Foreign Subsidiary, the inability of such Foreign Subsidiary to become a Subsidiary Guarantor or to permit its Capital Stock from being pledged pursuant to a pledge agreement on account of legal or financial limitations imposed by the jurisdiction of organization of such Foreign Subsidiary or other relevant jurisdictions having authority over such Foreign Subsidiary, in each case as determined by the Borrower in its commercially reasonable judgment acting in good faith and in consultation with its legal and tax advisors "First Lien Administrative Agent" means MSSF, in its capacity as administrative agent under the First Lien Credit Agreement. 11 "First Lien Collateral Agent" means MS&Co., in its capacity as collateral agent under the First Lien Credit Agreement. "First Lien Collateral Documents" means all agreements, instruments and documents executed in connection with the First Lien Credit Agreement that are intended to create or evidence Liens to secure the obligations under the First Lien Loan Documents. "First Lien Credit Agreement" means the Credit Agreement dated as of September 8, 2004 in connection with the First Lien Financing by and among the Borrower, as the borrower, the lenders party thereto, MSSF, as administrative agent, Morgan Stanley & Co. Incorporated, as collateral agent and JPMorgan Chase Bank, as syndication agent . "First Lien Financing" means the $715 million senior secured first lien financing incurred by the Borrower pursuant to the First Lien Credit Agreement. "First Lien Loan Documents" means the Loan Documents" as defined in the First Lien Credit Agreement. "First Tier Foreign Subsidiary" means each Foreign Subsidiary with respect to which any one or more of the Borrower and its Domestic Subsidiaries directly owns or controls more than 50% of such Foreign Subsidiary's issued and outstanding equity interests. "Floating Rate" means, for any day, a rate per annum equal to the sum of (i) the Alternate Base Rate for such day, changing when and as the Alternate Base Rate changes plus (ii) the Applicable Margin then in effect, changing as and when the Applicable Margin changes. "Floating Rate Advance" means an Advance consisting of Floating Rate Loans. "Floating Rate Loan" means a Loan which, except as otherwise provided in Section 2.9, bears interest at the Floating Rate. "Foreign Subsidiary" means any Subsidiary of any which is not a Domestic Subsidiary of such Person. "Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "Governmental Authority" means any nation or government, any foreign, federal, state, local or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services 12 (unless such purchase arrangements are on arm's-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantor" means each Subsidiary of the Borrower which is a party to the Guaranty, including each Subsidiary of the Borrower which becomes a party to the Guaranty pursuant to a joinder or other supplement thereto. "Guaranty" means the Guaranty, dated as of the Closing Date, made by the Guarantors in favor of the Administrative Agent for the benefit of the Holders of the Obligations, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Hazardous Materials" means (a) petroleum or petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law. "Holders of the Obligations" means the holders of the Obligations from time to time and shall refer to (i) each Lender in respect of its Loans, (ii) the Administrative Agent and the Lenders in respect of all other present and future obligations and liabilities of the Borrower or any of the Guarantors of every type and description arising under or in connection with this Agreement or any other Loan Document, and (iii) their respective successors, transferees and assigns. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness; provided that (1) any Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary will be deemed to be incurred by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary and (2) neither the accrual of interest nor the accretion of original issue discount nor the payment of interest in the form of additional Indebtedness (to the extent provided for when the Indebtedness on which such interest is paid was originally issued) shall be considered an Incurrence of Indebtedness. "Indebtedness" of a Person means, at any time, without duplication, such Person's (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (other than current accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), if the deferred purchase price is due more than six (6) months after the date the obligation is incurred or is evidenced by a note or similar written instrument, (iii) obligations which are evidenced by notes, bonds, debentures, acceptances, or other instruments representing extensions of credit (including, without limitation, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights, options for the purchase or other 13 acquisition from such Person of such shares (or such other interests), (iv) obligations of such Person to purchase, redeem, retire, defease or otherwise acquire or make any payment in respect of any capital stock of any other Person, valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (v) Capitalized Lease Obligations, (vi) Contingent Obligations of such Person, (vii) reimbursement obligations under Letters of Credit, bankers' acceptances, surety bonds and similar instruments, (viii) Off-Balance Sheet Liabilities, (ix) obligations under Sale and Leaseback Transactions, (x) Net Mark-to-Market Exposure under Rate Management Transactions and other Financial Contracts, (xi) Rate Management Obligations and (xii) any other obligation for borrowed money which in accordance with Agreement Accounting Principles would be shown as a liability on the consolidated balance sheet of such Person. "Intellectual Property Security Agreements" means the intellectual property security agreements as any Credit Party may from time to time make in favor of the Administrative Agent for the benefit of the Holders of the Obligations, in each case as the same may be amended, restated, supplemented or otherwise modified from time to time. "Intercreditor Agreement" means the intercreditor agreement dated as of the date hereof among the Administrative Agent, the Collateral Agent, the First Lien Administrative Agent and the First Lien Collateral Agent. "Interest Period" means, with respect to a Eurodollar Advance, a period of one, two, three or six months, commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on but exclude the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding advances to customers or suppliers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable, prepaid expenses or deposits on the balance sheet of the Borrower or its Restricted Subsidiaries and endorsements for collection or deposit arising in the ordinary course of business) or capital contribution or transfer of cash or other property to others or any payment for property or services for the account or use of others, or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include (1) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (2) the retention of the Capital Stock (or any other Investment) by the Borrower or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary, including without limitation, by reason of any transaction permitted by clause (c) or (d) of Section 6.5. For purposes of the definition of "Unrestricted Subsidiary" and Section 6.3, (a) the amount of, or a reduction in, an Investment shall be equal to the book value thereof at the time such Investment is made or reduced and (b) in the event the Borrower or a Restricted Subsidiary makes an Investment by 14 transferring assets to any Person and as part of such transaction receives Net Cash Proceeds, the amount of such Investment shall be the book value of the assets less the amount of Net Cash Proceeds so received, provided the Net Cash Proceeds are applied in accordance with clause (i) or (ii) of Section 6.10(b). "Lead Arranger" means MSSF and its successors, in its capacity as Sole Lead Arranger and Sole Book Runners. "Leased Real Property" means each parcel of real property leased or subleased by any Credit Party or any of its Subsidiaries pursuant to any Real Property Lease. "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Lending Installation" means, with respect to a Lender or the Administrative Agent, the office, branch, subsidiary or affiliate of such Lender or the Administrative Agent listed on the signature pages hereof or on the administrative information sheets provided to the Administrative Agent in connection herewith or on a Schedule or otherwise selected by such Lender or the Administrative Agent pursuant to Section 2.15. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, security interest, encumbrance, lien, charge or deposit arrangement or other arrangement having the practical effect of the foregoing and shall include the interest of a vendor or lessor under any conditional sale agreement, Capitalized Lease Obligation or other title retention agreement. "Loan" is defined in Section 2.1. "Loan Documents" means this Agreement, the Collateral Documents, the Guaranty and all other documents, instruments, notes (including any Notes issued pursuant to Section 2.11 (if requested)) and agreements executed in connection herewith or therewith or contemplated hereby or thereby, as the same may be amended, restated or otherwise modified and in effect from time to time. "Material Adverse Change" means any material adverse change (i) in the business, condition (financial or otherwise), performance, operations or results of operations or properties of the Borrower and its Restricted Subsidiaries, taken as a whole, (ii) the rights and remedies of any Agent or any Lender under any Loan Document or (iii) in the ability of the Borrower and its Restricted Subsidiaries (taken as a whole) to repay the Obligations or to perform their obligations under the Loan Documents. "Maturity Date" means the earlier of (i) September 1, 2012 and (ii) the date the Loans are declared due and payable pursuant to Section 8.1 hereof. "Moody's" means Moody's Investors Services, Inc. and any successor thereto. 15 "Mortgage" means deeds of trust, trust deeds, mortgages, leasehold mortgages and leasehold deeds of trust in substantially the form of Exhibit H hereto (with such changes as may be required to account for local law matters) and otherwise in form and substance reasonably satisfactory to the Administrative Agent and covering the Real Property Collateral, in each case as amended, restated, supplemented or otherwise modified from time to time. "Mortgage Instruments" is defined in Section 6.18. "Mortgage Policies" is defined in Section 6.18. "MS&Co." means Morgan Stanley & Co. Incorporated. "MSSF" means Morgan Stanley Senior Funding, Inc. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, which is covered by Title IV of ERISA and to which the Borrower or any member of the Controlled Group is obligated, or within any of the preceding five plan years has been obligated, to make contributions. "Multiple Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any member of the Controlled Group or (b) was so maintained and in respect of which the Borrower or any member of the Controlled Group could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds of such Asset Sale received by the Borrower or its Restricted Subsidiaries in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or Cash Equivalents, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to the properties or assets that are the subject of the Asset Sale, net of: (1) brokerage commissions and other fees and expenses (including without limitation fees and expenses of counsel, investment bankers, accountants and title and recording fees) related to such Asset Sale; (2) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Restricted Subsidiaries, taken as a whole; (3) payments made to repay Indebtedness (other than pursuant to an Offer to Purchase) or any other obligation outstanding at the time of such Asset Sale that either (x) is secured by a Lien on the property or assets sold, (y) is required to be paid as a result of such sale or (z) by the terms of such Asset Sale or applicable law, must be repaid out of the proceeds from such Asset Sale; 16 (4) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale (to the extent such amounts are received by the Company or its Restricted Subsidiaries); and (5) appropriate amounts to be provided by the Company or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP; and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or Cash Equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or Cash Equivalents, net of attorney's fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Net Mark-to-Market Exposure" of a Person means, as of any date of determination, the excess (if any) of all unrealized losses over all unrealized profits of such Person arising from Rate Management Transactions. "Unrealized losses" means the fair market value of the cost to such Person of replacing such Rate Management Transaction as of the date of determination (assuming the Rate Management Transaction were to be terminated as of that date), and "unrealized profits" means the fair market value of the gain to such Person of replacing such Rate Management Transaction as of the date of determination (assuming such Rate Management Transaction were to be terminated as of that date). "Non-Consenting Lender" is defined in Section 8.2. "Non-U.S. Lender" is defined in Section 3.5(iv). "Note" is defined in Section 2.11. "Obligations" means all Loans, advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Administrative Agent, any Lender, the Lead Arranger, any affiliate of the Administrative Agent, any Lender, or the Lead Arrangers, or any indemnitee under the provisions of Section 9.6 or any other provisions of the Loan Documents, in each case of any kind or nature, present or future, arising under this Agreement or any other Loan Document, whether or not evidenced by any note, guaranty or other instrument, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, foreign exchange risk, guaranty, indemnification, or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, reasonable attorney's and paralegals' fees and disbursements (in each case whether or not allowed), and any other sum chargeable to the Borrower or any of its Subsidiaries under this Agreement or any other Loan Document. 17 "Off-Balance Sheet Liability" of a Person means the principal component of (i) any repurchase obligation or liability of such Person with respect to Receivables or notes receivable sold by such Person, (ii) any liability under any so-called "synthetic lease" or "tax ownership operating lease" transaction entered into by such Person, or (iii) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the consolidated balance sheets of such Person, but excluding from this clause (iii) all Operating Leases. "Offer to Prepay" means an offer to prepay Loans by the Borrower commenced by delivering a notice to the Administrative Agent for distribution to each Lender stating: (i) the Section of this Agreement pursuant to which the offer is being made and that all Loans (for which prepayment is elected by the Lender thereof) will be prepaid on a pro rata basis; (ii) the prepay price and the date of prepay (which shall be a Business Day no earlier than 5 days nor later than 10 days from the date such notice is delivered to the Administrative Agent) (the "Prepayment Date"); (iii) that any Loan for which prepayment is not elected by the Lender thereof will continue to accrue interest pursuant to its terms; (iv) that, unless the Borrower defaults in the payment of the prepay price, any Loan accepted for payment pursuant to the Offer to Prepay shall cease to accrue interest on and after the Prepayment Date; (v) that Lenders will be entitled to withdraw their election if the Administrative Agent receives, not later than the close of business on the third Business Day immediately preceding the Prepayment Date, a telegram, facsimile transmission or letter setting forth the name of such Lender, the principal amount of Loans for which prepayment was to be elected and a statement that such Lender is withdrawing his election to have such Loans prepaid; and (vi) that Lenders whose Loans are being prepaid only in part will continue to hold Loans equal in principal amount to the unprepaid portion of the Loans prepaid; provided that each Loan prepaid and each remaining unpaid Loan shall be in a principal amount of $1,000 or integral multiples thereof. On the Prepayment Date, the Borrower shall (a) deposit with the Administrative Agent money sufficient to pay the prepay price of all Loans or portions thereof so accepted, together with accrued and unpaid interest through the Prepayment Date and (b) deliver, or cause to be delivered, to the Administrative Agent a certificate of an Authorized Officer specifying the Loans or portions thereof being prepaid the Borrower. The Administrative Agent shall promptly make available to the Lenders of Loans so accepted payment in an amount equal to the prepay price. 18 "Operating Lease" of a Person means any lease of Property (other than a Capitalized Lease) by such Person as lessee which has an original term (including any required renewals and any renewals effective at the option of the lessor) of one year or more. "Other Taxes" is defined in Section 3.5(ii). "Owned Real Property" means all real property owned by any Credit Party or any of its Subsidiaries from time to time. "Pari Passu Indebtedness" has the meaning provided in Section 6.10. "Participants" is defined in Section 12.2.1. "Payment Date" means the last day of each February, May, August and November and the Maturity Date. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto "Permitted Acquisition" means any Acquisition meeting the following requirements or otherwise approved by the Required Lenders: (i) as of the date of the consummation of such Acquisition, no Default or Unmatured Default shall have occurred and be continuing or would result from such Acquisition, and the representation and warranty contained in Section 5.11 shall be true both before and after giving effect to such Acquisition; (ii) such Acquisition is consummated on a non-hostile basis pursuant to a negotiated acquisition agreement approved by the board of directors or other applicable governing body of the seller or entity to be acquired, and no material challenge to such Acquisition (excluding the exercise of appraisal rights) shall be pending or threatened by any shareholder or director of the seller or entity to be acquired; (iii) the business to be acquired in such Acquisition is similar or related to one or more of the lines of business in which the Borrower and its Subsidiaries are engaged on the Closing Date; (iv) as of the date of the consummation of such Acquisition, all material governmental and corporate approvals required in connection therewith shall have been obtained; (v) (a) such Acquisition is a Permitted Alternative Fuel Acquisition or (b) during any fiscal year, (1) the Purchase Price for each such Acquisition (other than a Permitted Fuel Acquisition) payable in cash shall not exceed $30,000,000 and, together with the Purchase Price payable in cash for all other Permitted Acquisitions, shall not exceed an amount equal to $50,000,000 and (2) the Purchase Price for each such Acquisition (other than a Permitted Alternative Fuel Acquisition) not payable in cash (other than equity issued by the Borrower), together with the Purchase Price not payable in cash (other than equity issued by the Borrower) for all other Permitted Acquisitions, shall not 19 exceed an amount equal to $20,000,000 (as determined by reference to the underlying documents for such transaction, as long as such documents shall be the product of an arm's length basis and entered into in good faith), provided that (x) limitations set forth in this clause (b) shall not apply to any Acquisition if the Total Leverage Ratio after giving pro forma effect to such Acquisition is less than or equal to 4.00:1.00 and (y) any Acquisition consummated during a period when the Total Leverage Ratio, after giving pro forma effect to such Acquisition, was less than or equal to 4.00:1.00 shall be disregarded for purposes of determining compliance with this clause (b); and (vi) prior to the consummation of such Permitted Acquisition, the Borrower shall have delivered to the Administrative Agent a pro forma consolidated balance sheet, income statement and cash flow statement of the Borrower and its Subsidiaries (the "Acquisition Pro Forma"), based on the Borrower's most recent financial statements delivered pursuant to Section 6.15.1 and using historical financial statements for the acquired entity provided by the seller(s) or which shall be complete and shall fairly present, in all material respects, the financial condition and results of operations and cash flows of the Borrower and its Subsidiaries in accordance with Agreement Accounting Principles, but taking into account such Permitted Acquisition and the funding of all Indebtedness in connection therewith, and such Acquisition Pro Forma shall reflect that, on a pro forma basis, the Borrower would have been in compliance with the financial covenant set forth in Section 6.17 for the four fiscal quarter period reflected in the compliance certificate most recently delivered to the Administrative Agent pursuant to Section 6.15.3 prior to the consummation of such Permitted Acquisition (giving effect to such Permitted Acquisition and all Indebtedness funded in connection therewith as if made on the first day of such period). "Permitted Alternative Fuel Acquisition" means the Acquisition of membership interests listed on Schedule III hereto for an aggregate purchase price (excluding amounts accounted for as expenses on the financial statements of the Borrower) not to exceed $15 million. "Permitted Encumbrances" has the meaning specified in the Mortgages. "Permitted Indebtedness" means unsecured Indebtedness of the Borrower whether senior or subordinated provided that (i) both before and after the incurrence of such Indebtedness, the Borrower is in pro forma compliance with Section 6.17, (ii) in no event shall the terms of such Indebtedness require amortization prior to 6 months after the Maturity Date, (iii) a Subsidiary under the Loan Documents shall not guarantee such Indebtedness unless (x) such Subsidiary is also a Guarantor under the Guaranty and (y) such guarantee of such Indebtedness provides for the release and termination thereof, without action by any party, upon any release and termination of such Guaranty by the applicable Subsidiary (other than by reason of repayment and satisfaction of all of the Obligations), (iv) to the extent any such Indebtedness is subordinated, such Indebtedness shall be subordinated on terms and conditions reasonably acceptable to the Administrative Agent and (v) the Net Cash Proceeds from such Indebtedness shall be applied to make a prepayment of Indebtedness under the First Lien Credit Agreement or an Offer to Prepay. "Permitted Investment" means: (i) an Investment in the Borrower or a Guarantor or a Person which will, upon the making of such Investment, become a Guarantor or be merged or consolidated with or into or transfer or convey all or 20 substantially all its assets to, the Borrower or a Guarantor; provided that such person's primary business is related, ancillary or complementary to the businesses of the Borrower and the Guarantors on the date of such Investment; (ii) Cash Equivalent Investments; (iii) payroll, travel and similar advances or loans to cover matters that are expected at the time of such advances or loans ultimately to be treated as expenses in accordance with GAAP; (iv) stock, obligations or securities received in satisfaction of judgments; (v) an Investment in by an Unrestricted Subsidiary consisting solely of an Investment in another Unrestricted Subsidiary; (vi) Rate Management Transactions designed solely to protect the Borrower or its Restricted Subsidiaries against fluctuations in interest rates, commodity prices or foreign currency exchange rates; (vii) receivables owing to the Borrower or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; (viii) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with Section 6.10; (ix) an Investment by the Borrower or any of its Restricted Subsidiaries that, together with all other outstanding Investments made pursuant to this clause (ix), does not exceed $20 million; (x) deposits required by government agencies or public utilities (including pertaining to taxes and other similar charges); (xi) Guarantees issued in accordance with the provisions of Section 6.2; (xii) Investments in existence on the Closing Date; (xiii) Investments in the Loans; (xiv) Permitted Acquisitions; and (xv) Investments in entities in which the Borrower or any Restricted Subsidiary owns less than 100% of the issued and outstanding equity interests thereof, including the Investments described in Schedule 6.3, provided that Investments made after the date of this Agreement do not exceed over the term of this Agreement, an amount equal to $10 million plus an aggregate amount equal to 5% of Consolidated EBITDA for each twelve month period following the Closing 21 Date (the "Minority Investment Base Amount") in any fiscal year of the Borrower; provided further that if the aggregate amount of such Investments actually made in any one fiscal year of the Borrower are actually less than the Minority Investment Base Amount (the difference being the "Shortfall Amount"), then, so long as no Default or Unmatured Default has occurred and is continuing, the permitted amount of such Investments during the immediately succeeding fiscal year only shall be an amount equal to the Minority Investment Base Amount plus the Shortfall Amount. "Permitted Purchase Money Indebtedness" is defined in Section 6.2(b)(vi). "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee pension benefit plan, excluding any Multiemployer Plan, which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "Pledge and Security Agreement" means that certain Second Lien Pledge and Security Agreement, dated as of the Closing Date, by and between the Credit Parties and the Collateral Agent for the benefit of the Holders of the Obligations, as the same may be amended, restated, supplemented, or otherwise modified from time to time. "Pledge Subsidiary" means each Domestic Subsidiary and each First Tier Foreign Subsidiary. "Preferred Interests" means, with respect to any Person, equity interests issued by such Person that are entitled to a preference or priority over other equity interests issued by such Person upon any distribution of such Person's property and assets, whether by dividend or upon liquidation. "Prepayment Date" is defined in the definition of Offer to Prepay. "Pro Forma Opening Statements" is defined in Section 4.1.10. "Projections" is defined in Section 4.1.10. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Pro Rata Share" means, with respect to any Lender, the percentage obtained by dividing (i) such Lender's Commitment at such time by (ii) the aggregate amount of all of the Commitments at such time; provided, however, if all of the Commitments are terminated pursuant to the terms of this Agreement, then "Pro Rata Share" means the percentage obtained by dividing (a) the sum of such Lender's outstanding Loans at such time by (b) the aggregate outstanding amount of all Loans at such time. "Purchasers" is defined in Section 12.3.1. 22 "Rate Management Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Rate Management Transactions, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Rate Management Transactions. "Rate Management Transaction" means any transaction (including an agreement with respect thereto) now existing or hereafter entered by the Borrower or a Subsidiary which is a rate swap, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, forward transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions) or any combination thereof, whether linked to one or more interest rates, foreign currencies, commodity prices, equity prices or other financial measures. "Real Property" means the Leased Real Property and the Owned Real Property. "Real Property Collateral" means all Owned Real Property listed on Schedule 5.14(b)(iii), any Owned Real Property acquired after the Closing Date with a net book value in excess of $1,000,000 and any additional Owned Real Property to the extent that the aggregate net book value of all Owned Real Property that does not constitute Real Property Collateral exceeds $15,000,000. "Real Property Leases" means all leases of real property under which any Credit Party or any of its Subsidiaries is a lessee from time to time. "Receivable(s)" means and includes all of the Borrower's and each Restricted Subsidiary's presently existing and hereafter arising or acquired accounts, accounts receivable, and all present and future rights of the Borrower or such Restricted Subsidiary to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether or not they have been earned by performance, and all rights in any merchandise or goods which any of the same may represent, and all rights, title, security and guarantees with respect to each of the foregoing, including, without limitation, any right of stoppage in transit. "Redeemable" means, with respect to any equity interest, any Indebtedness or any other right or obligation, any such equity interest, Indebtedness, right or obligation that (a) the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer or (b) is redeemable at the option of the holder. "Refinancing" means the refinancing of all outstanding Indebtedness incurred under the Existing Credit Agreement. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the 23 extension of credit by banks, non-banks and non-broker lenders for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Replacement Assets" means, on any date, any capital expenditures, property or assets (other than current assets) of a nature or type or that are used in a business (or an Investment in a company having property or assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Borrower and its Restricted Subsidiaries existing on such date. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan subject to Title IV of ERISA, excluding, however, such events as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Reports" is defined in Section 9.6. "Required Lenders" means Lenders in the aggregate having more than 50% of the sum of the aggregate outstanding principal amount of Loans at such time, provided, however, that if any Lender shall be a Defaulting Lender at such time, there shall be excluded from the determination of Required Lenders at such time the outstanding aggregate principal amount of Loans of such Lender at such time. "Restricted Payments" has the meaning provided in Section 4.04. "Restricted Subsidiary" means any Subsidiary of the Borrower other than an Unrestricted Subsidiary. "S&P" means Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and any successor thereto. "Sale and Leaseback Transaction" means any sale or other transfer of Property by any Person with the intent to lease such Property as lessee. "Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group or with respect to which the Borrower or any member of the Controlled Group is reasonably expected to incur liability under Section 4064 or 4069 of ERISA. 24 "Solvent" and "Solvency" mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay such debts and liabilities as they mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Stated Maturity" means, with respect to any Indebtedness, the date specified in such Indebtedness as the fixed date on which the final installment of principal of such Indebtedness is due and payable, but shall not include any contingent obligations to repay, redeem or repurchase any such principal prior to the date scheduled for the payment thereof at the option of holders or otherwise. "Subordinated Indebtedness" of a Person means any Indebtedness of such Person the payment of which is subordinated to payment of the Obligations to the written reasonable satisfaction of the Administrative Agent. "Subordinated Indebtedness Documents" means any document, agreement or instrument evidencing any Subordinated Indebtedness or entered into in connection with any Subordinated Indebtedness. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Supplemental Collateral Agent" is defined in Section 10.17. "Tapco Acquisition" means the acquisition by the Borrower of 100% of the ownership interests in Tapco Holdings, Inc., a Michigan corporation pursuant to the Tapco Acquisition Documents. "Tapco Acquisition Documents" means the Agreement and Plan of Merger dated as of September 8, 2004 by and among the Borrower, Headwaters T Acquisition Corp., a direct wholly owned Subsidiary of the Borrower and Tapco Holdings, Inc., (b) the certificate of merger of Headwaters T Acquisitions Corp. into Tapco Holdings, Inc., duly filed with the State of Michigan and (c) the certificate of Articles of Merger/Share Exchange of Headwaters T Acquisition Corp. into Tapco Holdings, Inc., duly filed with the State of Utah Department of Commerce. 25 "Tapco Real Property Collateral" means the Real Property Collateral marked with an asterisk on Schedules 5.14(b)(iii) and 5.14(b)(iv). "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes and Other Taxes. "Tax-Free Exchange Transactions" means any transaction involving the purchase or sale of Property which does not trigger capital gains or similar taxes for the Borrower or any Subsidiary thereof. "Tenant Leases" means all leases of real property under which any Credit Party or any of its Subsidiaries is the lessor or sublessor from time to time. "Transferee" is defined in Section 12.4. "Total Leverage Ratio" is defined in Section 6.17. "Transaction" means collectively the Tapco Acquisition, the Refinancing and the transactions contemplated under the Loan Documents. "Transaction Documents" means, collectively, the Loan Documents and the Acquisition Documents. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance or a Eurodollar Advance and with respect to any Loan, its nature as a Floating Rate Loan or a Eurodollar Loan. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested and unvested accrued benefits under each Single Employer Plan subject to Title IV of ERISA exceeds the fair market value of all such Plan's assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan for which a valuation report is available, using actuarial assumptions for funding purposes as set forth in such report. "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "Unrestricted Subsidiary" means (1) any Subsidiary of the Borrower that at the time of determination shall be designated an Unrestricted Subsidiary by the board of directors of the Borrower in the manner provided below and (2) any Subsidiary of an Unrestricted Subsidiary. The board of directors of the Borrower may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary; provided that (A) any Guarantee by the Borrower or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an 26 "Investment" by the Company or such Restricted Subsidiary (or both, if applicable) at the time of such designation; (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 6.3 and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under Section 6.2 and Section 6.3. The board of directors of the Borrower may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (a) no Default or Unmatured Default shall have occurred and be continuing at the time of or after giving effect to such designation and (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of this Agreement. Any such designation by the board of directors of the Borrower shall be evidenced to the Administrative Agent by promptly filing with the Administrative Agent a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) by such Person or one or more Wholly Owned Subsidiaries of such Person. 1.2. Plural Forms. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. ARTICLE II THE loans 2.1. Loans. Each Lender severally and not jointly agrees to make a term loan, in Dollars, to the Borrower on the Closing Date in an amount equal to such Lender's Commitment (each such loan being referred to herein individually as a "Loan" and collectively as the "Loans"). Immediately upon the making of the Loans, the Commitments will be reduced to Zero. No portion of a Loan once repaid or prepaid may be reborrowed. 2.2. Repayments. Any outstanding Loans shall be paid in full by the Borrower on the Maturity Date and all other unpaid Obligations shall be paid in full by the Borrower on the earlier of the date when due or the Maturity Date, as applicable. 2.3. Ratable Loans; Types of Advances. (a) Each Advance hereunder shall consist of Loans made from the several Lenders ratably in proportion to their respective Pro Rata Shares. (b) The Advances may be Floating Rate Advances or Eurodollar Advances, or a combination thereof, selected by the Borrower in accordance with Sections 2.6 and 2.7. 2.4. Minimum Amount of Each Advance. Each Eurodollar Advance shall be in the minimum amount of $10,000,000 (and in multiples of $1,000,000 if in excess thereof), and each Floating Rate Advance shall be in the minimum amount of $10,000,000 (and in multiples of $1,000,000 if in excess thereof). 27 2.5. Optional Principal Payments. Subject to the provisions of the next succeeding sentence, the Borrower may from time to time pay (a) all outstanding Floating Rate Loans, or any portion of the outstanding Floating Rate Loans, in a minimum aggregate amount of $5,000,000 or any integral multiple of $1,000,000 in excess thereof, in each case upon two (2) Business Days' prior notice to the Administrative Agent and (b) subject to the payment of any funding indemnification amounts required by Section 3.4, all outstanding Eurodollar Loans, or, in a minimum aggregate amount of $5,000,000 or any integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Eurodollar Loans upon three (3) Business Days' prior notice to the Administrative Agent. Notwithstanding the foregoing, (i) the Borrower shall pay a premium of 4.00% of the aggregate principal amount of Loans prepaid during the period from the Closing Date to but excluding the first anniversary of the Closing Date, (ii) the Borrower shall pay a premium of 3.00% of the aggregate principal amount of Loans prepaid during the period from the first anniversary of the Closing Date to but excluding the second anniversary of the Closing Date, (iii) the Borrower shall pay a premium of 2.00% of the aggregate principal amount of Loans prepaid during the period from the second anniversary of the Closing Date to but excluding the third anniversary of the Closing Date and (iv) the Borrower shall pay a premium of 1.00% of the aggregate principal amount of Loans prepaid during the period from the third anniversary of the Closing Date to but excluding the fourth anniversary of the Closing Date. 2.6. Method of Selecting Types and Interest Periods for New Advances. The Borrower shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable thereto from time to time; provided that there shall be no more than 5 Interest Periods in effect with respect to all of the Loans at any time, unless such limit has been waived by the Administrative Agent in its sole discretion. The Borrower shall give the Administrative Agent irrevocable notice (a "Borrowing Notice") not later than 2:00 p.m. (New York City time) at least one Business Day before the Borrowing Date of each Floating Rate Advance and three Business Days before the Borrowing Date for each Eurodollar Advance, specifying: (i) the Borrowing Date, which shall be a Business Day, of such Advance, (ii) the aggregate amount of such Advance, (iii) the Type of Advance selected, and (iv) in the case of each Eurodollar Advance, the Interest Period applicable thereto. Not later than 1:00 p.m. (New York City time) on each Borrowing Date, each Lender shall make available its Loan or Loans in Federal or other funds immediately available in New York City to the Administrative Agent at its address specified pursuant to Article XIII. The Administrative Agent will promptly make the funds so received from the Lenders available to the Borrower at the Administrative Agent's aforesaid address. 2.7. Conversion and Continuation of Outstanding Advances; No Conversion or Continuation of Eurodollar Advances After Default. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate 28 Advances are converted into Eurodollar Advances pursuant to this Section 2.7 or are repaid in accordance with Section 2.5. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.5 or (y) the Borrower shall have given the Administrative Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. The Borrower may elect from time to time to convert all or any part of an Advance of any Type into any other Type or Types of Advances; provided that any conversion of any Eurodollar Advance shall be made on, and only on, the last day of the Interest Period applicable thereto, and provided, further, that no Advance that is less than $2,000,000 may be converted into or continued as a Eurodollar Advance. Notwithstanding anything to the contrary contained in this Section 2.7, during the continuance of a Default or an Unmatured Default, the Administrative Agent may (or shall at the direction of the Required Lenders), by notice to the Borrower, declare that no Advance may be made, converted or continued as a Eurodollar Advance. The Borrower shall give the Administrative Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of an Advance or continuation of a Eurodollar Advance not later than 2:00 p.m. (New York City time) at least one (1) Business Day, in the case of a conversion into a Floating Rate Advance, or three (3) Business Days, in the case of a conversion into or continuation of a Eurodollar Advance, prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation, (ii) the aggregate amount and Type of the Advance which is to be converted or continued, and (iii) the amount of such Advance which is to be converted into or continued as a Eurodollar Advance and the duration of the Interest Period applicable thereto. 2.8. Changes in Interest Rate, Etc. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is automatically converted from a Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.7, to but excluding the date it is paid or is converted into a Eurodollar Advance pursuant to Section 2.7 hereof, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Administrative Agent as applicable to such Eurodollar Advance based upon the Borrower's selections under Sections 2.6 and 2.7 and otherwise in accordance with the terms hereof. No Interest Period may end after the Maturity Date. 2.9. Rates Applicable After Default. During the continuance of a Default (including the Borrower's failure to pay any Loan at maturity) the Required Lenders may, at their option, by notice to the Borrower (which notice 29 may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each Eurodollar Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Floating Rate in effect from time to time plus 2% per annum; provided that, during the continuance of a Default under Section 7.7 or 7.8, the interest rates set forth in clauses (i) and (ii) above shall be applicable to all Advances, fees and other Obligations hereunder without any election or action on the part of the Administrative Agent or any Lender. 2.10. Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Administrative Agent at the Administrative Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Administrative Agent specified in writing by the Administrative Agent to the Borrower, by 1:00 p.m. (New York City time) on the date when due and shall be applied ratably by the Administrative Agent among the Lenders. Each payment delivered to the Administrative Agent for the account of any Lender shall be delivered promptly by the Administrative Agent to such Lender in the same type of funds that the Administrative Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Administrative Agent from such Lender. 2.11. Noteless Agreement; Evidence of Indebtedness. (i) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (ii) The Administrative Agent shall also maintain accounts in which it will record (a) the date and the amount of each Loan made hereunder, the Type thereof and the Interest Period (in the case of a Eurodollar Advance) with respect thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder, (c) the effective date and amount of each Assignment Agreement delivered to and accepted by it and the parties thereto pursuant to Section 12.3, (d) the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof, and (e) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. (iii) The entries maintained in the accounts maintained pursuant to paragraphs (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of the Administrative Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms. 30 (iv) Any Lender may request that its Loans be evidenced by promissory notes (the "Notes") in substantially the form of Exhibit. In such event, the Borrower shall prepare, execute and deliver to such Lender such Note(s) payable to the order of such Lender. Thereafter, the Loans evidenced by such Note(s) and interest thereon shall at all times (prior to any assignment pursuant to Section 12.3) be represented by one or more Notes payable to the order of the payee named therein, except to the extent that any such Lender subsequently returns any such Note(s) for cancellation and requests that such Loans once again be evidenced as described in paragraphs (i) and (ii) above. 2.12. Telephonic Notices. The Borrower hereby authorizes the Lenders and the Administrative Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Administrative Agent or any Lender in good faith believes to be acting on behalf of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing Notices and Conversion/Continuation Notices to be given telephonically. The Borrower agrees to deliver promptly to the Administrative Agent a written confirmation, signed by an Authorized Officer, if such confirmation is requested by the Administrative Agent or any Lender, of each telephonic notice. If the written confirmation differs in any material respect from the action taken by the Administrative Agent and the Lenders, the reasonable and documented records of the Administrative Agent and the Lenders shall govern absent manifest error. 2.13. Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Floating Rate Advance shall be payable in arrears on each Payment Date, commencing with the first such date to occur after the Closing Date, on any date on which the Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Advance on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Eurodollar Advances shall be calculated for actual days elapsed on the basis of a 360-day year. Interest on Floating Rate Advances shall be calculated for actual days elapsed on the basis of a 365/366-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 1:00 p.m. (New York City time) at the place of payment. If any payment of principal of or interest on an Advance, any fees or any other amounts payable to the Administrative Agent or any Lender hereunder shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest, fees and commissions in connection with such payment. 2.14. Notification of Advances, Interest Rates, Prepayments. Promptly after receipt thereof, the Administrative Agent will notify each Lender of the contents of each Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. The Administrative Agent will notify the Borrower and each Lender of the interest rate applicable to each Eurodollar 31 Advance promptly upon determination of such interest rate and will give the Borrower and each Lender prompt notice of each change in the Alternate Base Rate. 2.15. Lending Installations. Each Lender may book its Loans at any Lending Installation selected by such Lender, as applicable, and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans and any Notes issued hereunder shall be deemed held by each Lender for the benefit of any such Lending Installation. Each Lender may, by written notice to the Administrative Agent and the Borrower in accordance with Article XIII, designate replacement or additional Lending Installations through which Loans will be made by it or Facility LCs will be issued by it and for whose account Loan payments are to be made. 2.16. Non-Receipt of Funds by the Administrative Agent. Unless the Borrower or a Lender, as the case may be, notifies the Administrative Agent prior to the date on which it is scheduled to make payment to the Administrative Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Administrative Agent for the account of the Lenders, that it does not intend to make such payment, the Administrative Agent may assume that such payment has been made. The Administrative Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Administrative Agent, the recipient of such payment shall, on demand by the Administrative Agent, repay to the Administrative Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Administrative Agent until the date the Administrative Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first three days and, thereafter, the interest rate applicable to the relevant Loan or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. 2.17. Replacement of Lender. If the Borrower is required pursuant to Section 3.1, 3.2 or 3.5 to make any additional payment to any Lender or if any Lender's obligation to make or continue, or to convert Floating Rate Advances into, Eurodollar Advances shall be suspended pursuant to Section 3.3 or if any Lender becomes a Defaulting Lender (any Lender so affected an "Affected Lender"), the Borrower may elect, if such amounts continue to be charged or such suspension is still effective, to terminate or replace the Commitment and Loans of such Affected Lender, provided that no Default or Unmatured Default shall have occurred and be continuing at the time of such termination or replacement, and provided further that, concurrently with such termination or replacement, (i) if the Affected Lender is being replaced, another bank or other entity which is reasonably satisfactory to the Borrower and the Administrative Agent shall agree, as of such date, to purchase for cash the Loans of the Affected Lender pursuant to an Assignment Agreement substantially in the form of Exhibit C and to become a Lender for all purposes under this Agreement and to assume all obligations of the Affected Lender to be terminated as of such date and to comply with the requirements of Section 12.3 applicable to assignments, and (ii) the Borrower shall pay to such Affected Lender in immediately available funds on the day of such replacement (A) all interest, fees and other amounts then 32 accrued but unpaid to such Affected Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Affected Lender under Sections 3.1, 3.2 and 3.5, and (B) an amount, if any, equal to the payment which would have been due to such Lender on the day of such replacement under Section 3.4 had the Loans of such Affected Lender been prepaid on such date rather than sold to the replacement Lender, in each case to the extent not paid by the purchasing lender and (iii) if the Affected Lender is being terminated, the Borrower shall pay to such Affected Lender all Obligations due to such Affected Lender (including the amounts described in the immediately preceding clauses (i) and (ii) plus, to the extent not paid by the replacement Lender, the outstanding principal balance of such Affected Lender's Advances). 2.18. Defaulting Lenders. (a) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Loan to the Borrower and (iii) the Borrower shall be required to make any payment hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then the Borrower may, so long as no Default shall occur or be continuing at such time and to the fullest extent permitted by applicable law, set off and otherwise apply the Obligation of the Borrower to make such payment to or for the account of such Defaulting Lender against the obligation of such Defaulting Lender to make such Defaulted Loan. In the event that, on any date, the Borrower shall so set off and otherwise apply its obligation to make any such payment against the obligation of such Defaulting Lender to make any such Defaulted Loan on or prior to such date, the amount so set off and otherwise applied by the Borrower shall constitute for all purposes of this Agreement and the other Loan Documents a Loan by such Defaulting Lender made on the date of such setoff under the Facility pursuant to which such Defaulted Loan was originally required to have been made pursuant to Section 2.1. Such Loan shall be considered, for all purposes of this Agreement, to comprise part of the Advance in connection with which such Defaulted Loan was originally required to have been made pursuant to Section 2.1, even if the other Loans comprising such Advance shall be Eurodollar Loans on the date such Loan is deemed to be made pursuant to this subsection (a). The Borrower shall notify the Administrative Agent at any time the Borrower exercises its right of set-off pursuant to this subsection (a) and shall set forth in such notice (A) the name of the Defaulting Lender and the Defaulted Loan required to be made by such Defaulting Lender and (B) the amount set off and otherwise applied in respect of such Defaulted Loan pursuant to this subsection (a). Any portion of such payment otherwise required to be made by the Borrower to or for the account of such Defaulting Lender which is paid by the Borrower, after giving effect to the amount set off and otherwise applied by the Borrower pursuant to this subsection (a), shall be applied by the Administrative Agent as specified in subsection (b) or (c) of this Section 2.18. (b) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Amount to any Agent or any of the other Lenders and (iii) the Borrower shall make any payment hereunder or under any other Loan Document to the Administrative Agent for the account of such Defaulting Lender, then the Administrative Agent may, on its behalf or on behalf of such other Agents or such other Lenders and to the fullest extent permitted by applicable law, apply at such time the amount so paid by the Borrower to or for the account of such Defaulting Lender to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. In the event that the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this 33 Agreement and the other Loan Documents payment, to such extent, of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Agents or such other Lenders, ratably in accordance with the respective portions of such Defaulted Amounts payable at such time to the Administrative Agent, such other Agents and such other Lenders and, if the amount of such payment made by the Borrower shall at such time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent, such other Agents and such other Lenders, in the following order of priority: (i) first, to the Agents for any Defaulted Amounts then owing to them, in their capacities as such, ratably in accordance with such respective Defaulted Amounts then owing to the Agents; and (ii) second, to any other Lenders for any Defaulted Amounts then owing to such other Lenders, ratably in accordance with such respective Defaulted Amounts then owing to such other Lenders. Any portion of such amount paid by the Borrower for the account of such Defaulting Lender remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this subsection (b), shall be applied by the Administrative Agent as specified in subsection (c) of this Section 2.18. (c) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall not owe a Defaulted Loan or a Defaulted Amount and (iii) the Borrower, any Agent or any other Lender shall be required to pay or distribute any amount hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then the Borrower or such Agent or such other Lender shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow or the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in escrow under this subsection (c) shall be deposited by the Administrative Agent in an account with a bank (the "Escrow Bank") selected by the Administrative Agent, in the name and under the control of the Administrative Agent, but subject to the provisions of this subsection (c). The terms applicable to such account, including the rate of interest payable with respect to the credit balance of such account from time to time, shall be the Escrow Bank's standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this subsection (c). The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Loans required to be made by such Defaulting Lender and to pay any amount payable by such Defaulting Lender hereunder and under the other Loan Documents to the Administrative Agent or any other Lender, as and when such Loans or amounts are required to be made or paid and, if the amount so held in escrow shall at any time be insufficient to make and pay all such Loans and amounts required to be made or paid at such time, in the following order of priority: (i) first, to the Agents for any amounts then due and payable by such Defaulting Lender to them hereunder, in their capacities as such, ratably in accordance with such respective amounts then due and payable to the Agents; 34 (ii) second, to any other Lenders for any amount then due and payable by such Defaulting Lender to such other Lenders hereunder, ratably in accordance with such respective amounts then due and payable to such other Lenders; and (iii) third, to the Borrower for any Loan then required to be made by such Defaulting Lender pursuant to a Commitment of such Defaulting Lender. In the event that any Lender that is a Defaulting Lender shall, at any time, cease to be a Defaulting Lender, any funds held by the Administrative Agent in escrow at such time with respect to such Lender shall be distributed by the Administrative Agent to such Lender and applied by such Lender to the Obligations owing to such Lender at such time under this Agreement and the other Loan Documents ratably in accordance with the respective amounts of such Obligations outstanding at such time. (d) The rights and remedies against a Defaulting Lender under this Section 2.18 are in addition to other rights and remedies that the Borrower may have against such Defaulting Lender with respect to any Defaulted Loan and that any Agent or any Lender may have against such Defaulting Lender with respect to any Defaulted Amount. ARTICLE III YIELD PROTECTION; TAXES 3.1. Yield Protection. If, on or after the Closing Date, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in any such law, rule, regulation, policy, guideline or directive or in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or applicable Lending Installation with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency (other than any change by way of imposition or increase of Reserve Requirements): (i) subjects any Lender or any applicable Lending Installation to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender in respect of its Eurodollar Loans, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation of making, funding or maintaining its Eurodollar Loans, or reduces any amount receivable by any Lender or any applicable Lending Installation in connection with its Eurodollar Loans, or requires any Lender or any applicable Lending Installation 35 to make any payment calculated by reference to the amount of Eurodollar Loans held or interest received by it, by an amount deemed material by such Lender, and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Installation of making or maintaining its Eurodollar Loans, or to reduce the return received by such Lender or applicable Lending Installation in connection with such Eurodollar Loans, then, within 15 days of demand, accompanied by the written statement required by Section 3.6, by such Lender, the Borrower shall pay such Lender or LC Issuer such additional amount or amounts as will compensate such Lender or LC Issuer for such increased cost or reduction in amount received. If, upon receipt of the notice specified by the immediately preceding sentence, the Borrower so notifies the Administrative Agent, the Borrower may either (i) prepay in full all Eurodollar Loans of such Lender then outstanding, so long as the Borrower reimburses such Lender for its increased costs in accordance with this Section 3.1, or (ii) convert all Eurodollar Loans of all Lenders then outstanding into Floating Rate Loans in accordance with this Agreement, so long as the Borrower reimburses the Lenders for all of their increased costs in accordance with this Section 3.1. 3.2. Changes in Capital Adequacy Regulations. If a Lender determines the amount of capital required or expected to be maintained by such Lender any Lending Installation of such Lender or any corporation controlling such Lender or LC Issuer is increased as a result of a Change, then, within 15 days of demand, accompanied by the written statement required by Section 3.6, by such Lender, the Borrower shall pay such Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender determines is attributable to this Agreement, its Loans, or its Commitment to Loans, as applicable, hereunder (after taking into account such Lender's policies as to capital adequacy). "Change" means (i) any change after the Closing Date in the Risk-Based Capital Guidelines or (ii) any adoption of, or change in, or change in the interpretation or administration of any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the Closing Date which affects the amount of capital required or expected to be maintained by any Lender or any Lending Installation or any corporation controlling any Lender. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the Closing Date, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the Closing Date. 3.3. Availability of Types of Advances. (a) Eurodollar Advances shall not be available on the Closing Date. For 45 days following the Closing Date no Eurodollar Advances shall be available other than those with an Interest Period of one month. (b) If (x) any Lender reasonably determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or (y) the Required Lenders determine in good faith that (i) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available or (ii) the interest rate applicable to Eurodollar Advances does not accurately reflect the cost of making or maintaining Eurodollar Advances, or 36 (iii) no reasonable basis exists for determining the Eurodollar Base Rate, then the Administrative Agent shall suspend the availability of Eurodollar Advances and require any affected Eurodollar Advances to be repaid or converted to Floating Rate Advances on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law, subject to the payment of any funding indemnification amounts required by Section 3.4. 3.4. Funding Indemnification. If any payment of a Eurodollar Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance is not made or continued, or a Floating Rate Advance is not converted into a Eurodollar Advance, on the date specified by the Borrower for any reason other than default by the Lenders, or a Eurodollar Advance is not prepaid on the date specified by the Borrower for any reason, the Borrower will indemnify each Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance. 3.5. Taxes. (i) All payments by the Borrower to or for the account of any Lender or the Administrative Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Agent, (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.5) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) the Borrower shall make such deductions, (c) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower shall furnish to the Administrative Agent the original copy of a receipt evidencing payment thereof or, if a receipt cannot be obtained with reasonable efforts, such other evidence of payment as is reasonably acceptable to the Administrative Agent, in each case within 30 days after such payment is made. (ii) In addition, the Borrower shall pay any present or future stamp or documentary taxes and any other excise or property taxes, intangible or mortgage recording taxes, charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note ("Other Taxes"). (iii) The Borrower shall indemnify the Administrative Agent and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Administrative Agent or such Lender as a result of its any Advances made by it hereunder or otherwise in connection with its participation in this Agreement and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this 37 indemnification shall be made within 30 days of the date the Administrative Agent or such Lender makes demand therefor pursuant to Section 3.6. (iv) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Lender") agrees that it will, not more than ten Business Days after the date on which it becomes a party to this Agreement (but in any event before a payment is due to it hereunder), (i) deliver to each of the Borrower and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, or (ii) in the case of a Non-U.S. Lender that is fiscally transparent, deliver to the Administrative Agent a United States Internal Revenue Form W-8IMY together with the applicable accompanying forms, W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Administrative Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Administrative Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. (v) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv) above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv) above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes. (vi) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant 38 jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. (vii) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Administrative Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Administrative Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Administrative Agent, which attorneys may be employees of the Administrative Agent). The obligations of the Lenders under this Section 3.5(vii) shall survive the payment of the Obligations and termination of this Agreement. 3.6. Lender Statements; Survival of Indemnity. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Administrative Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type, currency and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Notwithstanding any other term or condition contained herein or elsewhere in the Loan Documents, a Lender claiming compensation under Section 3.1, 3.2, 3.4 or 3.5 shall only be entitled to compensation under this Article III (i) from and after the date of such notice until the events giving rise to such claim have ceased to exist, and (ii) during the ninety (90) day period preceding the date the Borrower receives notice from the Administrative Agent or such Lender setting forth the described claim for compensation. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement. The obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement. 3.7. Alternative Lending Installation. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of Eurodollar Advances under Section 3.3, so long as such designation is not, in 39 the judgment of such Lender, reasonably disadvantageous to such Lender. A Lender's designation of an alternative Lending Installation shall not affect the Borrower's rights under Section 2.18 to replace a Lender. ARTICLE IV CONDITIONS PRECEDENT 4.1. Initial Advance. The Lenders shall not be required to make the initial Advance hereunder, which initial Advance shall occur no later than the Closing Date, unless the following conditions precedent have been satisfied and, if applicable, the Borrower has furnished to the Administrative Agent with sufficient copies for the Lenders: 4.1.1 Copies of the articles or certificate of incorporation (or the equivalent thereof) of each initial Credit Party, in each case, together with all amendments thereto, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of organization, as well as any other information required by Section 326 of the USA Patriot Act, 31 U.S.C. Section 5318 or otherwise necessary for the Administrative Agent or any Lender to verify the identity of such Credit Party as required by Section 326 of the USA Patriot Act, 31 U.S.C. Section 5318. 4.1.2 Copies, certified by the Secretary or Assistant Secretary (or the equivalent thereof) of each initial Credit Party, in each case, of its by-laws and of its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents and Tapco Acquisition Documents to which such Credit Party is a party and certified copies of the Tapco Acquisition Documents. 4.1.3 An incumbency certificate, executed by the Secretary or Assistant Secretary (or the equivalent thereof) of each initial Credit Party, in each case, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of such Credit Party authorized to sign the Loan Documents to which such Credit Party is party, upon which certificate the Administrative Agent and the Lenders shall be entitled to rely until informed of any change in writing by such Credit Party. 4.1.4 A certificate signed by the chief financial officer of the Borrower, the statements in which shall be true, stating that on the initial Borrowing Date (a) no Default or Unmatured Default has occurred and is continuing, (b) all of the representations and warranties in Article V shall be true and correct in all material respects as of such date and (c) (i) no Material Adverse Change has occurred since September 30, 2003 and (ii) no material adverse change in the business, condition (financial or otherwise), operations, performance and properties of Tapco Holdings, Inc. and its Subsidiaries, taken as a whole, has occurred since October 31, 2003. 4.1.5 A written opinion of the initial Credit Parties' counsel, in form and substance satisfactory to the Administrative Agent and addressed to the Lenders, in substantially the form of Exhibit A. 4.1.6 Any Notes requested by a Lender pursuant to Section 2.11 payable to the order of each such requesting Lender. 40 4.1.7 Written money transfer instructions, in substantially the form of Exhibit D, addressed to the Administrative Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as the Administrative Agent may have reasonably requested. 4.1.8 [Reserved.] 4.1.9 The Administrative Agent shall have received the audited consolidated financial statements of the Borrower and its Subsidiaries for the Borrower's fiscal year ended September 30, 2003, audited consolidated financial statements of Tapco Holdings, Inc. and its Subsidiaries for the fiscal year ended October 31, 2003 and interim financial statements of the Borrower and Tapco Holdings, Inc. dated the end of the most recent fiscal quarter for which financial statements are available (or, in the event the Lenders' due diligence review reveals material changes since such financial statements, as of a later date within 45 days of the initial Advance). 4.1.10 The Administrative Agent and the Lenders shall have received pro forma opening consolidated financial statements ("Pro Forma Opening Statements") giving effect to the Tapco Acquisition and financial statement projections ("Projections") of balance sheets, income statements and cash flow statements on a quarterly basis for the first year following the day of the initial Advance and on an annual basis for each year thereafter until the fiscal year 2011, together with such information as the Administrative Agent and the Lenders may reasonably request to confirm the tax, legal, and business assumptions made in such Pro Forma Opening Statements and Projections, such Pro Forma Opening Statements and Projections demonstrating, in the reasonable judgment of the Administrative Agent and the Lenders, together with all other information then available to the Administrative Agent and the Lenders, that the Borrower and its Subsidiaries have the ability to repay their debts and satisfy the respective other obligations as and when due and to comply with Section 6.17. 4.1.11 The Administrative Agent and the Lenders shall have received a certificate from the Chief Financial Officer of the Borrower and each Guarantor certifying that the Borrower and each Guarantor, as the case may be, is Solvent and will be Solvent subsequent to incurring the Indebtedness hereunder (including the Advances), will be able to pay its debts and liabilities as they become due and will not be left with unreasonably small capital with which to engage in its businesses. 4.1.12 The Administrative Agent shall have received evidence reasonably satisfactory to the Administrative Agent of (i) the consummation of the Tapco Acquisition concurrently with the initial Advance strictly in accordance with the terms of the Tapco Acquisition Agreement, without any waiver or amendment not consented to by the Lenders of any term, provision or condition set forth therein and in compliance with all applicable laws and (ii) the payment of all principal, interest, fees and premiums, if any, on all (x) Indebtedness under the Existing Credit Agreement, and (y) Indebtedness of Tapco, and, in each case, the agreement to release all Liens and the termination of the applicable agreements relating thereto, all taking effect concurrently with the effectiveness of this Agreement; provided, however, that any existing letters of credit incorporated into and governed by the terms of the First Lien Credit 41 Agreement shall not be required to be terminated in connection with the termination of the Existing Credit Agreement and the agreements, documents, and instruments related thereto. 4.1.13 Such other documents as the Administrative Agent or its counsel may have reasonably requested, including, without limitation, those documents set forth in Exhibit G hereto. 4.1.14 The Lenders shall have completed a legal, environmental, tax accounting and confirmatory business due diligence investigation of the Credit Parties and their respective Subsidiaries in scope, and with results, satisfactory to the Lenders. 4.1.15 The Lenders shall have received true and complete copies of the consolidated audited balance sheets of Tapco Holdings, Inc. and its Subsidiaries as of October 31, 2001, 2002 and 2003 and the related audited consolidated statements of income and members' equity and cash flow for the fiscal years ended October 31, 2001, 2002 and 2003 including the audit reports and notes thereto, in each case prepared in accordance with GAAP consistently applied throughout the periods covered thereby. Such financial statements shall fairly reflect in all material respects the financial position of Tapco Holdings, Inc. and the Subsidiaries on a consolidated basis as of the respective dates thereof and the results of operations and changes in members' equity and cash flow for the periods then ended. 4.1.16 The Lenders shall be satisfied with the corporate and legal structure and capitalization of each Credit Party and each of its Subsidiaries, including the terms and conditions of the charter, bylaws and each class of Equity Interest in each Credit Party and each Subsidiary and of each agreement or instrument relating to such structure or capitalization. 4.1.17 (a) The Lenders shall be satisfied with the terms and conditions of the First Lien Financing and the documentation with respect thereto, including the Intercreditor Agreement, and the Borrower shall have received at least $640 million in gross cash proceeds from the incurrence of the First Lien Financing, and all such proceeds shall have been used or shall be used simultaneously with the initial Advance by the Borrower to fund the Transaction, and (b) the full amount of the Revolving Loan Commitments under the First Lien Credit Agreement (minus any amount attributable to existing letters of credit being deemed issued under the First Lien Credit Agreement) shall be available to be drawn after giving effect to all drawings on the Closing Date. 4.1.18 The Lead Arrangers shall be satisfied with the Borrower's arrangements to retain and compensate key employees of Tapco Holdings, Inc. and its Subsidiaries. 4.1.19 The Lenders shall be satisfied that, and shall have received a certificate from the Chief Financial Officer of the Borrower in the form of Exhibit I hereto certifying (based on stated assumptions as to the EBITDA of Tapco and its Subsidiaries) that, (a) Consolidated EBITDA for the 12-month period ending as of the most recently ended fiscal quarter on a pro forma basis after giving effect to the Transaction, is no less than $190.0 42 million and (b) the Total Leverage Ratio (on a pro forma basis after giving effect to the Transaction) for such 12-month period, is no greater than 5.1:1.00. 4.1.20 The Borrower shall have paid all accrued fees of the Administrative Agent, the Lead Arrangers and the Lenders (including the fees and expenses of counsel for the Lead Arrangers and local counsel for the Lenders). 4.1.21 The Second Lien Financing shall have received a debt rating from both Moody's Investor Services, Inc. and Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. ARTICLE V REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to each Lender and the Administrative Agent as of each of (i) the Closing Date and (ii) the date of the initial Advances hereunder (if different from the Closing Date): 5.1. Existence and Standing. Each of the Borrower and its Subsidiaries is a corporation, partnership (in the case of Subsidiaries only) or limited liability company (in the case of Subsidiaries only) duly and properly incorporated or organized, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted, except where the failure to do so could reasonably be expected to result in a Material Adverse Change. 5.2. Authorization and Validity. The Borrower has the power and authority and legal right to execute and deliver the Transaction Documents to which it is a party and to perform its obligations thereunder. The execution and delivery by the Borrower of the Transaction Documents to which it is a party and the performance of its obligations thereunder have been duly authorized by proper proceedings, and the Transaction Documents to which the Borrower is a party constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as enforceability may be limited by (i) bankruptcy, insolvency, fraudulent conveyances, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally; (ii) general equitable principles (whether considered in a proceeding in equity or at law); and (iii) requirements of reasonableness, good faith and fair dealing. 5.3. No Conflict; Government Consent. Neither the execution and delivery by the Borrower or its Subsidiaries, as applicable, of the Loan Documents to which such Person is a party, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, nor the consummation of the Tapco Acquisition or the Refinancing will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or (ii) the Borrower's or any Subsidiary's articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating agreement or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with, or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, 43 of or on the Property of the Borrower or a Subsidiary pursuant to the terms of, any such indenture, instrument or agreement, except as in the aggregate could not be reasonably likely to result in a Material Adverse Change. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any of its Subsidiaries, is required to be obtained by the Borrower or any of its Subsidiaries in connection with the execution and delivery of the Loan Documents, the borrowings under this Agreement, the payment and performance by the Borrower of the Obligations or the legality, validity, binding effect or enforceability of any of the Loan Documents, or the consummation of the Tapco Acquisition or the Refinancing except as in the aggregate cannot reasonably be expected to result in a Material Adverse Change. 5.4. Financial Statements. (a) The September 30, 2003 audited consolidated financial statements of the Borrower and its Subsidiaries and the October 31, 2003 audited consolidated financial statements of Tapco Holdings, Inc. and its Subsidiaries heretofore delivered to the Administrative Agent and the Lenders were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present, in all material respects, the consolidated financial condition and operations of the Borrower and its Subsidiaries and Tapco Holdings, Inc. and its Subsidiaries, respectively, at such date and the consolidated results of their operations for the period then ended. The June 30, 2004 unaudited consolidated financial statements of the Borrower and its Subsidiaries and Tapco Holdings, Inc. and its Subsidiaries, respectively, heretofore delivered to the Administrative Agent and the Lenders, were prepared in accordance with generally accepted accounting principles in effect on the date such statements were prepared and fairly present, subject to year-end audit adjustments, in all material respects, the consolidated financial condition and operations of the Borrower and its Subsidiaries as at such date and the consolidated results of their operations for the period then ended. (b) The consolidated pro forma balance sheet of the Borrower and its Subsidiaries as at June 30, 2004 and the related Consolidated pro forma statements of income and cash flows of the Borrower for the twelve months then ended, certified by the chief financial officer of the Borrower, copies of which have been furnished to each Lender Party, fairly present, subject to year-end audit adjustments, in all material respects the consolidated pro forma financial condition of the Borrower and its Subsidiaries as at such date and the Consolidated pro forma results of operations of the Borrower and its Subsidiaries for the period ended on such date, in each case giving effect to the Tapco Acquisition, all in accordance with generally accepted accounting principles. 5.5. Material Adverse Change. Since September 30, 2003, there has been no Material Adverse Change and since October 31, 2003, there has been no material adverse change in the business, condition (financial or otherwise), operations, performance and properties of Tapco Holdings, Inc. and its Subsidiaries, taken as a whole. 44 5.6. Taxes. The Borrower and its Subsidiaries have filed all United States federal tax returns, Utah state tax returns and, to the Borrower's best knowledge after due inquiry, all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except in respect of such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles and as to which no Lien exists (except as permitted by Section 6.15.1), except as could not be reasonably expected to result in a Material Adverse Change. No Liens have been filed and no claims are being asserted with respect to such taxes. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate under Agreement Accounting Principles. 5.7. Litigation and Contingent Obligations. There is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which could reasonably be expected to result in a Material Adverse Change or affecting Tapco Holdings, Inc. and its Subsidiaries which could reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), operations, performance or properties of Tapco Holdings, Inc. and its subsidiaries taken as a whole, or which seeks to prevent, enjoin or delay the making of any Credit Extensions. Other than liabilities incident to any litigation, arbitration or proceeding which could not reasonably be expected to be in an aggregate amount in excess of $1,000,000 or as disclosed in Schedule 5.7, the Borrower has no material contingent obligations not provided for or disclosed in the financial statements referred to in Section 5.4. 5.8. Subsidiaries. Schedule 5.8 contains an accurate list of all Subsidiaries of the Borrower as of the date of this Agreement, setting forth their respective jurisdictions of organization and the percentage of their respective capital stock or other ownership interests owned by the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock or other ownership interests of such Subsidiaries have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and non-assessable and are owned by such Credit Party or one or more of its Subsidiaries free and clear of all Liens, except those created under the Collateral Documents and the second priority liens created under the Second Lien Collateral Documents. 5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans do not in the aggregate exceed $1,000,000. Neither the Borrower nor any other member of the Controlled Group has incurred, or is reasonably expected to incur, pursuant to Section 4201 of ERISA, any withdrawal liability to Multiemployer Plans an amount that would result in a Material Adverse Change. Each Plan complies in all material respects with all applicable requirements of law and regulations. No Reportable Event has occurred with respect to any Plan. Neither the Borrower nor any other member of the Controlled Group has withdrawn from any Multiemployer Plan or Multiple Employer Plan within the meaning of Title IV of ERISA or initiated steps to do so, and no steps have been taken to reorganize or terminate, within the meaning of Title IV of ERISA, any Multiemployer Plan. No steps have been taken to initiate the termination of any Plan, and the PBGC has not given notice that it intends to terminate any Plan. 45 5.10. Accuracy of Information. (a) No Loan Document or written statement furnished by the Borrower or any of its Subsidiaries to the Administrative Agent or to any Lender in connection with the negotiation of, or compliance with, the Loan Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading. (b) The consolidated forecasted financial statements of the Borrower and its Subsidiaries delivered to the Lenders pursuant to Section 6.1.7 were prepared in good faith on the basis of the assumptions stated therein, which assumptions were fair in light of the conditions existing at the time of delivery of such forecasts, and represented, at the time of delivery, the Borrower's best estimate of its future financial performance. 5.11. Regulation U. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate of buying or carrying margin stock (as defined in Regulation U), and after applying the proceeds of each Credit Extension, margin stock (as defined in Regulation U) constitutes less than 25% of the value of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or any other restriction hereunder. 5.12. Material Agreements. Neither the Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction which could reasonably be expected to result in a Material Adverse Change. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any (i) agreement or instrument to which it is a party, which default could reasonably be expected to result in a Material Adverse Change or (ii) any agreement or instrument evidencing or governing Indebtedness. 5.13. Compliance with Laws. The Borrower and its Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property, except as cannot reasonably be expected to result in a Material Adverse Change. 5.14. Ownership of Properties. (a) Set forth on Schedule 5.14(a)(i) hereto is a complete and accurate list of all Owned Real Property as of the date hereof, showing as of the date hereof the street address, county or other relevant jurisdiction, state, record owner and book and estimated fair market value thereof; (ii) set forth on Schedule 5.14(a)(ii) hereto is a complete and accurate list of all Real Property Leases as of the date hereof, showing the street address or other information sufficient to identify the location of the affected real property, state, lessor, lessee, expiration date and annual rental cost thereof; and (iii) set forth on Schedule 5.14(a)(iii) hereto is a complete and accurate list of all Tenant Leases as of the date hereof, showing the street address or other information sufficient to identify the location of the affected real property, state, lessor, lessee, expiration date and annual rental cost thereof. (b) (i) The Borrower and its Subsidiaries have good, marketable and insurable fee simple title to, or a valid leasehold interest in, to all of the Owned Real Property listed on Schedule 5.14(a)(i) hereto and all 46 of the Leased Real Property listed on Schedule 5.14(a)(ii) hereto, free and clear of all Liens, other than Liens created or permitted by the Loan Documents, including, without limitation, such items that will constitute Permitted Encumbrances and Liens set forth on Schedule 6.15, (ii) each Real Property Lease and Real Property Sublease is the legal, valid and binding obligation of the Borrower or its applicable Subsidiary party thereto, enforceable in accordance with its terms against the Borrower or Subsidiary and (iii) the Real Property Collateral set forth on Schedule 5.14(b)(iii) hereto comprises all of the Owned Real Properties as of the date hereof required to be subject to a Mortgage pursuant to the Existing Credit Agreement, or acquired subsequent to the date thereof (after giving effect to the Acquisition), other than the property located at 32906-32808 Riverwood Street, Magnolia, Texas 77354 and any properties acquired in connection with the Tapco Acquisition with a net book value of less than $200,000. 5.15. Plan Assets; Prohibited Transactions. The Borrower is not an entity deemed to hold "plan assets" within the meaning of 29 C.F.R. ss. 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any plan (within the meaning of Section 4975 of the Code), and neither the execution of this Agreement nor the making of Loans hereunder gives rise to a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. 5.16. Environmental Matters. In the ordinary course of its business, the officers of the Borrower consider the effect of Environmental Laws on the business of the Borrower and its Subsidiaries, in the course of which they identify and evaluate potential risks and liabilities accruing to the Borrower due to Environmental Laws. On the basis of this consideration, the Borrower has concluded that Environmental Laws are not reasonably expected to result in a Material Adverse Change. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to result in a Material Adverse Change. 5.17. Investment Company Act. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 5.18. Public Utility Holding Company Act. The Borrower is not a "holding company" as such term is defined in the Public Utility Holding Company Act of 1935, as amended. 5.19. Insurance. The Borrower maintains, and has caused each Subsidiary to maintain, with financially sound and reputable insurance companies insurance on all their Property in such amounts, subject to such deductibles and self-insurance retentions and covering such properties and risks as is consistent with sound business practice. 5.20. No Default or Unmatured Default. No Default or Unmatured Default has occurred and is continuing. 47 5.21. SDN List Designation. Neither the Borrower nor any of its Subsidiaries or Affiliates is a country, individual or entity named on the Specifically Designated National and Blocked Persons (SDN) list issued by the Office of Foreign Asset Control of the Department of the Treasury of the United States of America. 5.22. Solvency. Each Credit Party is, individually and together with its Subsidiaries, Solvent. ARTICLE VI COVENANTS During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing: 6.1. [Reserved.] 6.2. Limitation on Indebtedness. (vii) The Borrower will not, and will not permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than the Loans and Indebtedness existing on the Closing Date); provided that the Borrower or any Guarantor may Incur Indebtedness if, after giving pro forma effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom (as though such Incurrence and receipt and application had occurred on the first day of the most recently ended four fiscal quarter period), no Default under Section 6.17 shall have occurred and be continuing. (viii) Notwithstanding the foregoing Section 6.2(a), the Borrower and any Restricted Subsidiary (except as specified below) may Incur each and all of the following: (i) Indebtedness of the Borrower and any Guarantor outstanding at any time in an aggregate principal amount (together with refinancings thereof) not to exceed $725 million under the First Lien Credit Agreement less any amount of such Indebtedness permanently repaid as provided under Section 6.10; (ii) Indebtedness owed (A) to the Borrower or any Guarantor evidenced by an unsubordinated promissory note or (B) to any other Restricted Subsidiary; provided that (x) any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Borrower or another Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (ii) and (y) if the Borrower or any Guarantor is the obligor on such Indebtedness, such Indebtedness must be expressly subordinated in right of payment to the Loans, in the case of the Borrower, or the Guaranty, in the case of a Guarantor on the terms set forth in Schedule 6.2(b)(ii) hereto; (iii) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance, refund, replace, renew or extend (including pursuant to any defeasance or discharge mechanism) then outstanding Indebtedness (other than Indebtedness outstanding under clause (ii) or (iv) hereof) and any refinancings thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued and unpaid interest, fees, underwriting discounts, commissions and 48 expenses); provided that (a) Indebtedness the proceeds of which are used to refinance or refund the Loans or Indebtedness that is pari passu with, or subordinated in right of payment to, the Loans or the Guaranty shall only be permitted under this clause (iii) if (x) in case the Loans are refinanced in part or the Indebtedness to be refinanced is pari passu with the Loans or the Guaranty, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the remaining Loans or the Guaranty, or (y) in case the Indebtedness to be refinanced is subordinated in right of payment to the Loans or the Guaranty, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Loans or the Guaranty at least to the extent that the Indebtedness to be refinanced is subordinated to the Loans or the Guaranty, (b) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded and (c) such new Indebtedness is Incurred by the Borrower or a Guarantor or by the Restricted Subsidiary who is the obligor on the Indebtedness to be refinanced or refunded; (iv) Indebtedness existing on the date hereof and described in Schedule 6.2(b)(iv) (and renewals, refinancings or extensions thereof on terms and conditions no less favorable to the applicable obligor than such existing Indebtedness and in a principal amount not in excess of that outstanding as of the date of such renewal, refinancing or extension); (v) To the extent approved by the Administrative Agent, Indebtedness arising under Rate Management Transactions; (vi) Secured or unsecured purchase money Indebtedness (excluding Capitalized Leases) incurred by the Borrower or any of its Subsidiaries after the Closing Date to finance the acquisition of assets used in its business, if (1) the total of all such Indebtedness for the Borrower and its Subsidiaries taken together incurred on or after the Closing Date shall not exceed an aggregate principal amount of $1,000,000 at any one time outstanding, (2) such Indebtedness when incurred shall not exceed the purchase price of the asset(s) financed, (3) no such Indebtedness shall be refinanced for a principal amount in excess of the principal balance outstanding thereon at the time of such refinancing, and (4) any Lien securing such Indebtedness is permitted under Section 6.8 (such Indebtedness being referred to herein as "Permitted Purchase Money Indebtedness"); (vii) Guaranty obligations of the Borrower of any Indebtedness of any Subsidiary permitted under this Section 6.2; (viii) Permitted Indebtedness; 49 (ix) Indebtedness of the Borrower and its Subsidiaries constituting Capitalized Lease Obligations in an aggregate principal amount not exceeding $10,000,000 at any time outstanding; (x) Indebtedness in respect of take or pay contracts entered into by the Borrower and its Subsidiaries in the ordinary course of business and consistent with past practices; (xi) Guarantees of the Loans by any Restricted Subsidiary other than a Foreign Subsidiary in accordance with Section 6.6; and (xii) Indebtedness of the Borrower or any Guarantor (in addition to Indebtedness permitted under clauses (i) through (xi) above) in an aggregate principal amount outstanding at any time (together with refinancings thereof) not to exceed $10 million, less any amount of such Indebtedness permanently repaid as provided under Section 6.10; (ix) Notwithstanding any other provision of this Section 6.2, the maximum amount of Indebtedness that may be Incurred pursuant to this Section 6.2 will not be deemed to be exceeded, with respect to any outstanding Indebtedness due solely to the result of fluctuations in the exchange rates of currencies. (x) For purposes of determining any particular amount of Indebtedness under this Section 6.2, (x) Indebtedness Incurred under the First Lien Credit Agreement shall be treated as Incurred pursuant to clause (1) of the second paragraph of part (b)(xi) of this Section 6.2 and (y) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included. For purposes of determining compliance with this Section 6.2, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above (other than Indebtedness referred to in clause (x) of the preceding sentence), including under part (a), the Borrower, in its sole discretion, shall classify, and from time to time may reclassify, such item of Indebtedness. (xii) The Borrower will not Incur any Indebtedness if such Indebtedness is subordinate in right of payment to any other Indebtedness unless such Indebtedness is also subordinate in right of payment to the Loans to the same extent. 6.3. Limitation on Restricted Payments. The Borrower will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (1) declare or pay any dividend or make any distribution on or with respect to its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire shares of such Capital Stock and (y) pro rata dividends or distributions on Common Stock of Restricted Subsidiaries (other than Guarantors) held by minority stockholders) held by Persons other than the Borrower or any of its Restricted Subsidiaries, (2) purchase, call for redemption or redeem, retire or otherwise acquire for value any shares of Capital Stock of (A) the Borrower or any Guarantor (including options, warrants or other rights to acquire such 50 shares of Capital Stock) held by any Person other than the Borrower or a Guarantor or (B) a Restricted Subsidiary other than a Guarantor (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Affiliate of the Borrower (other than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock of the Borrower, (3) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Borrower that is subordinated in right of payment to the Loans or any Indebtedness of a Guarantor that is subordinated in right of payment to the Guaranty or (4) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (1) through (4) above being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (a) a Default or Unmatured Default shall have occurred and be continuing, or (b) the aggregate amount of all Restricted Payments made after the Closing Date shall exceed the sum of (i) 50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a negative number, 100% of the negative amount is included in such calculation) accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter immediately following the Closing Date and ending on the last day of the last fiscal quarter preceding the date such Restricted Payment is to be made plus (ii) the aggregate Net Cash Proceeds received by the Borrower after the Closing Date as a capital contribution or from the issuance and sale of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the Borrower, including an issuance or sale permitted by this Agreement of Indebtedness of the Borrower for cash subsequent to the Closing Date upon the conversion of such Indebtedness into Capital Stock (other than Disqualified Stock) of the Borrower, or from the issuance to a Person who is not a Subsidiary of the Borrower of any options, warrants or other rights to acquire Capital Stock of the Borrower (in each case, exclusive of any Disqualified Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Maturity Date) plus (iii) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, repayments of loans or advances, or other transfers of assets, in each case to the Borrower or any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such Investment (except, in each case, to the extent any such payment or proceeds are included in the calculation of Adjusted Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed, in each case, the amount of Investments previously made by the Borrower or any Restricted Subsidiary in such Person or Unrestricted Subsidiary. 51 The foregoing provision shall not be violated by reason of: (i) the payment of any dividend or redemption of any Capital Stock within 60 days after the related date of declaration or call for redemption if, at said date of declaration or call for redemption, such payment or redemption would comply with the preceding paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Loans or the Guaranty including premium, if any, and accrued and unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of part (b) of Section 6.2; (iii) the repurchase, redemption or other acquisition of Capital Stock of the Borrower or a Guarantor (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a capital contribution or a substantially concurrent offering of, shares of Capital Stock (other than Disqualified Stock) of the Borrower (or options, warrants or other rights to acquire such Capital Stock); provided that such options, warrants or other rights are not redeemable at the option of the holder, or required to be redeemed, prior to the Maturity Date; (iv) the making of any principal payment or the repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness which is subordinated in right of payment to the Loans or the Guaranty in exchange for, or out of the proceeds of a capital contribution or a substantially concurrent offering of, shares of the Capital Stock (other than Disqualified Stock) of the Borrower (or options, warrants or other rights to acquire such Capital Stock); provided that such options, warrants or other rights are not redeemable at the option of the holder, or required to be redeemed, prior to the Maturity Date; (v) payments or distributions to dissenting stockholders pursuant to applicable law pursuant to or in connection with a consolidation, merger or transfer of assets of the Borrower that complies with the provisions of this Agreement applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of the Borrower; (vi) Investments acquired as a capital contribution to, or in exchange for, or out of the proceeds of a substantially concurrent offering of, Capital Stock (other than Disqualified Stock) of the Borrower; (vii) the repurchase of Capital Stock deemed to occur upon the exercise of options or warrants if such Capital Stock represents all or a portion of the exercise price thereof; (viii) any purchase, repurchase, redemption, retirement or other acquisition for value of shares of, or options to purchase shares of, common stock of the Borrower or any of its Subsidiaries from employees, former employees, directors or former directors of the 52 Borrower or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of any of the Borrower Incentive Plans; or (ix) Restricted Payments, not otherwise described in clauses (i) through (viii) above, in an aggregate amount not to exceed $20 million. Each Restricted Payment permitted pursuant to the preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or (iv) thereof, an Investment acquired as a capital contribution or in exchange for Capital Stock referred to in clause (vi) thereof and the repurchase of Capital Stock referred to in clause (vii) thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred to in clause (iii), (iv) or (vi), shall be included in calculating whether the conditions of clause (c) of the first paragraph of this Section 6.3 have been met with respect to any subsequent Restricted Payments. In the event the proceeds of an issuance of Capital Stock of the Borrower are used for the redemption, repurchase or other acquisition of the Notes, or Indebtedness that is pari passu with the Loans or the Guaranty, then the Net Cash Proceeds of such issuance shall be included in clause (c) of the first paragraph of this Section 6.3 only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of Indebtedness. For purposes of determining compliance with this Section 6.3, (x) the amount, if other than in cash, of any Restricted Payment shall be determined in good faith by the Disinterested Members of the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution and (y) in the event that a Restricted Payment meets the criteria of more than one of the types of Restricted Payments described in the above clauses, including the first paragraph of this Section 6.3, the Borrower, in its sole discretion, may order and classify, and from time to time may reclassify, such Restricted Payment if it would have been permitted at the time such Restricted Payment was made and at the time of such reclassification. 6.4. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. The Borrower will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Borrower or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Borrower or any other Restricted Subsidiary, (iii) make loans or advances to the Borrower or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Borrower or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (a) existing on the Closing Date in the First Lien Credit Agreement, this Agreement or any other agreements in effect on the Closing Date, and any extensions, refinancings, renewals or replacements of such agreements; provided that the encumbrances and restrictions in any such extensions, 53 refinancings, renewals or replacements taken as a whole are no less favorable in any material respect to the Holders of the Obligations than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (b) existing under or by reason of applicable law, regulation, rule or order; (c) existing with respect to any Person or the property or assets of such Person acquired by the Borrower or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired and any extensions, refinancings, renewals or replacements of thereof; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements taken as a whole are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (d) in the case of clause (iv) of the first paragraph of this Section 6.4: (i) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (ii) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Borrower or any Restricted Subsidiary not otherwise prohibited by this Agreement or (iii) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Borrower or any Restricted Subsidiary in any manner material to the Borrower or any Restricted Subsidiary; (iv) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary; (v) existing in agreements governing Indebtedness of any Guarantor permitted to be Incurred after the date of this Agreement, provided that the terms and conditions of any such encumbrances or restrictions are no more restrictive than those permitted under clause (a) above, and any extensions, refinancings, renewals or replacements of such Indebtedness; and provided that the encumbrances or restrictions in any such extensions, refinancings, renewals or replacements taken as a whole are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; 54 (vi) existing under purchase money obligations for property acquired in the ordinary course of business consistent with past practice that impose encumbrances or restrictions on the property so acquired of the nature described in clause (iv) of the first paragraph of this Section 6.4; and (vii) customary provisions with respect to the distribution of assets or property in joint venture agreements and other similar agreements. Nothing contained in this Section 6.4 shall prevent the Borrower or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted by Section 6.8 or (2) restricting the sale or other disposition of property or assets of the Borrower or any of its Restricted Subsidiaries that secure Indebtedness of the Borrower or any of its Restricted Subsidiaries. 6.5. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries. The Borrower will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except: (a) to the Borrower or a Wholly Owned Restricted Subsidiary; (b) issuances of director's qualifying shares or sales to foreign nationals of shares of Capital Stock of Foreign Subsidiaries, to the extent required by applicable law; (c) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under Section 6.3 if made on the date of such issuance or sale; or (d) sales of Capital Stock other than Disqualified Stock (including options, warrants or other rights to purchase shares of such Capital Stock) of a Restricted Subsidiary by the Borrower or a Restricted Subsidiary, provided that the Borrower or such Restricted Subsidiary applies the Net Cash Proceeds of any such sale in accordance with clause (A) or (B) of the second paragraph of Section 6.10. 6.6. Guarantees by Restricted Subsidiaries. The Borrower will cause each Restricted Subsidiary, other than a Foreign Subsidiary or a Restricted Subsidiary that becomes a Restricted Subsidiary as a result of a Permitted Investment under clause (xv) of the definition of Permitted Investment, to execute and deliver the Guaranty or, if such Restricted Subsidiary becomes a Restricted Subsidiary after the Closing Date, a supplement to the Guaranty. Notwithstanding the foregoing, (i) the Guaranty may provide by its terms that it shall be automatically and unconditionally released and discharged upon any sale, exchange or transfer, to any Person not an Affiliate of the Borrower, of all of the Borrower's and each Restricted Subsidiary's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is otherwise permitted by this 55 Agreement) or upon the designation of such Restricted Subsidiary as an Unrestricted Subsidiary in accordance with the terms of this Agreement and (ii) to the extent that the aggregate EBITDA of FlexCrete Building Systems, L.C., Florida N-Viro L.P. and Florida N-Viro Management, LLC for the most recently completed four fiscal quarter period does not exceed one percent (1%) of the Consolidated EBITDA of the Borrower and its Subsidiaries for the same period, the Borrower shall not be required to cause FlexCrete Building Systems, L.C., Florida N-Viro, L.P. or Florida N-Viro Management, LLC to guarantee the Obligations. 6.7. Limitation on Transactions with Shareholders and Affiliates. The Borrower will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of the Borrower or with any Affiliate of the Borrower or any Restricted Subsidiary, unless such transaction or series of related transactions is on fair and reasonable terms no less favorable to the Borrower or such Restricted Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to: (i) any transaction solely between the Borrower and any of its Restricted Subsidiaries or solely between Restricted Subsidiaries; (ii) the payment of reasonable and customary regular fees to directors of the Borrower who are not employees of the Borrower, insurance premiums in connection with directors' and officers' insurance and indemnification arrangements entered into by the Borrower consistent with past practices of the Borrower or typical for companies with businesses similar to that of the Borrower; (iii) any payments or other transactions pursuant to any tax-sharing agreement between the Borrower and any other Person with which the Borrower files a consolidated tax return or with which the Borrower is part of a consolidated group for tax purposes; (iv) any sale of shares of Capital Stock (other than Disqualified Stock) of the Borrower; (v) any Permitted Investments or any Restricted Payments not prohibited by Section 6.3; (vi) any issuance of securities pursuant to employment arrangements, stock options and stock ownership plans; (vii) loans or advances to employees of the Borrower or any of its Restricted Subsidiaries in the ordinary course of business in accordance with past practices of the Borrower, but in any event not to exceed $2.5 million in the aggregate outstanding at any one time; (viii) the renewal or extension of any agreement or arrangement in existence on the Closing Date to which the Borrower or any of its Restricted Subsidiaries is a party and that is described on Schedule 6.7 to this Agreement, as these agreements may be amended, modified or supplemented from time to time; provided, however, that any 56 future amendment, modification or supplement entered into after the Closing Date will be permitted to the extent that its terms are not materially less favorable to the Borrower or such Restricted Subsidiary than the terms of the agreements or arrangements in effect on the Closing Date; and 6.8. Limitation on Liens. The Borrower will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien in, of or on any of the Property of the Borrower or any Restricted Subsidiary. The foregoing limitation does not apply to: 6.8.1 Liens existing on the Closing Date; 6.8.2 Liens granted after the Closing Date on any assets or Capital Stock of the Borrower or its Restricted Subsidiaries created in favor of the Holders of the Obligations; 6.8.3 Liens with respect to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Borrower or a Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the Borrower or such other Restricted Subsidiary; 6.8.4 Liens securing Indebtedness which is Incurred to refinance secured Indebtedness which is permitted to be Incurred under clause (iii) of Section 6.2(b); provided that such Liens do not extend to or cover any property or assets of the Borrower or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; 6.8.5 Liens to secure Indebtedness Incurred under clause (i) of Section 6.2(b); 6.8.6 Liens on cash set aside at the time of the Incurrence of any Indebtedness, or government securities purchased with such cash, in either case to the extent that such cash or government securities pre-fund the payment of interest on such Indebtedness and are held in a collateral or escrow account or similar arrangement to be applied for such purpose; 6.8.7 Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books, unless and until any Lien resulting therefrom attaches to its Property or becomes enforceable against its other creditors. 6.8.8 Liens imposed by law, such as landlords', wage earners', carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which (a) secure payment of obligations not more than 60 days past due, (b) are being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books, or (c) 57 individually or together with all other Liens permitted pursuant to this Section 6.8 outstanding on any date of determination do not materially adversely affect the use of the Property to which they relate. 6.8.9 Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. 6.8.10 Deposits securing liability to insurance carriers under insurance or self-insurance arrangements. 6.8.11 Deposits to secure the performance of bids, trade or supply contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business. 6.8.12 Easements, reservations, rights-of-way, restrictions, survey exceptions and other similar encumbrances as to real property of the Borrower and its Restricted Subsidiaries which customarily exist on properties of corporations engaged in similar activities and similarly situated and which (a) were not incurred in connection with and do not secure indebtedness (except as expressly permitted by this Section 6.8), (b) do not render title to the property encumbered thereby unmarketable, and (c) do not materially interfere with the conduct of the business of the Borrower or such Restricted Subsidiary conducted at the property subject thereto. 6.8.13 Purchase money Liens securing Permitted Purchase Money Indebtedness; provided, that such Liens shall not apply to any property of the Borrower or its Restricted Subsidiaries other than that purchased with the proceeds of such Permitted Purchase Money Indebtedness. 6.8.14 Liens existing on any asset of any Restricted Subsidiary of the Borrower at the time such Restricted Subsidiary becomes a Restricted Subsidiary and not created in contemplation of such event. 6.8.15 Liens on any asset securing Indebtedness incurred or assumed for the purpose of financing or refinancing all or any part of the cost of acquiring or constructing such asset; provided that such Lien attaches to such asset concurrently with or within eighteen (18) months after the acquisition or completion or construction thereof. 6.8.16 Liens existing on any asset of any Restricted Subsidiary of the Borrower at the time such Restricted Subsidiary is merged or consolidated with or into the Borrower or any Restricted Subsidiary and not created in contemplation of such event. 6.8.17 Liens existing on any asset prior to the acquisition thereof by the Borrower or any Restricted Subsidiary and not created in contemplation thereof; provided that such Liens do not encumber any other property or assets. 58 6.8.18 Liens in respect of judgments that do not otherwise cause a Default under this Agreement. 6.8.19 Liens arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted under Sections 6.8.15 through 6.8.18; provided that (a) such Indebtedness is not secured by any additional assets and (b) the amount of such Indebtedness secured by any such Lien is not increased. 6.8.20 So long as no Default or Unmatured Default has occurred and is continuing, or would result therefrom, Liens on the accounts referred to in clause (iv) of the definition of "Exempt Property" and on refundable cash earnest money deposits made in connection with Permitted Acquisitions or other purchases of assets used in its business otherwise permitted under this Agreement in an aggregate amount not to exceed 25% of the purchase price of such Property. 6.8.21 Other Liens securing Indebtedness in an aggregate amount not to exceed an amount equal to 5% of Consolidated Tangible Assets at any time outstanding. In addition, neither Borrower nor any of its Restricted Subsidiaries shall become a party to any agreement, note, indentures or other instrument, or take any other action, which would prohibit the creation of a Lien on any of its Properties or other assets in favor of the Administrative Agent for the benefit of the Holders of the Obligations; provided, further, that any agreement, note, indenture or other instrument in connection with purchase money Indebtedness (including Capitalized Leases) for which the related Liens are permitted hereunder may prohibit the creation of a Lien in favor of the Administrative Agent for the benefit of the Holders of the Obligations, with respect to the assets or property obtained with the proceeds of such Indebtedness. 6.9. Limitation on Sale-Leaseback Transactions. The Borrower will not, and will not permit any Restricted Subsidiary to, enter into any sale-leaseback transaction involving any of its assets or properties whether now owned or hereafter acquired, whereby the Borrower or a Restricted Subsidiary sells or transfers such assets or properties and then or thereafter leases such assets or properties or any part thereof or any other assets or properties which the Borrower or such Restricted Subsidiary, as the case may be, intends to use for substantially the same purpose or purposes as the assets or properties sold or transferred. The foregoing restriction does not apply to any sale-leaseback transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the lease secures or relates to industrial revenue or pollution control bonds; (iii) the transaction is solely between the Borrower and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted Subsidiaries; or (iv) the Borrower or such Restricted Subsidiary, within 12 months after the sale or transfer of any assets or properties is completed, applies an amount not less than the net proceeds received from such sale in accordance with the second paragraph clause (i) or (ii) of Section 6.10(b). 6.10. Limitation on Asset Sales. (a) The Borrower will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the consideration received by the Borrower or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 75% of the consideration received consists of (A) cash or Cash Equivalent Investments, (B) the assumption of unsubordinated Indebtedness of the 59 Borrower or any Guarantor or Indebtedness of any other Restricted Subsidiary (in each case, other than Indebtedness owed to the Borrower or any Affiliate of the Borrower), provided that the Borrower, such Guarantor or such other Restricted Subsidiary is irrevocably and unconditionally released from all liability under such Indebtedness or (C) Replacement Assets. (b) In the event and to the extent that the Net Cash Proceeds received by the Borrower or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any fiscal year exceed 1% of Consolidated Total Assets, then the Borrower shall or shall cause the relevant Restricted Subsidiary to: (i) within 12 months after the date Net Cash Proceeds so received exceed the amount set forth in the immediately preceding paragraph, (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness under the First Lien Credit Agreement, or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in Replacement Assets (including, without limitation, by using such amount to repay Indebtedness Incurred to acquire Replacement Assets that were acquired in anticipation of the applicable Asset Sale), and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraphs of this Section 6.10. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month after the end of the 12-month period set forth in clause (i) of the preceding paragraph, there are any Excess Proceeds not theretofore subject to an Offer to Prepay, the Borrower must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Prepay to the Lenders on a pro rata basis an aggregate principal amount of Loans equal to the Excess Proceeds on such date, at a purchase price equal to 100% of their principal amount, plus, in each case, accrued and unpaid interest (if any) to the Payment Date and any applicable premium as set forth in Section 2.5. To the extent that the aggregate amount of Loans for which prepayment is validly elected and not properly withdrawn pursuant to an Offer to Prepay is less than the Excess Proceeds, the Borrower may use any remaining Excess Proceeds for any other purpose which is permitted by this Agreement. If the aggregate principal amount of Loans for which Lenders elect prepayment exceeds the amount of Excess Proceeds, the Administrative Agent shall select the Loans to be purchased on a pro rata basis on the basis of the 60 aggregate principal amount of Loans electing prepayment. Upon completion of such Offer to Prepay, the amount of Excess Proceeds shall be reset to zero. 6.11. Existence. The Borrower will, and will cause each Restricted Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated or organized, validly existing and (to the extent such concept applies to such entity) in good standing as a domestic corporation, partnership or limited liability company in its jurisdiction of incorporation or organization, as the case may be, as in effect on the Closing Sate, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 6.12. Payment of Taxes and Other Claims. The Borrower will, and will cause each Subsidiary to, timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with Agreement Accounting Principles; provided, however, that it shall not be a Default or Unmatured Default under this Section 6.5 if all such failures in the aggregate do not result in a Material Adverse Change. 6.13. Maintenance of Properties and Insurance. The Borrower will cause all properties used or useful in the conduct of its business or the business of any of its Restricted Subsidiaries material to the Borrower and its Restricted Subsidiaries, taken as a whole to be maintained and kept in normal condition, repair and working order (reasonable wear and tear excepted) and will cause to be made all necessary repairs, renewals and replacements thereof, all as in the judgment of the Borrower may be necessary so that the business carried on in connection therewith may be properly conducted at all times; provided that nothing in this Section 6.13 shall prevent the Borrower or any Restricted Subsidiary from discontinuing the use, operation or maintenance of any of such properties or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Borrower, desirable in the conduct of the business of the Borrower or such Restricted Subsidiary. The Borrower will provide or cause to be provided, for itself and its Restricted Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds that in the reasonable good faith judgment of the Borrower is adequate and appropriate for the conduct of the business of the Borrower and the Restricted Subsidiaries. 6.14. Notice of Defaults. Within three (3) Business Days after an Authorized Officer becomes aware thereof, the Borrower will, and will cause each Subsidiary to, give notice in writing to the Lenders of the occurrence (i) of any Default or Unmatured Default and (ii) of any other development, financial or otherwise, which (solely with respect to this clause (ii)) could reasonably be expected to result in a Material Adverse Change. 6.15. Reporting. 6.15.1 Upon the earlier to occur of (i) the date required by law or regulation for the following to be filed with a government body and (ii) the date that is 90 days after the close of each of its fiscal years, the 61 Borrower will furnish to the Lenders financial statements prepared in accordance with generally accepted accounting principles as in effect in the United States from time to time on a consolidated basis for itself and its Subsidiaries, including balance sheets as of the end of such period, statements of income and statements of cash flows, accompanied by (a) an audit report, unqualified as to scope, of a nationally recognized firm of independent public accountants or other independent public accountants reasonably acceptable to the Required Lenders; (b) any management letter prepared by said accountants and (c) a certificate of said accountants that, in the course of their examination necessary for their certification of the foregoing, they have obtained no knowledge of any Default or Unmatured Default under Section 6.17, or if, in the opinion of such accountants, any such Default or Unmatured Default shall exist, stating the nature and status thereof. 6.15.2 Upon the earlier to occur of (i) the date required by law or regulation for the following to be filed with a government body and (ii) the date that is 45 days after the close of the first three quarterly periods of each of its fiscal years, the Borrower will furnish to the Lenders, for itself and its Subsidiaries, consolidated unaudited balance sheets as at the close of each such period, consolidated statements of income, and a consolidated statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified as to fairness of presentation, compliance with generally accepted accounting principles as in effect in the United States from time to time and consistency by its chief financial officer or treasurer. 6.15.3 Together with the financial statements required under Sections 6.15.1 and 6.15.2, a compliance certificate in substantially the form of Exhibit B signed by its chief financial officer or treasurer showing the calculations necessary to determine compliance with this Agreement, an officer's certificate in substantially the form of Exhibit F stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof, and a certificate executed and delivered by the chief executive officer or chief financial officer stating that the Borrower and each of its principal officers are in compliance with all requirements of Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 and all rules and regulations related thereto. 6.15.4 As soon as practicable, and in any event within 45 days after the beginning of each fiscal year of the Borrower, a copy of the plan and forecast (including a projected consolidated balance sheet, income statement and cash flow statement) of the Borrower for such fiscal year, together with a reasonably detailed descriptions of the assumptions used in the preparation thereof. 6.15.5 As soon as possible, and in any event within 15 days after the occurrence thereof, a reasonably detailed notification to the Administrative Agent and its counsel of any change in the jurisdiction of organization of the Borrower or any Guarantor. 6.15.6 (a) By no later than such date as the Administrative Agent may from time to time specify, such valuations and appraisals (all costs and expenses with respect to which shall be for the account of the Borrower) as the Administrative Agent may require with respect to the value of the Real Property Collateral; provided that, so long as no Default has occurred and is 62 continuing, no such valuations and appraisals shall be required more than once with respect to any individual Owned Real Property and (b) As soon as available and in any event within 30 days after the end of each fiscal year of the Borrower, a report supplementing Schedules 5.14(a)(i), 5.14(a)(ii), 5.14(a)(iii), 5.14(b)(iii) and 5.14(b)(iv) hereto, including an identification of all Real Property disposed of by any Credit Party during such fiscal year in accordance with the terms of this Agreement, a list and description (including the street address, country or other relevant jurisdiction, state, record owner, book value thereof and, in the case of leases or property, lessor, lessee, expiration date and annual rental cost hereof) of all Real Property acquired or for which leases were entered into during such fiscal year and, as to all such Schedules, a description of such other changes in the information included in such Schedule as may be necessary for such Schedule to be accurate and complete. 6.15.7 As soon as available and in any event within 30 days after the end of each fiscal year, a report summarizing the insurance coverage (specifying type, amount and carrier) in effect for each Credit Party and its Subsidiaries and containing such additional information as any Agent, or any Lender through the Administrative Agent, may reasonably specify. 6.16. Mergers, Consolidations and Sales of Assets. The Borrower shall not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into it unless: (a) the Borrower shall be the continuing Person; (b) immediately after giving effect to such transaction, no Default or Unmatured Default shall have occurred and be continuing; (c) immediately after giving effect to such transaction on a pro forma basis, the Borrower shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Borrower immediately prior to such transaction; and (d) the Borrower delivers to the Administrative Agent an officers' certificate (attaching the arithmetic computations to demonstrate compliance with clause (c) of this Section 6.16) and opinion of counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture, if any, complies with Section 6.16 and that all conditions precedent provided for herein relating to such transaction have been complied with; and provided, however, that clause (c) of this Section 6.16 do not apply if, in the good faith determination of the Board of Directors of the Borrower, whose determination shall be evidenced by a board resolution, the principal purpose of such transaction is to change the state of incorporation of the Borrower and any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. 6.17. Total Leverage Ratio. The Borrower shall at all times maintain a ratio (the "Total Leverage Ratio"), determined as of the end of each of its fiscal quarters set forth below, of (i) Consolidated Funded Indebtedness of the 63 Borrower to (ii) Consolidated EBITDA for the then most recently ended four fiscal quarters, of not greater than the ratio set forth for such period below. For each four fiscal quarter period ended: Total Leverage Ratio ------------------------------------------ -------------------- September, 2004 through December 31, 2004 5.50:1.00 March 31, 2005 through June 30, 2005 5.25:1.00 September 30, 2005 through December 31, 2005 5.00:1.00 March 31, 2006 through June 30, 2006 4.75:1.00 September 30, 2006 and thereafter 4.50:1.00 6.18. Collateral; Environmental Reports. (a) Subject to the exceptions set forth in this Section 6.18, the Borrower will cause, and will cause each other Credit Party to cause, all of its owned Property whether now or hereafter acquired (other than Exempt Property) to be subject at all times to second priority (except in case of Liens permitted in Section 6.8), perfected Liens in favor of the Administrative Agent for the benefit of the Holders of the Obligations to secure the Obligations in accordance with the terms and conditions of the Collateral Documents, subject in any case to Liens permitted by Section 6.8 hereof. Without limiting the generality of the foregoing, the Borrower will cause the Applicable Pledge Percentage of the issued and outstanding equity interests of each Pledge Subsidiary) directly owned by the Borrower or any other Credit Party to be subject at all times to a second priority, perfected Lien in favor of the Administrative Agent to secure the Obligations in accordance with the terms and conditions of the Collateral Documents or such other security documents as the Administrative Agent shall reasonably request. Notwithstanding the foregoing, (1) no pledge agreement in respect of the equity interests of a Foreign Subsidiary shall be required hereunder to the extent such pledge thereunder is prohibited by applicable law or the Administrative Agent reasonably determines that such pledge would not provide material credit support for the benefit of the Holders of Secured Obligations pursuant to legally valid, binding and enforceable pledge agreements and (2) no such pledge agreement shall be required to be delivered with respect to Foreign Subsidiaries existing as of the Closing Date, unless otherwise determined in the reasonable discretion of the Administrative Agent upon 45 days notice to the Borrower. (b) The Borrower will cause, and will cause each other Credit Party to cause, all of its Real Property Collateral whether now or hereafter acquired or leased to be subject at all times to second priority, perfected Liens in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations to secure the Secured Obligations in accordance with the terms and conditions of the Collateral Documents, subject in each case to Liens created or permitted by the Loan Documents, including, without limitation, such items that will constitute Permitted Encumbrances. Without limiting the generality of the foregoing, the Borrower will, and will cause each Guarantor to, deliver Mortgages and, to the extent applicable, Mortgage Instruments with respect to the Real Property Collateral to the extent, and within such time period as is, reasonably required by the Administrative Agent; provided, however, that with respect to the Real Property Collateral existing as of the 64 Closing Date, no such Mortgages, Mortgage Instruments and pledge agreements are required to be delivered hereunder until 90 days following the Closing Date with respect to Real Property Collateral and 120 days following the Closing Date with respect to all other Real Property Collateral (it being understood and agreed that the failure to deliver such Mortgages, Mortgage Instruments and pledge agreements by 120 days following the Closing Date or such date 30 days later as the Administrative Agent may agree in its sole discretion shall constitute a Default under Section 7.3); provided that the Borrower hereby agrees to use its reasonable efforts to cause the delivery of such Mortgages and Mortgage Instruments as soon as practicable after the Closing Date. Without limiting the generality of the foregoing, in addition to each Mortgage delivered pursuant to this Section 6.18, the Administrative Agent shall receive the following items with respect to the Real Property Collateral (collectively, the "Mortgage Instruments"): (A) evidence that counterparts of the Mortgages have been duly executed, acknowledged and delivered and are in form suitable for filing or recording in all filing or recording offices that the Administrative Agent may deem necessary or desirable in order to create a valid first and subsisting Lien on the property described therein in favor of the Administrative Agent for the benefit of the Holders of Secured Obligations and that all applicable filing and recording taxes and fees have been paid, (B) with respect to the Real Property Collateral, fully paid American Land Title Association Lender's Extended Coverage title insurance policies (the "Mortgage Policies") in form and substance, with endorsements and in amount reasonably acceptable to the Administrative Agent, issued by Chicago Title Insurance Company, insuring the Mortgages of the Real Property Collateral to be valid first and subsisting Liens on the property described therein, free and clear of all defects (including, but not limited to, mechanics' and materialmen's Liens) and encumbrances, excepting only Permitted Encumbrances, and providing for such other affirmative insurance (including endorsements for future advances under the Loan Documents and for mechanics' and materialmen's Liens) and such direct access reinsurance as the Administrative Agent may reasonably require, (C) with respect to the Real Property Collateral, American Land Title Association/American Congress on Surveying and Mapping form surveys, for which all necessary fees (where applicable) have been paid, and dated no more than 60 days before the filing of the related Mortgage or such other date as the Administrative Agent shall reasonably determine, provided that Chicago Title Insurance Company shall agree to omit the general survey exception to the applicable Mortgage Policy on the basis of such survey, certified to the Administrative Agent and Chicago Title Insurance Company in a manner 65 satisfactory to the Administrative Agent by a land surveyor duly registered and licensed in the States in which the property described in such surveys is located and acceptable to the Administrative Agent, showing all buildings and other improvements, any off-site improvements, the location of any easements, parking spaces, rights of way, building set-back lines and other dimensional regulations and the absence of encroachments, either by such improvements or on to such property, and other defects, other than encroachments and other defects acceptable to the Administrative Agent or for which affirmative reinsurance coverage is provided in the Mortgage Policies, (D) such consents and agreements of third parties, and such estoppel letters and other confirmations, as the Administrative Agent may deem necessary or desirable, (E) evidence of the insurance required by the terms of the Mortgages, (F) evidence that all other action that the Administrative Agent may deem necessary or desirable in order to create valid first and subsisting Liens on the property described in the Mortgages has been taken, (G) favorable opinions of local counsel for the Credit Parties (i) in states in which the Real Property Collateral is located, with respect to the enforceability and perfection of the Mortgages and any related fixture filings substantially in the form of Exhibit A-2 hereto and otherwise in form and substance satisfactory to the Administrative Agent and (ii) in states in which the Credit Parties party to the Mortgages are organized or formed, with respect to the valid existence, corporate power and authority of such Credit Parties in the granting of the Mortgages, in substantially the form of Exhibit A-3 hereto, and otherwise in form and substance satisfactory to the Administrative Agent. (c) The Borrower shall, within 45 days after the Closing Date (which may be extended by up to an additional 30 days in the sole discretion of the Administrative Agent), cause, and cause each other Credit Party to cause, all of its Deposit Accounts (as defined in the Security Agreement) and securities accounts (as defined in the New York Uniform Commercial Code) to be subject to Deposit Account Control Agreements or Securities Account Control Agreements (each as defined in the Security Agreement), as applicable, acceptable to the Collateral Agent and subject to any exceptions set forth in the Security Agreement. (d) Within 30 days after the Closing Date, the Borrower shall deliver to the Lenders a Phase I environmental assessment report, from an environmental consulting firm acceptable to the Lenders, which report shall identify existing and potential environmental concerns, and shall quantify related costs and liabilities, associated with all of the Real Property 66 Collateral and the Lenders shall be satisfied with the Borrower's plans with respect thereto and if so recommended by any such Phase I report, the Borrower shall deliver to the Lenders within 60 days of the Closing Date a Phase II environmental assessment report with respect to the applicable site and the Lenders shall be satisfied with the Borrower's plans with respect to the matters addressed therein. (e) The Borrower shall use its commercially reasonable efforts to obtain the consent of Brown Brothers Harriman within 90 days of the Closing Date to the grant by ACM Block & Brick, and shall cause ACM Block & Brick to so grant, of a perfected third priority lien, on terms satisfactory to the Administrative Agent, on all property securing the BBH Debt in favor of the Collateral Agent for the Holders of the Obligations. If such consent is not obtained within 90 days of the Closing Date, the Borrower shall cause the BBH Debt to be repaid in full and cause ACM Block & Brick to grant a perfected second priority lien, on terms satisfactory to the Administrative Agent, on all property securing the BBH Debt in favor of the Collateral Agent on behalf of the Holders of the Obligations. Simultaneously with the granting of the liens contemplated by this Section 6.18(e), the Borrower shall cause ACM Block & Brick to satisfy all requirements of this Section 6.18 and of the Pledge and Security Agreement as they apply to Collateral with respect to the property being so pledged. (f) Within 14 days of the Closing Date, the Borrower shall cause Tapco International Corporation to enter into an employment agreement with John N. Lawless, III, as president of Tapco International Corporation, on terms and conditions satisfactory to the Lead Arrangers. 6.19. Use of Proceeds. The Borrower will, and will cause each Subsidiary to, use the proceeds of the Loans solely for repaying the Indebtedness under the Existing Credit Agreement and to finance the Tapco Acquisition, in each case, including payment of the costs, fees and expenses incurred by the Borrower and its Subsidiaries in connection therewith. ARTICLE VII DEFAULTS The occurrence of any one or more of the following events shall constitute a Default: 7.1 Default in the payment of principal of (or premium, if any, on) any Loan when the same becomes due and payable at maturity, upon acceleration, or otherwise; 7.2 Default in the payment of interest on any Loan when the same becomes due and payable, and such default continues for a period of five Business Days; 7.3 Default in the performance or breach of Section 6.16, Section 6.17 or Section 6.19 of this Agreement, or the failure to make or consummate an Offer to Purchase in accordance with Section 6.10; 7.4 Any representation or warranty made or deemed made by the Borrower, any of its Subsidiaries, or any Authorized Officer thereof to the Lenders or the Administrative Agent under or in connection with this Agreement, any Advance, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be false in any material respect on the date as of which made or deemed made. 67 7.5 The Borrower or any Guarantor defaults in the performance of or breaches any other covenant or agreement in this Agreement or under the other Loan Documents (other than a default specified in clause 7.1, 7.2, 7.3 or 7.4 above) and such default or breach continues for a period of 30 consecutive days after written notice by the Administrative Agent or the Required Lenders; 7.6 There occurs with respect to any Indebtedness of the Borrower, any Guarantor or any Restricted Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; 7.7 Any final judgment or order (not covered by insurance) for the payment of money in excess of $5 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Borrower, any Guarantor or any Restricted Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid, waived or discharged against all such Persons to exceed $10 million, during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; 7.8 A court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Borrower, any Guarantor or any Restricted Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Borrower, any Guarantor or any Restricted Subsidiary or for all or substantially all of the property and assets of the Borrower, any Guarantor or any Restricted Subsidiary or (C) the winding up or liquidation of the affairs of the Borrower, any Guarantor or any Restricted Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; 7.9 The Borrower, any Guarantor or any Restricted Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Borrower, any Guarantor or any Restricted Subsidiary or for all or substantially all of the property and assets of the Borrower, any Guarantor or any Restricted Subsidiary or (C) effects any general assignment for the benefit of creditors; or 7.10 (a) Any Guarantor repudiates its obligations under the Guaranty or, except as permitted by this Agreement, the Guaranty is determined to be unenforceable or invalid or shall for any reason cease to be in full force and 68 effect or (b) any of the Collateral Documents shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected second priority lien on and security interest in the Collateral purported to be covered thereby; or 7.11 Any Change of Control occurs. ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 8.1. Acceleration. (i) If any Default described in Section 7.8 or 7.9 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Administrative Agent or any Lender. If any other Default occurs, the Required Lenders (or the Administrative Agent with the consent of the Required Lenders) may (a) terminate or suspend the obligations of the Lenders to make Loans hereunder or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives. (ii) If, after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans as a result of any Default (other than any Default as described in Section 7.8 or 7.9 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Administrative Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.2. Amendments. Subject to the provisions of this Section 8.2 and the Intercreditor Agreement, the Required Lenders (or the Administrative Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or thereunder or waiving any Default hereunder or thereunder; provided, however, that no such supplemental agreement shall, without the consent of all of the Lenders (other than any Lender that is, at such time, a Defaulting Lender), except for any amendment, waiver or consent with respect to the items set forth in Sections 8.2.1 and 8.2.3, which shall only require the consent of all of the Lenders directly affected by such amendment, waiver or consent: 8.2.1 Extend the final maturity date of any Loan to a date after the Maturity Date, or postpone any regularly scheduled payment of principal of any Loan or forgive all or any portion of the principal amount thereof, or reduce the rate or extend the time of payment of interest or fees thereon (other than a waiver of the application of the default rate of interest pursuant to Section 2.11 hereof. 69 8.2.2 Reduce the percentage specified in the definition of Required Lenders or any other percentage of Lenders specified to be the applicable percentage in this Agreement to act on specified matters or amend the definition of "Pro Rata Share". 8.2.3 Increase the amount of the Commitment of any Lender hereunder. 8.2.4 Amend this Section 8.2, or permit the Borrower to assign its rights or obligations under this Agreement. 8.2.5 Subject to the provisions of the Intercreditor Agreement, other than in connection with a transaction permitted under this Agreement, release all or substantially all of the Collateral. 8.2.6 Other than in connection with a transaction permitted under this Agreement, release all or substantially all of the value of the Guaranty. If, in connection with any proposed amendment, waiver, or consent, the consent of all of the Lenders, or all of the Lenders directly affected thereby, is required pursuant to this Section 8.2, and any such Lender refuses to consent to such amendment, waiver or consent (any such Lender whose consent is not obtained as described in this Section 8.2 being referred to as a "Non-Consenting Lender"), then, so long as the Administrative Agent is not a Non-Consenting Lender, at the Borrower's request, the Administrative Agent or an Eligible Assignee shall be entitled (but shall have no obligation) to purchase from such Non-Consenting Lender, and such Non-Consenting Lender (by its acceptance of the benefits of the Loan Documents) agrees that it shall, upon the Administrative Agent's request, sell and assign to the Administrative Agent or such Eligible Assignee, all of the Loans of such Non-Consenting Lender or Non-Consenting Lenders for an amount equal to the principal balance of all Loans held by the Non-Consenting Lender and all accrued interest and fees with respect thereto through the date of sale. Each Lender (by its acceptance of the benefits of the Loan Documents) agrees that, if it becomes a Non-Consenting Lender, it shall execute and deliver to the Administrative Agent an Assignment and Acceptance to evidence such sale and purchase and shall deliver to the Administrative Agent any Note (if the assigning Lender's Loans are evidenced by Notes) subject to such Assignment and Acceptance; provided, however, that the failure of any Non-Consenting Lender to execute an Assignment and Acceptance shall not render such sale and purchase (and the corresponding assignment) ineffective. No amendment of any provision of this Agreement relating to or affecting the Administrative Agent shall be effective without the written consent of the Administrative Agent. The Administrative Agent may waive payment of the fee without obtaining the consent of any other party to this Agreement. 8.3. Preservation of Rights. No delay or omission of the Lenders or the Administrative Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no 70 waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by, or by the Administrative Agent with the consent of, the requisite number of Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Administrative Agent and the Lenders until all of the Obligations have been paid in full. ARTICLE IX GENERAL PROVISIONS 9.1. Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Advances herein contemplated. 9.2. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.3. Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 9.4. Entire Agreement. The Loan Documents embody the entire agreement and understanding among the Borrower, the Administrative Agent and the Lenders and supersede all prior agreements and understandings among the Borrower, the Administrative Agent and the Lenders relating to the subject matter thereof other than those contained in the fee letter described in Section 10.13 which shall survive and remain in full force and effect during the term of this Agreement. 9.5. Several Obligations; Benefits of This Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Administrative Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided, however, that the parties hereto expressly agree that the Lead Arrangers shall enjoy the benefits of the provisions of Sections 9.6, 9.10 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement. 9.6. Expenses; Indemnification. (i) The Borrower shall reimburse the Administrative Agent and the Lead Arrangers for any reasonable out-of-pocket expenses (including reasonable attorneys' and paralegals' fees and time charges of attorneys for the Administrative Agent) paid or incurred by the Administrative Agent or the Lead Arrangers in connection with the investigation, preparation, negotiation, documentation, execution, delivery, syndication, distribution (including, without limitation, via the internet), review, amendment, modification and administration of the Loan Documents. The Borrower also agrees to reimburse the Administrative Agent, the Lead Arrangers and the 71 Lenders for any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' and paralegals' fees and time charges and expenses of attorneys and paralegals for the Administrative Agent, the Lead Arrangers and the Lenders, which attorneys and paralegals may be employees of the Administrative Agent, the Lead Arrangers or the Lenders) paid or incurred by the Administrative Agent, the Lead Arrangers or any Lender in connection with the collection and enforcement of the Loan Documents. Expenses being reimbursed by the Borrower under this Section include, without limitation, the cost and expense of obtaining an appraisal of each parcel of real property or interest in real property described in any relevant Collateral Document, which appraisal shall be in conformity with the applicable requirements of any law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, and any rules promulgated to implement such provisions and costs and expenses incurred in connection with the Reports described in the following sentence. (ii) The Borrower hereby further agrees to indemnify the Administrative Agent, the Lead Arrangers, each Lender, their respective affiliates, and each of their directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and out-of-pocket expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not the Administrative Agent, the Lead Arrangers, any Lender or any affiliate is a party thereto, and all attorneys' and paralegals' fees, time charges and expenses of attorneys and paralegals of the party seeking indemnification, which attorneys and paralegals may or may not be employees of such party seeking indemnification) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Credit Extension hereunder except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the party seeking indemnification. The obligations of the Borrower under this Section 9.6 shall survive the termination of this Agreement. 9.7. Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Administrative Agent with sufficient counterparts so that the Administrative Agent may furnish one to each of the Lenders, as shall have been reasonably requested of the Borrower by the Administrative Agent. 9.8. Accounting. Except as provided to the contrary herein, all accounting terms used in the calculation of any financial covenant or test shall be interpreted and all accounting determinations hereunder in the calculation of any financial covenant or test shall be made in accordance with Agreement Accounting Principles. If any changes in generally accepted accounting principles are hereafter required or permitted and are adopted by the Borrower or any of its Subsidiaries with the agreement of its independent certified public accountants and such changes result in a change in the method of calculation of any of the financial covenants, tests, restrictions or standards herein or in the related definitions or terms used therein ("Accounting Changes"), the parties hereto agree, at the Borrower's request, to enter into negotiations, in good faith, in order to amend such provisions in a credit neutral manner so as to reflect equitably such changes with the desired result that the criteria for evaluating the Borrower's and its Subsidiaries' financial condition shall be the same after such changes as if such changes had not been made; provided, however, until such provisions are amended in a manner 72 reasonably satisfactory to the Administrative Agent and the Required Lenders, no Accounting Change shall be given effect in such calculations. In the event such amendment is entered into, all references in this Agreement to Agreement Accounting Principles shall mean generally accepted accounting principles as of the date of such amendment. Notwithstanding the foregoing, all financial statements to be delivered by the Borrower pursuant to Section 6.1 shall be prepared in accordance with generally accepted accounting principles in effect at such time. 9.9. Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.10. Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders and the Administrative Agent on the other hand shall be solely that of borrower and lender. Neither the Administrative Agent, the Lead Arrangers nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Administrative Agent, the Lead Arrangers nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. The Borrower agrees that neither the Administrative Agent, the Lead Arrangers nor any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. None of the parties hereto shall have any liability with respect to, and each party hereto hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by any such party in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby. 9.11. Confidentiality. The Administrative Agent and each Lender agrees to hold any confidential information which it may receive from the Borrower in connection with this Agreement in confidence, except for disclosure (i) to its Affiliates and to the Administrative Agent and any other Lender and their respective Affiliates, to the extent such Person is or is reasonably expected to be involved in the evaluation of such information in connection with the transactions contemplated by this Agreement, (ii) to legal counsel, accountants, and other professional advisors to such Lender or to a Transferee, (iii) to regulatory officials, (iv) to any Person as required by law, regulation, or legal process, or to any Person as required in connection with any legal proceeding to which it is a party, provided that the Borrower shall have received prior written notice of such disclosure to the extent such notice is permitted and the disclosing party shall have taken all steps reasonably requested by the Borrower to protect the confidentiality of the information so disclosed, (v) to its direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, to the extent required in connection with such swap 73 agreements, (vi) permitted by Section 12.4, and (vii) to rating agencies subject to confidentiality restrictions reasonably acceptable to the Borrower, if requested or required by such agencies in connection with a rating relating to the Advances hereunder. Without limiting Section 9.4, the Borrower agrees that the terms of this Section 9.11 shall set forth the entire agreement between the Borrower and each Lender (including the Administrative Agent) with respect to any confidential information previously or hereafter received by such Lender in connection with this Agreement, and this Section 9.11 shall supersede any and all prior confidentiality agreements entered into by such Lender with respect to such confidential information. 9.12. Nonreliance. Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for herein. 9.13. Disclosure. The Borrower and each Lender hereby acknowledge and agree that each Lender and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with the Borrower and its Affiliates. 9.14. Performance of Obligations. The Borrower agrees that the Administrative Agent may, but shall have no obligation to (i) at any time, pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against any Collateral and (ii) after the occurrence and during the continuance of a Default make any other payment or perform any act required of the Borrower under any Loan Document or take any other action which the Administrative Agent in its discretion deems necessary or desirable to protect or preserve the Collateral, including, without limitation, any action to (x) effect any repairs or obtain any insurance called for by the terms of any of the Loan Documents and to pay all or any part of the premiums therefor and the costs thereof and (y) pay any rents payable by the Borrower which are more than 30 days past due, or as to which the landlord has given notice of termination, under any lease. The Administrative Agent shall use its best efforts to give the Borrower notice of any action taken under this Section 9.14 prior to the taking of such action or promptly thereafter provided the failure to give such notice shall not affect the Borrower's obligations in respect thereof. The Borrower agrees to pay the Administrative Agent, upon demand, the principal amount of all funds advanced by the Administrative Agent under this Section 9.14, together with interest thereon at the rate from time to time applicable to Floating Rate Loans from the date of such advance until the outstanding principal balance thereof is paid in full. If the Borrower fails to make payment in respect of any such advance under this Section 9.14 within one (1) Business Day after the date the Borrower receives written demand therefor from the Administrative Agent, the Administrative Agent shall promptly notify each Lender and each Lender agrees that it shall thereupon make available to the Administrative Agent, in Dollars in immediately available funds, the amount equal to such Lender's Pro Rata Share of such advance. If such funds are not made available to the Administrative Agent by such Lender within one (1) Business Day after the Administrative Agent's demand therefor, the Administrative Agent will be entitled to recover any such amount from such Lender together with interest thereon at the Federal Funds Effective Rate for each day during the period commencing on the date of such demand and ending on the date such amount is received. The failure of any Lender to make available to the Administrative Agent its Pro Rata Share of any such unreimbursed advance under this Section 9.14 shall neither relieve any other Lender of its obligation hereunder to make available to the Administrative 74 Agent such other Lender's Pro Rata Share of such advance on the date such payment is to be made nor increase the obligation of any other Lender to make such payment to the Administrative Agent. All outstanding principal of, and interest on, advances made under this Section 9.14 shall constitute Obligations secured by the Collateral until paid in full by the Borrower. 9.15. USA Patriot Act Notification. The following notification is provided to the Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318: IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government of the United States of America fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each Person that opens an account, including any deposit account, treasury management account, loan, other extension of credit, or other financial services product. Accordingly, when the Borrower opens an account, the Administrative Agent and the Lenders will ask for the Borrower's name, tax identification number, business address, and other information that will allow the Administrative Agent and the Lenders to identify the Borrower. The Administrative Agent and the Lenders may also ask to see the Borrower's legal organizational documents or other identifying documents. ARTICLE X THE ADMINISTRATIVE AGENT 10.1. Appointment; Nature of Relationship. MSSF is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "Administrative Agent") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Administrative Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. MS&Co. is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "Collateral Agent" and, together with the Administrative Agent, the "Agents") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Collateral Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. Each of the Agents agrees to act as such contractual representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined terms "Administrative Agent" and "Collateral Agent," it is expressly understood and agreed that the Agents shall not have any fiduciary responsibilities to any of the Holders of the Obligations by reason of this Agreement or any other Loan Document and that the Agents are merely acting as the contractual representatives of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual representative, each of the Agents (i) does not hereby assume any fiduciary duties to any of the Holders of the Obligations, (ii) is a "representative" of the Holders of the Obligations within the meaning of the term "secured party" as defined in the New York Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders, for itself and on behalf of its Affiliates as Holders of the Obligations, hereby agrees to assert no claim against either of the Agents on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Holder of the Obligations hereby waives. 75 10.2. Powers. Each of the Agents shall have and may exercise such powers under the Loan Documents as are specifically delegated to Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. Neither Agent shall have any implied duties or fiduciary duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the such Agent. 10.3. General Immunity. Neither Agent nor any of their respective directors, officers, agents or employees shall be liable to the Borrower, or any Lender or Holder of the Obligations for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final, non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. 10.4. No Responsibility for Loans, Recitals, Etc. Neither Agent nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except, in the case of the Administrative Agent, receipt of items required to be delivered solely to the Administrative Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any Collateral; or (g) the financial condition of the Borrower or any guarantor of any of the Obligations or of any of the Borrower's or any such guarantor's respective Subsidiaries. Neither Agent shall have any duty to disclose to the Lenders information that is not required to be furnished by the Borrower to such Agent at such time, but is voluntarily furnished by the Borrower to such Agent (either in its capacity as such Agent or in its individual capacity). 10.5. Action on Instructions of Lenders. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders (or all of the Lenders in the event that and to the extent that this Agreement expressly requires such), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that neither Agent shall be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders (or all of the Lenders in the event that and to the extent that this Agreement expressly requires such). Each Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 76 10.6. Employment of Agents and Counsel. Each Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Each Agent shall be entitled to advice of counsel concerning the contractual arrangement between such Agent and the Lenders and all matters pertaining to such Agent's duties hereunder and under any other Loan Document. 10.7. Reliance on Documents; Counsel. Each Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex, electronic mail message, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by such Agent, which counsel may be employees of such Agent. For purposes of determining compliance with the conditions specified in Section 4.1, each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the applicable date specifying its objection thereto. 10.8. Agents' Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Administrative Agent and the Collateral Agent ratably in proportion to the Lenders' Pro Rata Shares (i) for any amounts not reimbursed by the Borrower for which such Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by such Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by such Agent in connection with any dispute between such Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against such Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against such Agent in connection with any dispute between such Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Agent and (ii) any indemnification required pursuant to Section 3.5(vii) shall, notwithstanding the provisions of this Section 10.8, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement. 10.9. Notice of Default. Neither Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless such Agent has received written notice from a Lender or the 77 Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give prompt notice thereof to the Lenders. 10.10. Rights as a Lender. In the event either Agent is a Lender, such Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Advances as any Lender and may exercise the same as though it were not an Agent, and the term "Lender" or "Lenders" shall, at any time when an Agent is a Lender, unless the context otherwise indicates, include such Agent in its individual capacity. Either Agent and their respective Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. Neither Agent, in its individual capacity, is obligated to remain a Lender. 10.11. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Collateral Agent, the Lead Arrangers or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Collateral Agent, the Lead Arrangers or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. 10.12. Successor Agents. (a) The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective (x) twenty (20) days after the retiring Administrative Agent gives notice of its intention to resign, if the Administrative Agent resigns due to its determination, in its sole discretion, that being the Administrative Agent poses a conflict of interest for it or (y) upon the appointment of a successor Administrative Agent or, if no successor Administrative Agent has been appointed, forty-five (45) days after the retiring Administrative Agent gives notice of its intention to resign. The Administrative Agent may be removed at any time with or without cause by written notice received by the Administrative Agent from the Required Lenders, such removal to be (i) subject to, so long as no Default has occurred and is continuing, the prior written consent of the Borrower, such consent not to be unreasonably withheld and (ii) effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Administrative Agent's giving notice of its intention to resign, then the resigning Administrative Agent may appoint, on behalf of the Borrower and the Lenders, a successor Administrative Agent. Notwithstanding the previous sentence, the Administrative Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Administrative Agent hereunder. If the Administrative Agent has resigned or been removed and no successor Administrative Agent has been appointed, the Lenders may perform all the duties of the Administrative Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Administrative Agent shall be deemed to be appointed hereunder until such successor Administrative Agent has accepted the appointment. Any such successor 78 Administrative Agent shall be a commercial bank or other financial institution having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Administrative Agent. Upon the effectiveness of the resignation or removal of the Administrative Agent, the resigning or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Administrative Agent, the provisions of this Article X shall continue in effect for the benefit of such Administrative Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Administrative Agent by merger, or the Administrative Agent assigns its duties and obligations to an Affiliate pursuant to this Section 10.12, then the term "Prime Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Administrative Agent. (b) The Collateral Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective (x) twenty (20) days after the retiring Collateral Agent gives notice of its intention to resign, if the Collateral Agent resigns due to its determination, in its sole discretion, that being the Administrative Agent poses a conflict of interest for it or (y) upon the appointment of a successor Collateral Agent or, if no successor Collateral Agent has been appointed, forty-five (45) days after the retiring Collateral Agent gives notice of its intention to resign. The Collateral Agent may be removed at any time with or without cause by written notice received by the Collateral Agent from the Required Lenders, such removal to be (i) subject to, so long as no Default has occurred and is continuing, the prior written consent of the Borrower, such consent not to be unreasonably withheld and (ii) effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Collateral Agent. If no successor Collateral Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Collateral Agent's giving notice of its intention to resign, then the resigning Collateral Agent may appoint, on behalf of the Borrower and the Lenders, a successor Collateral Agent. Notwithstanding the previous sentence, the Collateral Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates as a successor Collateral Agent hereunder. If the Collateral Agent has resigned or been removed and no successor Collateral Agent has been appointed, the Lenders may perform all the duties of the Collateral Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Collateral Agent shall be deemed to be appointed hereunder until such successor Collateral Agent has accepted the appointment. Any such successor Collateral Agent shall be a commercial bank, trust company or other financial institution having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Collateral 79 Agent. Upon the effectiveness of the resignation or removal of the Collateral Agent, the resigning or removed Collateral Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of a Collateral Agent, the provisions of this Article X shall continue in effect for the benefit of such Collateral Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Collateral Agent hereunder and under the other Loan Documents. 10.13. Administrative Agent and Lead Arrangers Fees. The Borrower agrees to pay to the Administrative Agent and the Lead Arrangers, for their respective accounts, the fees agreed to by the Borrower, the Administrative Agent and the Lead Arrangers pursuant to that certain letter agreement dated September 3, 2004, or as otherwise agreed from time to time. 10.14. Delegation to Affiliates. The Borrower and the Lenders agree that each of the Administrative Agent and the Collateral Agent may delegate any of its respective duties under this Agreement to any of its respective Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which such Agent is entitled under Articles IX and X. 10.15. Co-Agents, Documentation Agent, Syndication Agent, Etc. None of the Lenders, if any, identified in this Agreement as a "co-agent", "documentation agent" or "syndication agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of such Lenders shall have or be deemed to have a fiduciary relationship with any Lender. Each Lender hereby makes the same acknowledgments with respect to such Lenders as it makes with respect to the Administrative Agent and the Collateral Agent in Section 10.11. 10.16. Collateral Documents. (a) Each Lender authorizes the Collateral Agent to enter into each of the Collateral Documents to which it is a party and to take all action contemplated by such documents. Each Lender agrees that no Holder of the Obligations (other than the Collateral Agent) shall have the right individually to seek to realize upon the security granted by any Collateral Document, it being understood and agreed that such rights and remedies may be exercised solely by the Collateral Agent for the benefit of the Holders of the Obligations upon the terms of the Collateral Documents. (b) In the event that any Collateral is hereafter pledged by any Person as collateral security for the Obligations, the Collateral Agent is hereby authorized to execute and deliver on behalf of the Holders of the Obligations any Loan Documents necessary or appropriate to grant and perfect a Lien on such Collateral in favor of the Collateral Agent on behalf of the Holders of the Obligations. (c) The Lenders hereby authorize the Collateral Agent, at its option and in its discretion, to release any Lien granted to or held by the Collateral Agent upon any Collateral (i) upon termination of the Commitments and payment and satisfaction of all of the Obligations (other than contingent indemnity obligations and Rate Management Obligations) at any time arising under or in respect of this Agreement or the Loan Documents or the transactions 80 contemplated hereby or thereby; (ii) as permitted by, but only in accordance with, the terms of the applicable Loan Document; or (iii) if approved, authorized or ratified in writing by the Required Lenders, unless such release is required to be approved by all of the Lenders hereunder. Upon request by the Collateral Agent at any time, the Lenders will confirm in writing the Collateral Agent's authority to release particular types or items of Collateral pursuant to this Section 10.16. (d) Upon any sale or transfer of assets constituting Collateral which is permitted pursuant to the terms of any Loan Document, or consented to in writing by the Required Lenders or all of the Lenders, as applicable, and upon at least five Business Days' prior written request by the Borrower to the Collateral Agent, the Collateral Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to evidence the release of the Liens granted to the Collateral Agent for the benefit of the Holders of the Obligations herein or pursuant hereto upon the Collateral that was sold or transferred; provided, however, that (i) the Collateral Agent shall not be required to execute any such document on terms which, in the Collateral Agent's opinion, would expose the Collateral Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of the Borrower or any Subsidiary in respect of) all interests retained by the Borrower or any Subsidiary, including (without limitation) the proceeds of the sale, all of which shall continue to constitute part of the Collateral. 10.17. Supplemental Collateral Agent. Anything contained herein or in the Collateral Documents to the contrary notwithstanding, the Administrative Agent may from time to time, when the Administrative Agent deems it necessary, appoint one or more trustees, co-trustees, collateral co-agents or collateral subagents (each a "Supplemental Collateral Agent") with respect to all or any part of the Real Property Collateral. In the event that the Administrative Agent so appoints any Supplemental Collateral Agent with respect to any Real Property Collateral, (i) such Supplemental Collateral Agent shall automatically be vested, in addition to the Administrative Agent, with all rights, powers, privileges, interests and remedies of the Administrative Agent under the Collateral Documents with respect to such Real Property Collateral; (ii) such Supplemental Collateral Agent shall be deemed to be an "Agent" for purposes of this Agreement and the other Loan Documents, and the provisions of Section 9.1 of the Security Agreement, this Article and Section 9.6 hereof that refer to the Agents (or either of them) shall inure to the benefit of such Supplemental Collateral Agent, and all references therein and in the other Loan Documents to the Administrative Agent shall be deemed to be references to the Administrative Agent and/or such Supplemental Collateral Agent, as the context may require; and (iii) the term "Administrative Agent," when used herein or in any applicable Collateral Document in relation to the Liens on or security interests in such Real Property Collateral granted in favor of the Administrative Agent, and any rights, powers, privileges, interests and remedies of the Administrative Agent with respect to such Real Property Collateral, shall be deemed to include such Supplemental Collateral Agent; provided, however, that no such Supplemental Collateral Agent shall be authorized to take any action with respect to any such Real Property Collateral unless and except to the extent expressly authorized in writing by the Administrative Agent. Should any instrument in writing from the Borrower or any other Credit Party be required by any Supplemental Collateral Agent so appointed by the Administrative Agent to more fully or certainly vest in and confirming to such Supplemental Collateral Agent such rights, powers, 81 privileges and duties, the Borrower shall, or shall cause such Credit Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by the Administrative Agent. If any Supplemental Collateral Agent, or successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall automatically vest in and be exercised by the Administrative Agent until the appointment of a new Supplemental Collateral Agent. ARTICLE XI SETOFF; RATABLE PAYMENTS 11.1. Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any other Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or any Affiliate of any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part thereof, shall then be due. 11.2. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Loans (other than payments received pursuant to Section 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a participation in the Loans held by the other Lenders so that after such purchase each Lender will hold its Pro Rata Share. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their respective Pro Rata Shares. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 12.1. Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and the Lenders and their respective successors and assigns permitted hereby, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents without the prior written consent of each Lender, (ii) any assignment by any Lender must be made in compliance with Section 12.3, and (iii) any transfer by Participation must be made in compliance with Section 12.2. Any attempted assignment or transfer by any party not made in compliance with this Section 12.1 shall be null and void, unless such attempted assignment or transfer is treated as a participation in accordance with Section 12.3.2. The parties to this Agreement acknowledge that clause (ii) of this Section 12.1 relates only to absolute assignments and this Section 12.1 does not prohibit assignments creating security interests, including, without limitation, (x) any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank, (y) in the case of a Lender which is a Fund, any pledge or 82 assignment of all or any portion of its rights under this Agreement and any Note to its Administrative Agent in support of its obligations to its Administrative Agent or (z) any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to direct or indirect contractual counterparties in swap agreements relating to the Loans; provided, however, that no such pledge or assignment creating a security interest shall release the transferor Lender from its obligations hereunder unless and until the parties thereto have complied with the provisions of Section 12.3. The Administrative Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 12.3; provided, however, that the Administrative Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Loan or which holds any Note to direct payments relating to such Loan or Note to another Person. Any assignee of the rights to any Loan or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Loan. 12.2. Participations. 12.2.1 Permitted Participants; Effect. Any Lender may at any time sell to one or more banks or other entities ("Participants") participating interests in any Loans of such Lender, any Note held by such Lender, or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Loans and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 12.2.2 Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Advance in which such Participant has an interest which would require consent of all of the Lenders pursuant to the terms of Section 8.2 or of any other Loan Document. 12.2.3 Benefit of Certain Provisions. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to 83 be shared in accordance with Section 11.2 as if each Participant were a Lender. The Borrower further agrees that each Participant shall be entitled to the benefits of Sections 3.1, 3.2, 3.4 and 3.5 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 12.3, provided that (i) a Participant shall not be entitled to receive any greater payment under Section 3.1, 3.2 or 3.5 than the Lender who sold the participating interest to such Participant would have received had it retained such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of the Borrower, and (ii) any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 3.5 to the same extent as if it were a Lender. 12.3. Assignments. 12.3.1 Permitted Assignments. Any Lender may at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents. Such assignment shall be evidenced by an agreement substantially in the form of Exhibit C or in such other form as may be agreed to by the parties thereto (each such agreement, an "Assignment Agreement"). Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate of a Lender or an Approved Fund shall either be in an amount equal to the entire applicable Commitment and/or Loans, as applicable, of the assigning Lender or (unless each of the Borrower and the Administrative Agent otherwise consents) be in an aggregate amount not less than $1,000,000. The amount of the assignment shall be based on the Commitment and/or outstanding Loans (if the Commitment has been terminated), as applicable, subject to the assignment, determined as of the date of such assignment or as of the "Trade Date," if the "Trade Date" is specified in the Assignment Agreement. 12.3.2 Consents. The consent of the Borrower shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund, provided that the consent of the Borrower shall not be required if (i) a Default has occurred and is continuing, (ii) if such assignment is in connection with the physical settlement of any Lender's obligations to direct or indirect contractual counterparties in swap agreements relating to the Loans or (iii) if such assignment is made in connection with the primary syndication of the Loans and commitments hereunder. The consent of the Administrative Agent shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund. Any consent required under this Section 12.3.2 shall not be unreasonably withheld or delayed. 12.3.3 Effect; Effective Date. Upon delivery to the Administrative Agent of an Assignment Agreement, together with any consents required by Sections 12.3.1 and 12.3.2, such assignment shall become effective on the effective date specified in such assignment. The Assignment Agreement shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Loans under the applicable Assignment Agreement constitutes "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders 84 and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party thereto, and the transferor Lender shall be released with respect to the Loans assigned to such Purchaser without any further consent or action by the Borrower, the Lenders or the Administrative Agent. In the case of an assignment covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a Lender hereunder but shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Documents which survive payment of the Obligations and termination of the applicable agreement. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 12.3 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 12.2. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.3, the transferor Lender, the Administrative Agent and the Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender, if applicable, and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments (or, if the Commitments have been terminated, outstanding Loans), as adjusted pursuant to such assignment. 12.3.4 Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain a copy of each Assignment Agreement delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Revolving Loan Commitments of, and principal amounts of the Advances owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower at any reasonable time and from time to time upon reasonable prior notice. 12.3.5 Borrower Increased Costs. Notwithstanding any other provision of this Agreement to the contrary, if solely and directly as a result of any assignment or transfer effected by a Lender under this Agreement, there arises or will arise any obligation on the part of the Borrower under Article III of this Agreement to pay any sum in excess of the sum (if any) which, but for such assignment or transfer, it would have been obliged to pay to such Lender as an additional amount under Article III, the Borrower shall not be obliged to pay such excess. 12.4. Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries, including 85 without limitation any information contained in any Reports; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement. 12.5. Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is not incorporated under the laws of the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.5(iv). ARTICLE XIII NOTICES 13.1. Notices; Effectiveness; Electronic Communication 13.1.1 Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in Section 13.1.2 below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows: (i) if to the Borrower, at its address or telecopier number set forth on the signature page hereof; (ii) if to the Administrative Agent, at its address or telecopier number set forth on the signature page hereof; (iii) if to a Lender, to it at its address (or telecopier number) set forth in its Administrative Questionnaire. Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications to the extent provided in Section 13.1.2 below, shall be effective as provided in said Section 13.1.2. 13.1.2 Electronic Communications. Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and internet or intranet websites) pursuant to procedures approved by the Administrative Agent or as otherwise determined by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its respective discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it or as it otherwise determines, provided that such 86 determination or approval may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not given during the normal business hours of the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor. 13.2. Change of Address, Etc. Any party hereto may change its address or telecopier number for notices and other communications hereunder by notice to the other parties hereto. ARTICLE XIV COUNTERPARTS; INTEGRATION; EFFECTIVENESS; ELECTRONIC EXECUTION 14.1. Counterparts; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Except as provided in Article IV, this Agreement shall become effective when it shall have been executed by the Borrower, the Administrative Agent and the Lenders and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of such parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. 14.2. Electronic Execution of Assignments. The words "execution," "signed," "signature," and words of like import in any Assignment Agreement shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, or any other state laws based on the Uniform Electronic Transactions Act. ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL 15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 87 15.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK CITY, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT, THE LC ISSUER, ANY LENDER OR ANY HOLDER OF THE OBLIGATIONS TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE ADMINISTRATIVE AGENT, ANY LENDER OR ANY HOLDER OF THE OBLIGATIONS OR ANY AFFILIATE OF THE ADMINISTRATIVE AGENT, ANY LENDER OR ANY HOLDER OF THE OBLIGATIONS INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW YORK CITY, NEW YORK. 15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT, EACH LENDER, AND EACH OTHER HOLDER OF THE OBLIGATIONS HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. [Signature Pages Follow] 88 IN WITNESS WHEREOF, the Borrower, the Lenders, the LC Issuer and the Administrative Agent have executed this Agreement as of the date first above written. HEADWATERS INCORPORATED as the Borrower By: /s/ Steven G. Stewart ------------------------------------------------ Name: Steven G. Stewart Title: Chief Financial Officer 10653 S. River Front Parkway, Suite 300 South Jordan, Utah 84095 Attention: Steven G. Stewart Telephone: (801) 984-9400 FAX: (801) 984-9430 MORGAN STANLEY SENIOR FUNDING, INC., as a Lender, as Administrative Agent, and as Joint Lead Arranger By: /s/ Todd Vannucci --------------------------------------- Name: Todd Vannucci Title: Executive Director 1633 Broadway, 25th Floor New York, NY 10019 Attention: James Morgan/Larry Benison Telephone: 212-537-1470/1439 FAX: 212-537-1867/1866 MORGAN STANLEY & CO. INCORPORATED, as Collateral Agent By: /s/ Todd Vannucci ------------------------------------------ Name: Todd Vannucci Title: Executive Director 1633 Broadway, 25th Floor New York, NY 10019 Attention: James Morgan/Larry Benison Telephone: 212-537-1470/1439 FAX: 212-537-1867/1866 JPMORGAN CHASE BANK, as a Lender and Syndication Agent By: /s/ David L. Howard ------------------------------------------ Name: David L. Howard Title: Vice President 2200 Ross Avenue, Floor 3 Dallas, TX 75201 Attention: David L. Howard Tel: 214-965-4756 Fax: 214-965-2044 Email: david.l.howard@chase.com With a copy to: Bank One, N.A. Attention: Tony C. Nielsen 50 West Broadway, Salt Lake City, UT 84101 Tel: 801-481-5004/Fax: 801-481-5031 Email: tony_c_Nielsen@bankone.com J.P. MORGAN SECURITIES INC., as Joint Lead Arranger By: /s/ Adam G. Bernard ------------------------------------------ Name: Adam G. Bernard Title: Vice President 270 Park Avenue, Floor 5 New York, NY 10017 Attention: Adam G. Bernard Tel: 212-270-9253 Fax: 212-270-1063 Email: adam.g.bernard@jpmorgan.com COMMITMENT SCHEDULE Commitments Amount of % of Aggregate Lender Commitment Commitment - ------ ---------- -------------- Morgan Stanley Senior Funding, Inc. $ 90,000,000.00 60% JPMorgan Chase Bank $ 60,000,000.00 40% TOTAL $150,000,000.00 100% SCHEDULE I CONSOLIDATED EBITDA [insert EBITDA Amounts] SCHEDULE II SOUTHWEST CONCRETE ESCROW AND DEPOSIT ACCOUNTS 1. Escrow Amount at August 31, 2004: $1,100,000 Chase Manhattan Bank ABA: 021000021 For Account of Brown Brothers Harriman & Co. Acct: 920-1-033231 Further Credit to: Headwaters Incorporated Acct: 8457046 Escrowed funds to collateralize an equipment loan - funds are released to Headwaters in an amount equal to principal payments made on the related loan. 2. Escrow Amount at August 31, 2004: $5,200,000 J.P. Morgan Chase Bank ABA: 113000609 Account: 00103409257 REF: ACM Block & Brick / Southwest Escrow Escrowed funds related to an environmental indemnity in connection with the Southwest Concrete acquisition - Headwaters may submit certain environmental claims to be paid from this escrow account, subject to certain terms, through December 31, 2005. Subsequent to December 31, 2005, all remaining escrowed funds are released to the Southwest Concrete sellers. SCHEDULE III PERMITTED ALTERNATIVE FUEL ACQUISITION Membership interests in DTE IndyCoke, LLC SCHEDULE 5.7 LITIGATION Headwaters: 1. Boynton, et al v. Headwaters, Inc. et al, U.S. Dist. Ct. W.D. Tenn., Civ. No. 1-02-1111, filed 2002. In October 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to a synthetic fuel technology invented by Davidson. (This technology is distinct from the technology developed by Headwaters.) This action is factually related to an earlier action brought by certain purported officers and directors of Adtech, Inc. That action was dismissed by the United States District Court for the Western District of Tennessee and the District Court's order of dismissal was affirmed on appeal. In the current action, the allegations arise from the same facts, but the claims are asserted by certain purported stockholders of Adtech. In June 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee alleging, among other things, fraud, conspiracy, constructive trust, conversion, patent infringement and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. The complaint seeks declaratory relief and compensatory damages in the approximate amount of $10 million and punitive damages. The District Court has dismissed all claims against Headwaters except conspiracy and constructive trust. The case is set for trial in November 2004. 2. AGTC v. Headwaters Incorporated, American Arbitration Association, Salt Lake City, Utah, No. 81 181 031 02, filed 2002. In March 1996, Headwaters entered into an agreement with AGTC and its associates for certain services related to the identification and selection of synthetic fuel projects. In March 2002, AGTC filed an arbitration demand in Salt Lake City, Utah claiming that it is owed commissions under the 1996 agreement for 8% of the revenues received by Headwaters from the Port Hodder project. AGTC claims approximate damages in a range between $520,000 and $14,000,000. Headwaters asserts that AGTC did not perform under the agreement and that the agreement was terminated and the disputes were settled in July 1996. Headwaters has filed an answer in the arbitration, denying AGTC's claims and has asserted counterclaims against AGTC. In July and August 2004, the arbitrator held hearings. The arbitrator has asked the parties for post-hearing briefs and proposed findings and conclusions. 3. Headwaters Incorporated v. AJG Financial Services, Inc., Fourth Dist. Ct., State of Utah, Civ. No. 000403381, filed 2000. In December 1996, Headwaters entered into a technology license and proprietary chemical reagent sale agreement with AJG Financial Services, Inc. The agreement called for AJG to pay royalties and to purchase proprietary chemical reagent material from Headwaters. In October 2000, Headwaters filed a complaint in the Fourth District Court for the State of Utah against AJG alleging that it had failed to make payments and to perform other obligations under the agreement. Headwaters asserts claims including breach of contract, declaratory judgment, unjust enrichment and accounting and seeks money damages as well as other relief. AJG's answer to the complaint denies Headwaters' claims and asserted counterclaims based upon allegations of misrepresentation and breach of contract. AJG seeks compensatory damages in the approximate amount of $71 million and punitive damages. Headwaters denies the allegations of AJG's counterclaims. The case is set for trial in January 2005. 4. EEOC and Chavez et al v. Eldorado Stone, LLC, U.S. Dist. Ct. W.D. Wash., Civ. No. CV03-2768P, filed 2003. In September 2003, the EEOC filed a complaint in the Federal District Court for the Western District of Washington against Eldorado Stone, LLC, an affiliated company, and certain individuals alleging sexual harassment, retaliation, and constructive discharge in violation of the Civil Rights Act, arising out of the operations at a Carnation, Washington facility. Six individual former employees joined the lawsuit alleging multiple related causes of action. Plaintiffs pray for injunctive relief as well as compensatory and punitive damages. Eldorado Stone has filed answers to the complaints, denying liability and damages. Plaintiffs have not provided a damages calculation, but estimates range between $500,000 and $1,000,000. 5. McEwan v. Headwaters Incorporated, Fourth Dist. Ct., State of Utah, Civ. No. 040401670, filed 2004. In 1995, Headwaters granted stock options to a member of its board of directors, Lloyd , McEwan. The director resigned from the board in 1996. Headwaters has declined McEwan's attempts to exercise most of the options on grounds that the options terminated. In May 2004, McEwan filed a complaint in the Fourth District Court for the State of Utah against Headwaters alleging breach of contract, breach of implied covenant of good faith and fair dealing, fraud, and misrepresentation. McEwan seeks declaratory relief as well as compensatory damages in the approximate amount of $2,000,000 and punitive damages. Headwaters has filed an answer denying McEwan's claims and has asserted counterclaims against McEwan. McEwan denies the counterclaims. Tapco: 1. Eason Associates Sales Company, Inc. vs. Darin Lee Watson, Evergreene Marketing, Inc., John D. Greene, and Franklin Murray Hyatt, North Carolina Superior Court, Columbus County, Division Case No. 03CV01428. Eason Associate Sales Company, Inc. ("Eason"), a company which formerly provided sales representatives to Tapco International Corporation ("Tapco International"), filed a claim on November 3, 2003 against two former Tapco International individual sales representatives, John D. Greene and Franklin Murray Hyatt, seeking compensatory damages in excess of $10,000 and punitive damages. Although Tapco International is not a named defendant in the suit, Tapco International has an oral indemnification agreement with Mr. Greene and Mr. Hyatt and has, consequently, undertaken their defense. Although the suit is still ongoing, Tapco International believes that the General Release obtained from Eason pursuant to settlement of an earlier related lawsuit filed by Eason against Tapco International bars this second lawsuit. 2. Richard Grubola vs. Tapco International Corporation, Wayne County Circuit Court, State of Michigan, Case No. 03-318496NZ. On June 9, 2003, Richard Grubola, an employee of Tapco International who was terminated in 2002, filed an age discrimination complaint. Although the claims was denied by the EEOC on March 10, 2003, the matter is still ongoing. Mr. Grubola claims compensatory damages in the amount of $25,000, exemplary damages in the amount of $25,000 and lost wages and benefits, past and future. Tapco International maintains that the decision to terminate Mr. Grubola was performance-related. 3. Dinesol Building Products, Ltd. vs. Tapco International, Inc., U.S. District Court for the Northern District of Ohio, Case No. 4:04 CV 0185. This litigation involves claims and counterclaims for both patent infringement and trade dress claims in connection with certain vent, block and shutter products. While the patent infringement claims were settled in June 2004 pursuant to a settlement agreement under which Dinesold Building Products, Ltd. agreed to change its design, the trade dress claims are currently being litigated. 4. Tapco International Corporation vs. Novik Inc., U.S. District Court for the Eastern District of Michigan, Case No. 03-72109. On May 29, 2003, Tapco International filed a claim of patent infringement against a Canadian competitor, Novik, Inc. ("Novik"). Tapco International is seeking preliminary and permanent enjoinment of Novik from infringing various of its patents. 5. Pamela Darling vs. Tapco International Corporation, Michigan Department of Civil Rights, Complaint/Charge No. 316048, EEOC 23AA400557C. Pamela Darling, a current employee of Tapco International, filed a claim of age, gender and disability discrimination against her employer. No specific amount of damages have been claimed. On January 20, 2004, the State of Michigan Department of Civil Rights sent Tapco International a notice requesting a response to interrogatories and a statement of position with regard to the complaint. Tapco responded to this request in a letter dated February 17, 2004. In this letter, Tapco International states that no adverse employment action has been taken against Ms. Darling and requests that the charge be dismissed with a finding of no probable cause. 6. Metamora There is historical contamination at the 4057 South Oak Street, Metamora, MI property, which has been the subject of several investigations. Initially, the site was targeted for investigation due to a disgruntled former employee's 1991 report of illegal disposal of hazardous waste drums in a pond on the property that has since been filled. Subsequent investigation discredited the employee's claims but did turn up modest levels of contaminants at the site. A No Further Action ("NFA") letter from the Michigan Department of Environmental Quality has been requested. There are presently no estimates of amounts of remediation should remediation eventually be required. 7. Internal Revenue Service audit of Tapco Holdings, Inc. & Subsidiaries federal income tax returns for the tax year ended October 31, 2002. 8. Workers Compensation claims by Brandon Montrull, Anna Hotelling, Matthew Little and Pamela Darling.
SCHEDULE 5.8 SUBSIDIARIES Headwaters: - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Block & Brick ACM Block & Utah Common Stock 100 100 100 General, Inc. Brick, LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Block & Brick American Utah Units -- -- 100 Partner, LLC Construction Materials, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Block & Brick, American Utah Units -- -- 100 LLC Construction Materials, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Block & Brick, ACM Block & Texas Partnership -- -- 1 LP Brick Interest General, Inc. (General Partner) -------------- ----------------- ACM Block & 99 Brick Partner, LLC (Limited Partner) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM FlexCrete, LP ACM Block & Texas Partnership -- -- 1 Brick Interest General, Inc. (General Partner) -------------- ----------------- ACM Block & 99 Brick Partner, LLC (Limited Partner) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ACM Georgia, Inc. ACM Block & Georgia Common Stock 100 100 100 Brick Partner, LLC (Limited Partner) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- American Headwaters Utah Common Stock 100 100 100 Construction Incorporated Materials, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Best Masonry & ISG Texas Common Stock 100,000 1,000 100 Tool Supply, Inc. Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Chihuahua Stone LLC Eldorado Delaware Units -- -- 100 Stone LLC (Member) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Covol Engineered Headwaters Utah Units -- -- 100 Fuels, LC Clean Coal Corp. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Covol Services Headwaters Utah Common Stock 100 100 100 Corporation Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Don's Building ISG Texas Partnership -- -- 1 Supply, L.P. Manufactured Interest Products, Inc. (General Partner) -------------- ----------------- ISG Partner, 99 Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eagle Stone & Brick Eldorado Delaware Units -- -- 100 LLC Stone (Member) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Headwaters Utah Units -- -- 100 Acquisition, LLC Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Funding Co. Headwaters Utah Common Stock 100 100 100 Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Headwaters Utah Common Stock 100 100 100 G-Acquisition Co. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Headwaters Utah Common Stock 100 100 100 SC-Acquisition Co. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Delaware Units -- -- 4 Acquisition Co., LLC G-Acquisition Co. -------------- ----------------- Eldorado 96 Acquisition, LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Washington Common Stock 5000 1000 100 Corporation Stone Acquisition Co., LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Utah Units -- -- 50 Funding Co., LLC G-Acquisition Co. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Utah Units -- -- 50 Funding Co., LLC Acquisition, LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone LLC Eldorado Delaware Units -- -- 22 Stone Coporation -------------- ----------------- Northwest 17 Stone & Brick Co., Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado 24 SC-Acquisition Co. -------------- ----------------- Eldorado 37 Stone Acquisition Co., LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Eldorado Stone Eldorado Delaware Units -- -- 100 Operations LLC Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- FlexCrete Building ISG Utah Units -- -- 90 Systems, L.C. Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Florida N-Viro, L.P. VFL Delaware -- -- -- 51 Technology Corporation (GP) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Florida N-Viro VFL Delaware Units -- -- 52 Management, LLC Technology Corporation (Member) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Global Climate Headwaters Utah Common Stock 100 100 100 Reserve Corporation Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Clean Headwaters Utah Common Stock 100 100 100 Coal Corp. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Heavy Headwaters Utah Common Stock 100 100 90 Oil, Inc. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Headwaters Utah Common Stock 100 100 100 NanoKinetix, Inc. Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Olysub Headwaters Delaware Common Stock 1, 000 100 100 Corporation Incorporated - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Headwaters Headwaters Utah Common Stock 100 100 100 Technology Incorporated Innovation Group, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- HTI Chemical Headwaters New Jersey Common Stock 1,000,000 100 100 Subsidiary, Inc. Technology (f/k/a Chemsampco, Innovation Inc.) Group - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Hydrocarbon Hydrocarbon Canada, Class A (Common Unlimited 1,000,000 100 Technologies Technologies, province of Voting) Canada, Inc. Inc. Alberta -------------- ------------------ --------------- ---------------- ----------------- -- Class B (Common Unlimited 0 -- Non-Voting) -------------- ------------------ --------------- ---------------- ----------------- -- Class C Unlimited 0 -- (Preferred Redeemable Voting) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- -- Class D Unlimited 0 -- Preferred Redeemable Voting) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Hydrocarbon Headwaters Utah Common Stock 100 100 100 Technologies, Inc. Technology Innovation Group - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Canada Limited ISG Canada, Common Stock Unlimited 100 100 Resources, province of Inc. New Brunswick - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Manufactured ISG Utah Common Stock 20,000,00 1,000 100 Products, Inc. Resources, Inc. -------------- ----------------- --------------- ---------------- ----------------- N/A Preferred Stock 10,000,000 0 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Partner, Inc. ISG Utah Common Stock 20,000,00 100 100 Resources, Inc. -------------- ------------------ --------------- ---------------- ----------------- N/A Preferred Stock 10,000,000 0 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Resources, Inc. Headwaters Utah Common Stock 8,000,000 100 100 Olysub Corporation -------------- ------------------ --------------- ---------------- ----------------- N/A Preferred Stock 2,000,000 0 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Services Headwaters Utah Common Stock 100 100 100 Corporation (f/k/a Olysub ISG Capital Corporation Corporation) - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- ISG Swift Crete, ISG Utah Common Stock 10,000,000 100 100 Inc. Resources, Inc. -------------- ------------------ --------------- ---------------- ----------------- N/A Preferred Stock 20,000,000 0 - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- L&S Stone LLC Eldorado Delaware Units -- -- 100 Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- L-B Stone LLC Eldorado Delaware Units -- -- 100 Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Lewis W. Osborne, ISG California Common Stock 25,000 12,296 100 Inc. Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Magna Wall, Inc. ISG Texas Common Stock 1,000,000 1,000 100 Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Northwest Eldorado Delaware Units -- -- 100 Properties LLC Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Northwest Stone & Eldorado Washington Common Stock 5000 1000 100 Brick Co., Inc. Stone Acquisition Co., LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Northwest Stone & Eldorado Delaware Units -- -- 100 Brick LLC Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Palestine Concrete ISG Texas Partnership -- -- 1 Tile Company, L.P. Manufactured Interest Products, Inc. (General Partner) -------------- ----------------- ISG Partner, 99 Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- StoneCraft Eldorado Delaware Units -- -- 100 Industries LLC Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- Tempe Stone LLC Eldorado Delaware Units -- -- 100 Stone LLC - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- United Terrazzo ISG California Common Stock 800 16 100 Supply Co., Inc. Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- VFL Technology ISG Pennsylvania Common Stock 1000 100 100 Corporation Resources, Inc. - --------------------- -------------- --------------- ------------------ --------------- ---------------- ----------------- - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Tapco Holdings, Inc. Headwaters Michigan Common Stock 100 100 100 Incorporated - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Tapco International Tapco Holdings, Michigan Common Stock 60,000 1,000 100 Corporation Inc. - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Atlantic Shutter Tapco South Carolina Common Stock 100,000 1,000 100 Systems, Inc. International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Builder's Edge, Inc. Wamco Corporation Pennsylvania Common Stock 10,000 100 100 - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Comaco, Inc. Wamco Corporation Pennsylvania Common Stock 10,000 100 100 - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- MTP, Inc. (d/b/a Tapco Ohio Common Stock 75 45 100 The Foundry) International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Metamora Products Tapco Michigan Common Stock 550,000 390.407 67.47 Corporation International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Metamora Products Wamco Corporation Michigan Common Stock 550,000 390.407 32.53 Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Metamora Products Metamora Pennsylvania Common Stock 400,000 400,000 100 Corporation of Products Elkland Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Number of Number of Percentage of Class of Equity Shares Shares its Equity Name Parent Jurisdiction Interest Authorized Outstanding Interest Owned - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Tapco Europe Tapco United Kingdom Common Stock 600,000 501,000 100 Limited International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Vantage Building Tapco Michigan Common Stock 1,000 1,000 100 Products Corporation International Corporation - --------------------- ------------------ --------------- ------------------ --------------- ---------------- ----------------- Wamco Corporation Metamora Michigan Common Stock 100,000 85,000 100 Products Corporation of Elkland - --------------------- ------------------ --------------- ------------------ --------------- ---------------- -----------------
SCHEDULE 5.14(a)(i) OWNED REAL PROPERTY Headwaters: - ------------------------------- ------------------------------------------------ ------------------------------------------- Record Owner Facility & Address Book Value - ------------------------------- ------------------------------------------------ ------------------------------------------- Headwaters Incorporated Wellington Property ("Sunnyside") $45,000 Near 5171 S. Farnham Rd. Price, UT 84501 Carbon County - ------------------------------- ------------------------------------------------ ------------------------------------------- Headwaters Technology New Jersey Facility $766,662.17 Innovation Group 1501 New York Avenue Lawrenceville, NJ 08648 Mercer County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources ("ISG Centralia Storage $487,839.16 Resources") 1720 Lum Road Centralia, WA 98531 Lewis County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Irondale (Denver) Terminal $2,854,604.77 8850 Yosemite Street Henderson, CO 80640 Adams County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Ogden Storage Terminal $16,598.60 2911 Pacific Avenue Ogden, UT 844091 Weber County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Pomona Terminal $3,613,375.67 1345 - 1347 Philadelphia Street Pomona, CA 91766 Los Angeles County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Altavista $70,000 Near Virginia Secondary State Route #12 Altavista, VA 24517 Campbell County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Bull Run / Lost Ridge $699,716.80 104 Garden Road Clifton, TN 37716 Anderson County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Cape Fear $94,564.43 2250 Commerce Dr. Leland, NC 28451 Brunswick County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources MTRF (Testing Facility) $552,640.38 2650 Highway 113, SW Taylorsville, GA 30178 Bartow County - ------------------------------- ------------------------------------------------ ------------------------------------------- ISG Resources Pacolet Terminal $205,308.26 520 Calico Drive Pacolet, SC 29372 Spartanburg County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Best / Magna Wall - Bagging Plant & Testing $677,902.03 (combined value of both Materials / ACM Mortars & Facility Callaghan Road properties) Stucco 5033 Callaghan Road San Antonio, TX 78228 Bexar County - ------------------------------- ------------------------------------------------ ------------------------------------------- - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Best Masonry - San Antonio Store See above Materials / ACM Mortars & 5014 Callaghan Road Stucco San Antonio, TX 78228 Bexar County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Best Masonry - South Houston Store $304,574.24 Materials / ACM Mortars & 14702 Jersey Shore Drive Stucco Houston, TX 77047 Harris County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction Don's Building Supply - Dallas Store & Facility $592,940.90 Materials / ACM Mortars & 2327 Langford Street Stucco Dallas, TX 75208 Dallas County - ------------------------------- ------------------------------------------------ ------------------------------------------- American Construction LW Osborne Plant / United Terrazzo $1,128,821.20 Materials / ACM Mortars & 16005 Phoebe Avenue Stucco La Mirada, CA 09638 Los Angeles County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick Palestine - Dallas Facility $2,465,875.03 2202 Chalk Hill Road Dallas, TX 75212 Dallas County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick Palestine - Palestine Facility $791,729.51 2500 W. Reagan Road Palestine, TX 75802 Anderson County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick, L.P. Corporate Office / Facility $1,826,700 (d/b/a Southwest Concrete 2088 FM 949 Products) ("ACM Block & Alleyton, TX 78935 Brick") Colorado County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick Magnolia $135,000 32906 and 32808 Riverwood Street Magnolia, TX 77354 Montgomery County - ------------------------------- ------------------------------------------------ ------------------------------------------- ACM Block & Brick San Antonio $2,920,400 2233 Ackerman Road San Antonio, TX 78219 Bexar County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone West Carnation $2,300,000 31610 NE 40th Street, Building B Carnation, WA 98014 King County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone Northwest Arlington (Northwest Stone & Brick) $1,150,000 5925 199th Street NE and 6906 Cemetery Road Arlington, WA 98223 Snohomish County - ------------------------------- ------------------------------------------------ ------------------------------------------- Eldorado Stone Northwest Royal City $750,000 3997 Road 13.6 SW Royal City, WA 99357 Grant County - ------------------------------- ------------------------------------------------ -------------------------------------------
Tapco: - ------------------------------- ------------------------------------------------ ------------------------------------------- Record Owner Facility & Address Book Value - ------------------------------- ------------------------------------------------ ------------------------------------------- 1. Metamora Products 4057 South Oak Street $2,416,073 Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 2. Metamora Products 4063-4073 South Oak Street Items (2) - (6): $3,684,690 Corporation Metamora, MI 48455 - ------------------------------- ------------------------------------------------ 3. Metamora Products 4029 South Oak Street Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ 4. Metamora Products 3.5 acre parcel on Dryden Road Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ 5. Metamora Products 3951 Timbro Drive Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ 6. Metamora Products 3939 Timbro Drive Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 7. Metamora Products Elkland Industrial Park $10,263,696 Corporation of Elkland Elkland, PA 16920 Tioga County - ------------------------------- ------------------------------------------------ ------------------------------------------- 8. Wamco Corporation 29797 Beck Road $3,310,576 Wixom, MI 48096 Oakland County - ------------------------------- ------------------------------------------------ ------------------------------------------- 9. Wamco Corporation 558 Morrice Blvd. $1,700,334 Imlay City, MI 48444 Lapeer County - ------------------------------- ------------------------------------------------ -------------------------------------------
SCHEDULE 5.14(a)(ii) REAL PROPERTY LEASES Headwaters: - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Expiration Annual Base Address of Rental Property Space Lessee Lessor Date of Lease Rent - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 10653 S. River Front 29,122 sq ft Headwaters RiverPark One, LLC 8/01/07 $490,512 Pkwy, Ste 300 Incorporated South Jordan, UT 84095 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 11778 South Election 7,648 sq. ft. Headwaters Draper C.G., LLC 12/31/05 $49,712 Drive, 2 Floor Incorporated Salt Lake County Draper, UT 84020 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 9498 South 670 West 13,600 sq ft American David Blaylock 8/31/07 $78,000 Sandy, UT 84070 Construction Materials, Inc. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 2025 W. Hazelton 8.49 acres ISG Resources, Inc. Daphne Ann Munzer 10/04/13 $247,500 Stockton, CA 95203 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 951 Industry Drive 1,263 sq ft ISG Resources, Inc. Calwest Industrial 7/31/07 $17,364 Tukwila, WA 98188 Holdings, LLC - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 3045 W. 28th Street -- ISG Resources, Inc. Sizemore Properties, 9/31/05 $15,900 Pine Bluff, AR 71603 LLC - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 4043 North Euclid Ave. 2,566 sq ft ISG Resources, Inc. Raymond E. & Betty L. 8/31/04 $24,000 Bay City, MI 48706 Johnson - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 12150 Tribune Blvd. 2.09 acres ISG Resources, Inc. PGBK Properties, LC 11/12/07 $37,208 Punta Gorda, FL 33955 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 16 Hagerty Blvd. 20,000 sq ft VFL Technology D&L Development Co. 4/07 $186,000 West Chester, PA 19382 Corporation - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 48699 Franklin 275 10,000 sq ft VFL Technology Luburgh, Inc. 6/30/05 $30,000 Coshocton, OH 43812 Corporation - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 841 Juniper Crescent, 1,500 sq ft VFL Technology Vito Covino 2/28/05 $11,856 Ste 102 Corporation Chesapeake, VA 23320 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 16745 W. Hardy Rd. 20,000 sq ft Best Masonry & Tool Trust Management Co. 7/31/09 $86,400 Houston, TX 77060 Supply, Inc. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 3405 Martin Farm Rd. 16,000 sq ft Best Masonry & Tool Inland.Sims.Development,3/31/07 $104,000 Bldg 200 Supply, Inc. LLC Suwanee, GA 30024 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 300 N. Throckmorton #101 5,000 sq ft Don's Building Meyers Industrial Park 8/30/04 $13,200 McKinney, TX 75069 Supply, L.P. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1109 Upland Drive 5,000 sq ft ACM Block & Brick, Hartman real Estate 6/30/07 $30,000 Suite C LP (dba Southwest Investment trust Houston, TX 77043 Concrete Products) - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Expiration Annual Base Address of Rental Property Space Lessee Lessor Date of Lease Rent - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1605 Genoa Red Bluff 5,000 sq ft ACM Block & Brick, Jackson Industries 7/01/09 $72,000 Pasadena, TX 77504 LP (dba Southwest Concrete Products) - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1420 Grand Avenue 16,302 sq ft StoneCraft Allspace San Marcos 11/24/05 $133,020 San Marcos, CA 92062 Industries, Inc. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1370 Grand Avenue 14,000 sq ft StoneCraft Dewey Real Properties 9/30/06 $34,080 San Marcos, CA 92062 Industries, Inc. Management Company - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Lot 58, Pueblo Memorial 25,650 sq ft StoneCraft Pueblo Development 1/09/10 $138,468 Airport (Industrial Park Industries, Inc. Foundation Subdivision) Pueblo, CO 81001 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 9550 Hermosa Avenue 60,640 sq ft Eldorado Stone LLC Toth Enterprises 4/30/07 $362,827 Rancho Cucamonga, CA 91730 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 520 Zephyr Street 25,500 sq ft StoneCraft McCall Development LLC 4/30/07 $110,160 Stockton, CA 95206 Industries LLC - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1510 West Drake St. 50,700 sq ft Tempe Stone LCC Steven R. and Lorelei 5/01/06 $80,000 Tempe, AZ 85283 J. Coultrap as Trustees under the Joint Living Trust UDA - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 221 Mill Street 21,390 sq ft Eagle Stone & Brick Glenn Gielow & Debra 1/02/06 $54,999 Red Bud, IL 62278 LLC Gielow - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1001 South Reilly Rd. -- L&S Stone LLC Eugene R. Strite 6/30/05 $39,600 Fayetteville, NC 28314 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 9156 Molly Pitcher Highway -- L&S Stone LLC Eugene R. Strite & 6/30/05 $226,200 Greencastle, PA 17225 Karen J. Strite - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 8642 Molly Pitcher Highway -- L&S Stone LLC KJS Properties, L.L.C. 6/30/05 90,000 Greencastle, PA 17225 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 167 Maple Street 45,000 L-B Stone LLC Reusser Realty 12/30/05 $159,999 Apple Creek, OH 44606 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 15 Lorna Dorne Blvd. -- L&S Stone LLC The Estate of James 11/14/04 $34,980 Orlando, FL 32805 Dollar - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 18083 SW Lower Boones 11,750 sq ft Northwest Stone & Raymond R. Leagjeld, 3/18/05 $48,000 Ferry Rd. Brick Company, LLC Richard A. Leagjeld & Tigard, OR 97224 Dorothy T. Leagjeld - --------------------------- -------------- --------------------- ----------------------- --------------- -------------
Tapco: - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Expiration Annual Base Address of Rental Property Space Lessee Lessor Date of Lease Rent - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1470 Imlay City Road 27,000 sq. Metamora Products Novak Industrial 10/31/04 $108,000 Lapeer, MI 48446 ft. Corporation Center, L.L.C. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 300 E. Second Street 16,000 sq. Metamora Products Mold Masters Co. 12/1/04 $50,400 Imlay City, MI 48444 ft. Corporation - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 31 First Street, Building 28,000 sq. Metamora Products Dresser-Rand Company 10/22/04 $63,000 36 ft. Corporation Painted Post, NY 14870 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Approx. 1 acre of vacant -- Metamora Products The Village of 2006 $1819.20 land adjacent to 4057 Corporation Metamora South Oak Street Metamora, MI 48455 - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 3210 South Main Street 28,000 sq. MTP, Inc. PTM Properties, LLC 8/31/06 $72,348 Middletown, OH 45044 ft. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1301 Hook Drive 30,926 sq. MTP, Inc. Blake Enterprise, LLC 11/30/05 $92,778 Middletown, OH 45044 ft. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 1715 Reinartz 18,500 sq. MTP, Inc. Perry Thatcher Month-to-month $24,456 Middletown, OH 45042 ft. - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 413-415 Main Street 2,200 sq. ft. Tapco International South Main Partners Month-to-month $21,000 Pittsburgh, PA 15215 Corporation - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- 3217 Highway 301 South 80,000 sq. Tapco International Cottingham Asset 5/19/05 $30,506.04 Latta, SC 29565 ft. Corporation Management, LLC - --------------------------- -------------- --------------------- ----------------------- --------------- ------------- Units 22 & 32, Tokenspire 17,500 sq. Tapco Europe, Ltd. P.A.T. (Pensions) 1/30/06 (pound)59,736 Business Park ft. Limited Hull Rd. Woodmansey Beverley Yorkshire HU17 0TB United Kingdom - --------------------------- -------------- --------------------- ----------------------- --------------- -------------
SCHEDULE 5.14(a)(iii) TENANT LEASES Headwaters: - ------------------ ---------------------------------------- ---------------------- --------------------- -------------- LESSEE / SUBLESSEE ADDRESS LEASED EST. SPACE ANNUAL RENT - ----------------------------------------------------------------------------------------------------------------------- HEADWATERS CORPORATE HEADQUARTERS - ----------------------------------------------------------------------------------------------------------------------- O'Currance, Inc. 11778 South Election Drive, 2 Floor Lease 7,648 sq ft $47,799.96 Salt Lake County Exp. 12/31/05 Draper, UT 84020 - ----------------------------------------------------------------------------------------------------------------------- ISG RESOURCES, INC. - ----------------------------------------------------------------------------------------------------------------------- World Wide 1347 E. Philadelphia, Suite 200 Lease 40,000 sq ft. $82,750.20 Inflatables Pomona, CA 91766 Exp. 8/30/06 - ----------------------------------------------------------------------------------------------------------------------- STONECRAFT INDUSTRIES, LLC - ----------------------------------------------------------------------------------------------------------------------- Racetronics, Inc. 1420 Grand Avenue, Suites A&B Lease 1,512 sq ft $25,404.00 San Marcos, CA 92069 Exp. Mo to Mo. - ------------------ ---------------------------------------- ---------------------- --------------------- -------------- Lease 1,512 sq ft $12,708.00 Timothy W. Nash 1420 Grand Avenue, Suite C Exp. San Marcos, CA 92069 Mo. to Mo. - ------------------ ---------------------------------------- ---------------------- --------------------- -------------- Tapco: None.
SCHEDULE 5.14(b)(iii) OWNED REAL PROPERTY COLLATERAL - ------------------------------- ------------------------------------------------ ------------------------------------------- Record Owner Facility and Address Book Value - ------------------------------- ------------------------------------------------ ------------------------------------------- 1. ISG Resources Irondale (Denver) Terminal $2,854,604.77 8850 Yosemite Street Henderson, CO 80640 Adams County - ------------------------------- ------------------------------------------------ ------------------------------------------- 2. American Construction Don's Building Supply - Dallas Store & Facility $592,940.90 Materials / ACM Mortars & 2327 Langford Street Stucco Dallas, TX 75208 Dallas County - ------------------------------- ------------------------------------------------ ------------------------------------------- 3. Headwaters Technology New Jersey Facility $766,662.17 Innovation Group 1501 New York Avenue Lawrenceville, NJ 08648 Mercer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 4. American Construction LW Osborne Plant / United Terrazzo $1,128,821.20 Materials / ACM Mortars & 16005 Phoebe Avenue Stucco La Mirada, CA 09638 Los Angeles County - ------------------------------- ------------------------------------------------ ------------------------------------------- 5. ISG Resources Pomona Terminal $3,613,375.67 1345 - 1347 E. Philadelphia Street Pomona, CA 91766 Los Angeles County - ------------------------------- ------------------------------------------------ ------------------------------------------- 6. ACM Block & Brick Palestine - Dallas Facility $2,465,875.03 2202 Chalk Hill Road Dallas, TX 75212 Dallas County - ------------------------------- ------------------------------------------------ ------------------------------------------- 7. Eldorado Stone West Carnation $2,300,000 31610 NE 40th Street, Building B Carnation, WA 98014 King County - ------------------------------- ------------------------------------------------ ------------------------------------------- 8. Eldorado Stone Northwest Arlington (Northwest Stone & Brick) $1,150,000 5925 199th Street NE and 6906 Cemetery Road Arlington, WA 98223 Snohomish County - ------------------------------- ------------------------------------------------ ------------------------------------------- 9. Eldorado Stone Northwest Royal City $750,000 3997 Road 13.6 SW Royal City, WA 99357 Grant County - ------------------------------- ------------------------------------------------ ------------------------------------------- 10. Metamora Products 4057 South Oak Street $2,416,073 Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 11. Metamora Products 4029 South Oak Street Items (11) - (15): $3,684,690 Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ 12. Metamora Products 3.5 acre parcel on Dryden Road Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ 13. Metamora Products 3951 Timbro Drive Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- - ------------------------------- ------------------------------------------------ ------------------------------------------- 14. Metamora Products 3939 Timbro Drive Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ 15. Metamora Products 4063-4073 South Oak Street Corporation Metamora, MI 48455 Lapeer County - ------------------------------- ------------------------------------------------ ------------------------------------------- 16. Metamora Products Elkland Industrial Park $10,263,694 Corporation of Elkland Elkland, PA 16920 Tioga County - ------------------------------- ------------------------------------------------ ------------------------------------------- 17. Wamco Corporation 29797 Beck Road $3,310,576 Wixom, MI 48096 Oakland County - ------------------------------- ------------------------------------------------ ------------------------------------------- 18. Wamco Corporation 558 Morrice Blvd. $1,700,334 Imlay City, MI 48444 Lapeer County - ------------------------------- ------------------------------------------------ -------------------------------------------
SCHEDULE 6.2(b)(ii) SUBORDINATION PROVISIONS RE. INTERCOMPANY INDEBTEDNESS Notwithstanding any provision contained in this [Note] to the contrary, the indebtedness (principal, interest (including, without limitation, any such interest accruing subsequent to the filing by or against the Headwaters Incorporated or any subsidiary (collectively, "Loan Parties") of any proceeding brought under any applicable bankruptcy or insolvency law, including, without limitation, Chapter 11 of the United States Bankruptcy Code (11 U.S.C. Section 100 et seq.), whether or not such interest is allowed as a claim pursuant to the provisions of any such applicable law), collection costs and expenses and other amounts) of [identify Borrower or Subsidiary] to the holder of this Note evidenced by or arising under or in respect of this Note (collectively, the "Subordinated Indebtedness") is and shall at all times be wholly subordinate and junior in right of payment to any and all other present and future indebtedness (principal, premium, if any, interest (including, without limitation, any such interest accruing subsequent to the filing by or against any Loan Party of any proceeding brought under any applicable bankruptcy or insolvency law, including, without limitation, Chapter 11 of the United States Bankruptcy Code (11 U.S.C. Section 100 et seq.), whether or not such interest is allowed as a claim pursuant to the provisions of any such applicable law), fees, collection costs and expenses and/or other amounts), liabilities and obligations (including, without limitation, letter of credit reimbursement obligations) of any Loan Party for or with respect to borrowed money, letters of credit and/or interest rate swaps and/or hedges which is incurred under or in connection with that certain Credit Agreement dated as of March 31, 2004 by and among Headwaters Incorporated, certain lenders party thereto and Bank One, NA as administrative agent, as the same may be amended, restated, supplemented or otherwise modified from time to time (collectively, the "Senior Indebtedness"), in the manner and with the force and effect hereinafter set forth: (a) in the event of (i) any liquidation, dissolution or other winding up of any Loan Party, voluntary or involuntary, (ii) any receivership, insolvency, bankruptcy, liquidation, readjustment, reorganization, composition or other similar proceeding relative to any Loan Party or its property, (iii) any general assignment by any Loan Party for the benefit of creditors or (iv) any distribution, division, marshaling or application of any of the properties or assets of any Loan Party or the proceeds thereof to creditors, voluntary or involuntary, and whether or not involving legal proceedings, then and in any such event: (A) all principal, premium, if any, interest (including, without limitation, any such interest accruing subsequent to the filing by or against any Loan Party of any proceeding brought under any applicable bankruptcy or insolvency law, including, without limitation, Chapter 11 of the United States Bankruptcy Code (11 U.S.C. Section 100 et seq.)), whether or not such interest is allowed as a claim pursuant to the provisions of any such applicable law), fees, collection costs and expenses and other amounts owing on or in respect of any of the Senior Indebtedness shall first be paid in full in cash before any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities, including equity securities, or other evidences of indebtedness, the payment of which is unconditionally subordinated to the payment of all of the Senior Indebtedness which may at the time be outstanding) shall be made on any of the Subordinated Indebtedness; (B) all of the Subordinated Indebtedness shall forthwith become due and payable, and any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities, including equity securities or other evidences of indebtedness, the payment of which is unconditionally subordinated to the payment of all of the Senior Indebtedness which may at the time be outstanding), which would otherwise (but for the terms hereof) be payable or deliverable in respect of the Subordinated Indebtedness, shall be paid or delivered, pro rata, directly to, or for the account of, the holders of the Senior Indebtedness, for application to the payment of the Senior Indebtedness until all of the Senior Indebtedness shall have been paid in full in cash, and the holder(s) of this Note irrevocably authorize, empower and direct all receivers, trustees, liquidators, conservators, fiscal agents and others having authority in the premises to effect all such payments and deliveries; and (C) notwithstanding the foregoing provisions, if for any reason whatsoever any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities, including equity securities or other evidences of indebtedness, the payment of which is unconditionally subordinated to the payment of all of the Senior Indebtedness which may at the time be outstanding), be received by a holder of this Note before all of the Senior Indebtedness is paid in full in cash, such payment or distribution shall be held in trust for the benefit of, and shall immediately paid or delivered by such holder to, as the case may be, the holders of such Senior Indebtedness remaining unpaid, pro rata, for application to the payment of the Senior Indebtedness until all of the Senior Indebtedness shall have been paid in full in cash; (b) in the event either (i) any default in respect of the payment of any principal of, premium on, if any, interest on or other amount owing with respect to any of the Senior Indebtedness shall have occurred and be continuing or (ii) any other default on or with respect to any of the Senior Indebtedness as a result of which the holder(s) thereof shall then be entitled to accelerate such Senior Indebtedness shall have occurred and be continuing or would be created by or result from a payment described in clause (A) or (B) below, then, unless and until all of the Senior Indebtedness shall have been paid in full in cash, no Loan Party will not, directly or indirectly, make or agree to make, and the holder(s) of this Note will not demand, accept or receive, (A) any payment in cash, property, securities (other than in securities, including equity securities or other evidences of indebtedness, the payment of which is unconditionally subordinated to the payment of all of the Senior Indebtedness which may at the time be outstanding) or otherwise, direct or indirect, of or on account of any principal of, interest on or other amount owing with respect to any of the Subordinated Indebtedness or (B) any payment for the purpose of any redemption, purchase or other acquisition, direct or indirect, of any of the Subordinated Indebtedness, and no such payments shall be due or payable; (c) if any payment or distribution of any kind or character (whether in cash, securities or other property) or any security shall be received by any holder(s) of this Note in contravention of any of the terms of this Note, such payment or distribution or security shall be held in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Indebtedness, pro rata, for application to the payment of all of the Senior Indebtedness remaining unpaid, to the extent necessary to pay all such Senior Indebtedness in full in cash. In the event of the failure of any holder of this Note to endorse or assign any such payment, distribution or security, any holder of the Senior Indebtedness is hereby irrevocably authorized to endorse or assign the same; (d) without the prior written consent of each holder of Senior Indebtedness, the holder(s) of this Note shall have no right to enforce payment of any of the Subordinated Indebtedness against any Loan Party, or to otherwise take any action against any Loan Party or any property or assets of any Loan Party (including, without limitation, any property or assets of any Loan Party pledged as collateral to secure any of the Senior Indebtedness) unless and until all of the Senior Indebtedness shall have been paid in full in cash; (e) the holder(s) of this Note undertake and agree for the benefit of each holder of Senior Indebtedness to execute, verify, deliver and file any proofs of claim within fifteen (15) days before the expiration of the time to file the same which any holder of Senior Indebtedness may at any time require in order to prove and realize upon any rights or claims pertaining to the Subordinated Indebtedness and to effectuate the full benefit of the subordination contained herein; and upon failure of the holder(s) of this Note so to do, any such holder of Senior Indebtedness shall be deemed to be irrevocably appointed the agent and attorney-in-fact of the holder(s) of this Note to execute, verify, deliver and file any such proofs of claim; (f) the subordination effected by the foregoing provisions and the rights created thereby in favor of the holders of the Senior Indebtedness shall not be affected by (i) any amendment, modification, extension, renewal, restatement or replacement of, increase in or addition or supplement to any of the Senior Indebtedness or any instrument or agreement relating thereto, (ii) any exercise or nonexercise of any right, power or remedy under or in respect of any of the Senior Indebtedness or any instrument or agreement relating thereto or (iii) the giving or denial of any waiver, consent, release, indulgence, extension, renewal, modification or delay or the taking or nontaking of any other action, inaction or omission, in respect of any of the Senior Indebtedness or any instrument or agreement relating thereto or to any securities relating thereto or any guarantee thereof, whether or not any holder(s) of this Note shall have had notice or knowledge of any of the foregoing; (g) the foregoing provisions are solely for the purpose of defining the relative rights of the holders of the Senior Indebtedness on the one hand, and the holder(s) of this Note on the other hand, and nothing herein shall impair, as between any Loan Party and the holder(s) of this Note, the obligation of such Loan Party which is unconditional and absolute, to pay the principal, interest and other amounts owing on or in respect of the Subordinated Indebtedness in accordance with the terms of this Note, nor shall anything herein prevent the holder(s) of this Note from exercising all remedies otherwise permitted by applicable law or under this Note, subject in all events to the rights of the holders of the Senior Indebtedness as herein provided for; and (h) the provisions of this sixth paragraph of this Note (i) may not be amended without the prior written consent of each holder of Senior Indebtedness, (ii) shall be continuing, irrevocable and binding on the holder(s) of this Note and their respective heirs, executors, personal representatives, successors and assigns and (iii) shall inure to the benefit of the holders of the Senior Indebtedness and their respective successors and assigns.
SCHEDULE 6.2(b)(iv) EXISTING INDEBTEDNESS Headwaters: Headwaters Incorporated August 31, 2004 - --------------------------------------------------------------------------------------------- --------------------- Approximate Description Amount Outstanding - --------------------------------------------------------------------------------------------- --------------------- 2 7/8% Convertible Senior Subordinated Notes Due 2016 $172,500,000 - --------------------------------------------------------------------------------------------- --------------------- Note payable to a bank, quarterly principal payments of $90,278 with interest at 1/2% above $5,687,500 LIBOR (interest rate floor of 4.5%) - --------------------------------------------------------------------------------------------- --------------------- Note payable to a bank, quarterly principal payments of $100,000 with interest at 1/2% below $1,100,000 the bank's rate (3.5% at August 31, 2004) - --------------------------------------------------------------------------------------------- --------------------- Note payable to a bank, quarterly principal payments of $107,143 beginning January 1, 2005 $3,000,000 with interest at 1/2% above LIBOR (interest rate floor of 4.5%). A balloon payment of approximately $1,285,000 is due November 2008. - --------------------------------------------------------------------------------------------- --------------------- Total $182,287,500 - --------------------------------------------------------------------------------------------- --------------------- Tapco: Capital / Equipment Leases of MPT, Inc.: - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- Lessor Leased Asset Contract # 2004 Remaining 2005 2006 2007 Total - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- Citicorp Del-Lease, Caterpillar 005-0014388-002 $1204 $3756 $3982 $3860 $12802 Inc. Lift Truck - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- Citicorp Del-Lease, Caterpillar 005-0014388-001 $1506 $3769 $1638 $6913 Inc. Lift Truck - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- M&I First National Material 0147880-000 $1326 $4337 $1977 $7640 Leasing Grinder - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- The CIT Group Barrel and 90076445 $4924 $15828 $16013 $36765 screw, conveyor, other various equipment - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- The CIT Group Additive 90080253 $3198 $10308 $10468 $23974 feeder, other various equipment - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- The CIT Group Form, trim 90093652 $8796 $26324 $29183 $21196 $85499 and punch station; conveyor; die - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- The CIT Group Chiller, 90094528 $2644 $8599 $9697 $8077 $29017 vacuum system, other various equipment - ------------------------ --------------- --------------- --------------- --------- --------- ---------- -------------- TOTAL $23,598 $72921 $72958 $33,133 $202,610 - ------------------------ --------------- --------------- --------------- --------- --------- ---------- --------------
SCHEDULE 6.3 EXISTING MINORITY INVESTMENTS Headwaters: Environmental Technologies Group, LLC - Headwaters Incorporated holds a 50% membership interest. FT Solutions, LLC - Headwaters Technology Innovation Group, Inc. holds a 50% membership interest. FlexCrete Building Systems, L.C. - ISG Resources, Inc. holds a 90% membership interest. Florida N-Viro Management, LLC - VFL Technology Corporation holds a 52% membership interest. Florida N-Viro, L.P. - VFL Technology Corporation holds a 51% partnership interest Tapco: None. SCHEDULE 6.7 EXISTING AFFILIATE TRANSACTIONS None. 2. EXHIBIT A-1 FORM OF BORROWER'S COUNSEL'S OPINION Attached September 8, 2004 Morgan Stanley Senior Funding, Inc., as Administrative Agent Morgan Stanley & Co., as Collateral Agent Each of the Lenders party to the Agreement, as defined below Re: Second Lien Credit Agreement, dated as of September 8, 2004 (the "Agreement"), by and among Headwaters Incorporated, the Lenders from time to time parties thereto, Morgan Stanley Senior Funding, Inc., as joint lead arranger and joint bookrunner and as Administrative Agent, Morgan Stanley & Co., Incorporated, as Collateral Agent, J.P. Morgan Securities Inc., as joint lead arranger and as joint bookrunner, and JP Morgan Chase Bank, as syndication agent Ladies and Gentlemen: We have acted as special New York (the "State") counsel to Headwaters Incorporated, a Delaware corporation (the "Company"), and to each of the corporations listed on Annex A to this opinion letter (collectively, the "Guarantors"), in connection with the Agreement. The definitions of terms contained in Annex B apply to this opinion letter and the definitions of terms contained in the Agreement apply to terms that are used and not otherwise defined herein or in Annex B. This opinion is delivered to you pursuant to Section 4.1.5 of the Agreement, at the request of the Company. In rendering this opinion, we have reviewed the following documents, each made, entered into or dated as of the date of this opinion: A. the Agreement; B. the Guaranty, made by each Guarantor in favor of the Administrative Agent (the "Guaranty"; C. the First Lien Pledge and Security Agreement, by and among the Company, the Guarantors and the Collateral Agent (the "Pledge and Security Agreement"); D. the Intellectual Property Security Agreement, by and among the Company, the Guarantors and the Collateral Agent (the "Intellectual Property Security Agreement" and, together with the Pledge and Security Agreement, the "Collateral Agreements"); E. the Intercreditor Agreement, by and among the Company, the Administrative Agent, the Second Lien Administrative Agent, the Collateral Agent and the Second Lien Collateral Agent; F. the Notes delivered on the date of the opinion (the "Delivered Notes"); G. the UCC-1 financing statements attached hereto as Schedules 1A, 1B, 1C, 1D, 1E, 1F, 1G, 1H, 1I, 1J, 1K, 1L, 1M, 2A, 2B, 3A, 3B, 3C, 3D, 3E and 3F; H. the current charters, articles of incorporation, certificates of incorporation, articles of organization, certificates of formation, certificates of limited partnership, certificate of partnership, by-laws, partnership agreements, limited liability company agreements and operating agreements, as applicable, of the Company and the California and Texas Guarantors; and I. such other documents as we have deemed necessary as a basis for the opinions we express below. On the basis of the assumptions and subject to the qualifications and limitations set forth below, we are of the opinion that: 1. (a) The Company is duly incorporated, validly existing and in good standing under Delaware General Corporation Law and has the corporate power to own and hold under lease the properties it purports to own and hold under lease and to conduct the business in which it is engaged. (b) The Company has the corporate power to execute and deliver, and to perform its obligations under the Agreement, the Delivered Notes, the Intercreditor Agreement and the Collateral Agreements and for the Company's incurrence of the indebtedness in the amount of the Aggregate Revolving Loan Commitment and the Aggregate Term B Loan Commitment (as in effect on the date hereof) and the repayment of such indebtedness, with interest, in accordance with the terms of the Agreement, and for the grant by the Company of the security interest in its Collateral described in Section 1.2 of the Pledge and Security Agreement. (c) Each California Guarantor is duly incorporated, validly existing and in good standing under the law of California and has the corporate power to own and hold under lease the properties it purports to own and hold under lease and to conduct the business in which it is engaged. (d) Each Texas Guarantor is duly incorporated, validly existing and in good standing under the law of Texas and has the corporate power to own and hold under lease the properties it purports to own and hold under lease and to conduct the business in which it is engaged. (e) Each California and Texas Guarantor has the corporate power to execute and deliver, and to perform its obligations under, the Guaranty and for the grant by such Guarantor of the security interest in its Collateral described in Section 1.2 of the Pledge and Security Agreement. 2. Each of the Agreement, the Intercreditor Agreement and the Collateral Agreements constitutes a valid and legally binding agreement of the Company, and each Delivered Note will, upon disbursement of the loans evidenced by such Note, constitute a valid and legally binding obligation of the Company, in each case enforceable against the Company in accordance with its terms. 3. Each of the Guaranty and the Collateral Agreements (a) has been duly authorized, executed and delivered by each of the Texas and California Guarantors and (b) constitutes a valid and legally binding agreement of each Guarantor, in each case enforceable against such Guarantor in accordance with its terms. 4. The execution and delivery of, and the performance of its obligations under, the Agreement, the Delivered Notes, the Intercreditor Agreement and the Collateral Agreements by the Company do not and will not violate or conflict with, result in a breach of, constitute a default under, or result in the creation of any Lien upon any property of the Company under, the federal law of the United States of America ("Federal Law") or the law of the State. 5. The execution and delivery of, and the performance of its obligations under, the Guaranty and the Collateral Agreements by each Guarantor do not and will not violate or conflict with, result in a breach of, constitute a default under, or result in the creation of any Lien upon any property of such Guarantor under, Federal Law or the law of the State or, in the case of the California Guarantors, the law of California or, in the case of the Texas Guarantors, the law of Texas. 6. Under Federal Law and the law of the State and, in the case of the California Guarantors, the law of California and, in the case of the Texas Guarantors, the law of Texas, no Governmental Approvals are required to have been obtained, and no Governmental Registrations are required to have been made: (a) by the Company, (i) for the valid execution and delivery by the Company of the Agreement, the Delivered Notes, the Intercreditor Agreement or the Collateral Agreements, (ii) for the Company's incurrence of the indebtedness in the amount of the Aggregate Revolving Loan Commitment and the Aggregate Term B Loan Commitment (as in effect on the date hereof) and the repayment of such indebtedness, with interest, in accordance with the terms of the Agreement, or (iii) for the grant by the Company of the security interest in its Collateral described in Section 1.2 of the Pledge and Security Agreement (such security interests, collectively, the "Company Security Interests"); or (b) by any Guarantor, (i) for the valid execution and delivery by such Guarantor of the Guaranty or the Collateral Agreements, or (ii) for the grant by such Guarantor of the security interest in its Collateral described in Section 1.2 of the Pledge and Security Agreement (such security interests, collectively, the "Guarantor Security Interests" and, together with the Company Security Interests, the "Security Interests"). 7. (a) Each of the Security Interests is an enforceable security interest in the collateral to which it applies. (b) (i) If financing statements in the form attached hereto as Schedule 1A through Schedule 1M are communicated to the Delaware Secretary of State by a method of document delivery authorized under Section 106 of the Administrative Rules of the Delaware Secretary of State and an amount equal to the applicable filing fee is tendered to such filing office, such filing office will have an obligation to accept such financing statements. (ii) Upon acceptance of such financing statements by said filing office, the Company Security Interests and Guarantor Security Interests granted by the Delaware Guarantor in so much of the Collateral as consists of (in each case as defined in the Uniform Commercial Code) accounts (other than accounts described in Section 9-102(a)(6)(B) of the Uniform Commercial Code), general intangibles, goods, chattel paper, investment property, negotiable documents and instruments will be perfected. (iii) Such financing statements are all of the filings, and are in the form, required to effect such perfection. (iv) Except for the filings and fees referred to in clause (i), no other action, including the payment of any recording or other taxes or fees, is required by law to effect such perfection. (c) (i) If financing statements in the form attached hereto as Schedule 2A and Schedule 2B are communicated to the Office of the Secretary of State of California by a method of document delivery authorized under the filing rules of that Office and an amount equal to the applicable filing fee is tendered to such filing office, such filing office will have an obligation to accept such financing statements. (ii) Upon acceptance of such financing statements by said filing office, the Guarantor Security Interests granted by the California Guarantors in so much of the Collateral as consists of (in each case as defined in the Uniform Commercial Code) accounts (other than accounts described in Section 9-102(a)(6)(B) of the Uniform Commercial Code), general intangibles, goods, chattel paper, investment property, negotiable documents and instruments will be perfected. (iii) Such financing statements are all of the filings, and are in the form, required to effect such perfection. (iv) Except for the filings and fees referred to in clause (i), no other action, including the payment of any recording or other taxes or fees, is required by law to effect such perfection. (d) (i) If financing statements in the form attached hereto as Schedule 3A through Schedule 3F, are communicated to the Texas Secretary of State by a method of document delivery authorized under Rule Section 95.106 of the Texas Administrative Code and an amount equal to the applicable filing fee is tendered to such filing office, such filing office will have an obligation to accept such financing statements. (ii) Upon acceptance of such financing statements by said filing office, the Guarantor Security Interests granted by the Texas Guarantors in so much of the Collateral as consists of (in each case as defined in the Uniform Commercial Code) accounts (other than accounts described in Section 9-102(a)(6)(B) of the Uniform Commercial Code), general intangibles, goods, chattel paper, investment property, negotiable documents and instruments will be perfected. (iii) Such financing statements are all of the filings, and are in the form, required to effect such perfection. (iv) Except for the filings and fees referred to in clause (i), no other action, including the payment of any recording or other taxes or fees, is required by law to effect such perfection. (e) (i) The delivery to the First Lien Collateral Agent (as defined in the Agreement) in New York of the certificates (and related stock powers executed in blank) evidencing the Securities listed on Schedule 4 will be effective to perfect the Security Interest in such Securities. (ii) The Security Interest in the Securities listed on Schedule 4, when such certificates are so delivered, will be free of any adverse claim, as defined in Section 8-102(a)(1) of the New York Uniform Commercial Code. 8. To our knowledge, neither the Company nor any Guarantor is a party in any action, suit or proceeding in which the pleadings request as relief that (a) any of the obligations of the Company, or any of the rights of the Administrative Agent or the Lenders, under the Agreement, the Delivered Notes, the Intercreditor Agreement or the Collateral Agreements, or (b) any of the obligations of any Guarantor, or any of the rights of the Administrative Agent or the Lenders, under the Guaranty or the Collateral Agreements, be declared invalid or subordinated or their performance be enjoined. Our opinion is subject to the following qualifications and limitations: 1. Our opinion is subject to the effect of (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance and other similar laws affecting creditors' rights generally, (ii) general equitable principles, (iii) requirements of reasonableness, good faith and fair dealing and (iv) additionally in the case of (A) indemnities, a requirement that facts, known to the indemnitee but not the indemnitor, in existence at the time the indemnity becomes effective that would entitle the indemnitee to indemnification be disclosed to the indemnitor, (B) waivers, Sections 9-602 and 9-603 of the Uniform Commercial Code, (C) indemnities, waivers and exculpatory provisions, public policy and (D) restrictions on, or remedies in the event of, assignment or transfer of rights or interests or the creation, attachment, perfection or enforcement of security interests, Sections 9-401(b), 9-406, 9-407, 9-408 and 9-409 of the Uniform Commercial Code. Our opinion with respect to the Guaranty is subject to the further qualification that the Guarantor may be exonerated as to a guaranteed party if such guaranteed party fails to inform the Guarantor of material, adverse information, known to it and not to the Guarantor, concerning the Company or any Collateral. 2. The opinions expressed in paragraphs 1(a), 1(c) and 1(d) as to the due incorporation, valid existence and good standing of the Company, the California Guarantors and the Texas Guarantors, respectively, are based on recent good standing certificates and verbal confirmations of good standing as of September 7, 2004. 3. Certain remedial provisions of the Loan Documents as to which we are opining may be unenforceable in whole or in part, but the inclusion of such provisions does not affect the validity of the balance of such Loan Documents, and the practical realization of the benefits created by such Loan Documents taken as a whole will not be materially impaired by the unenforceability of those particular provisions. In addition, certain remedial provisions of such Loan Documents may be subject to procedural requirements not set forth therein. 4. The Security Interests (i) will not be enforceable with respect to, or attach to, any Collateral until value has been given and the Grantor thereof has rights in such Collateral or (ii) be enforceable with respect to any Collateral (other than the Securities that are the subject of our opinion in paragraph 7(e)) against the competing interests of those third parties (other than the Grantor thereof) who would, in accordance with the provisions of Applicable Law, take free of, or have priority over, such Security Interest in such Collateral, notwithstanding its perfection. 5. Our opinion is limited to the law of the State and Federal Law, in each case as in effect on the date hereof, except that our opinions expressed in paragraphs 7(b), 7(c) and 7(d) are limited to the Delaware Uniform Commercial Code, the California Commercial Code and the Texas Uniform Commercial Code, respectively, and, in each case, to Federal Law. 6. Our opinion is intended for the sole benefit of the Administrative Agent and the Lenders, and their permitted successors and assignees and permitted participants in or purchasers of the obligations of the Company under the Loan Documents and no other Person is entitled to rely on it for any purpose without our prior written consent. 7. We express no opinion with respect to: a. the Company's or the Guarantors' rights in, title to or legal or beneficial ownership of any of the Collateral or any Collateral acquired after the date hereof; b. the perfection of the Security Interest in any dividends or other distributions of any Securities that are not the subject of our opinion in paragraph 7(e); c. the priority of the Security Interests in any Collateral or the effect of perfection or nonperfection of the Security Interests in any Collateral of a type referred to in Section 9-301(c) of the New York Uniform Commercial Code (or the equivalent section of the Delaware, California or Texas Uniform Commercial Code) that is not located in the State, the State of California, the State of Delaware, or the State of Texas, as applicable; d. any Collateral that (A) is not governed by Article 8 or 9 of the Uniform Commercial Code (and not, in the case of Article 9, excluded therefrom by Section 9-109(c) or (d)) or (B) is subject to a certificate of title or (C) is a trademark; e. Section 15.2 of the Agreement and the equivalent sections in the other Loan Documents insofar as said sections relate to federal courts (except as to the personal jurisdiction thereof); and f. the definition of Collateral contained in the Pledge and Security Agreement to the extent the same purports to make (A) commercial tort claims part of the Collateral by using general terms such as "currently existing commercial tort claims" or (B) any other assets part of the Collateral by using general terms such as "any property of the Grantors", in each case without further specificity; provided that the foregoing shall not in any way limit our opinions in paragraphs 7(b), 7(c) and 7(d) in respect of (i) commercial tort claims which are specifically listed in the definition of Collateral (directly or by reference to a schedule or exhibit) or (ii) any property which is specifically referenced by type in the definition of Collateral. In rendering our opinion: 1. We have, without independent verification, relied, with respect to factual matters, statements and conclusions, on certificates and statements of governmental officials and officials of the Company and the Guarantors and on the representations made by the Company and the Guarantors in the Loan Documents. 2. We have examined originals, or copies of originals certified, conformed or otherwise identified to our satisfaction, of such agreements, documents and records as we have considered relevant and necessary as a basis for this opinion. 3 We have assumed the accuracy and completeness of all, and the authenticity of all original, certificates, agreements, documents, records and other materials submitted to us, the conformity with the originals of any copies submitted to us, the genuineness of all signatures and the legal capacity of all natural persons. 4. We have assumed that: (a) (i) the execution and delivery of, and the performance of its obligations under, the Agreement and the Collateral Agreements by the Company do not and will not (A) require any Governmental Approval or Governmental Registration or (B) violate or conflict with, result in a breach of, or constitute a default under, (1) any agreement or instrument to which the Company or any of its Affiliates is a party or by which the Company or any of its Affiliates or any of their respective properties may be bound, (2) any Governmental Approval or Governmental Registration that may be applicable to the Company or any of its Affiliates or any of their respective properties, (3) any order, decision, judgment or decree that may be applicable to the Company or any of its Affiliates or any of their respective properties, or (4) any law; (ii) The execution and delivery of, and the performance of the obligations of each Guarantor under, the Guaranty and the Collateral Agreements by such Guarantor do not and will not (A) require any Governmental Approval or Governmental Registration or (B) violate or conflict with, result in a breach of, or constitute a default under, (1) any agreement or instrument to which such Guarantor or any of its Affiliates is a party or by which such Guarantor or any of its Affiliates or any of their respective properties may be bound, (2) any Governmental Approval or Governmental Registration that may be applicable to such Guarantor or any of its Affiliates or any of their respective properties, (3) any order, decision, judgment or decree that may be applicable to such Guarantor or any of its Affiliates or any of their respective properties, or (4) any law; except that the foregoing assumptions do not apply to, (x) in the case of the Governmental Approvals and Governmental Registrations referred to in subclauses (a)(i)(A) and (a)(ii)(A), the Governmental Approvals and Governmental Registrations that are the subject of our opinion expressed in paragraph 6 above, and (y) in the case of the law referred to in subclauses (a)(ii)(B)(4) and (a)(ii)(B)(4), Federal Law, the law of the State, the Delaware General Corporation Law, the Delaware Uniform Commercial Code, the law of California and the law of Texas, in each case as in effect on the date hereof, except as to any Governmental Approvals and Governmental Registrations required under Federal Law, the law of the State, the Delaware General Corporation Law, the Delaware Uniform Commercial Code, the law of California and the law of Texas that are not the subject of our opinion expressed in paragraph 6 above; (b) the Loan Documents constitute (subject to the same qualifications as are contained in subparagraph (a) of the immediately preceding paragraph) the valid, legally binding and enforceable agreements of the parties thereto under all applicable law (other than, in the case of the Company, and the Guarantors, Federal Law and the law of the State, except as to any Governmental Approvals and Governmental Registrations required under Federal Law or the law of the State that are not the subject of our opinion expressed in paragraph 6 above); (c) for so much of our opinions expressed in paragraphs 2 and 3 as relates to Section 15.1 of the Agreement and the equivalent sections in the other Loan Documents relating to the selection of New York law as the governing law of the agreements, that such sections would be enforced by a court in strict conformity to the provisions of New York General Obligations Law Section 5-1401; (d) (i) the Collateral Agent (on behalf of the Holders of the Secured Obligations) hold the Securities (A) within the State and (B) without notice of any adverse claim, as defined in Section 8-102(a)(1) of the Uniform Commercial Code; and (ii) the Collateral Agent complies with the provisions of, and continuously holds such Securities for the benefit of the Holders of the Secured Obligations in the manner provided for in, the Pledgor Security Agreement; (e) each of the Delaware Guarantors is a corporation or limited liability company, as applicable, organized solely under the laws of the State of Delaware; (f) each of the Company, the Texas Guarantors and the California Guarantors has knowingly, voluntarily and intelligently waived its right to a trial by jury in any proceeding involving the Loan Documents; and (g) the Company and the Guarantors are engaged only in the businesses described in the Company's Annual Report on Form 10-K for its fiscal year ended September 30, 2003 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. Very truly yours, Annex A Subsidiaries of Headwaters Incorporated ACM Block & Brick General, Inc. ACM Block & Brick Partner, LLC ACM Block & Brick, LLC ACM Block & Brick, LP ACM FlexCrete, LP ACM Georgia, Inc. American Construction Materials, Inc. Best Masonry & Tool Supply, Inc. Chihuahua Stone LLC Comaco, Inc. Covol Engineered Fuels, LC Covol Services Corporation Don's Building Supply, L.P. Eagle Stone & Brick LLC Eldorado Acquisition, LLC Eldorado Funding Co. Eldorado G-Acquisition Co. Eldorado SC-Acquisition Co. Eldorado Stone Acquisition Co., LLC Eldorado Stone Corporation Eldorado Stone Funding Co., LLC Eldorado Stone LLC Eldorado Stone Operations LLC Global Climate Reserve Corporation Headwaters Clean Coal Corp. Headwaters Heavy Oil, Inc. Headwaters NanoKinetix, Inc. Headwaters Olysub Corporation Headwaters Technology Innovation Group, Inc. HTI Chemical Subsidiary, Inc. Hydrocarbon Technologies, Inc. ISG Manufactured Products, Inc. ISG Partner, Inc. ISG Resources, Inc. ISG Services Corporation ISG Swift Crete, Inc. L&S Stone LLC L-B Stone LLC Lewis W. Osborne, Inc. Magna Wall, Inc. Northwest Properties LLC Northwest Stone & Brick Co., Inc. Northwest Stone & Brick LLC Palestine Concrete Tile Company, L.P. StoneCraft Industries LLC Tempe Stone LLC United Terrazzo Supply Co., Inc. VFL Technology Corporation Tapco Holdings, Inc. Tapco International Corporation Vantage Building Products Corporation MTP, Inc. Atlantic Shutter Systems, Inc. Metamora Products Corporation Metamora Products Corporation of Elkland Wamco Corporation Builders Edge, Inc. Annex B The following definitions apply to the opinion to which this Annex B is attached: "Applicable Law" means (a) all applicable common law and principles of equity and (b) all applicable provisions of all (i) constitutions, statutes, rules, regulations and orders of governmental bodies, (ii) Governmental Approvals and (iii) orders, decisions, judgments and decrees of all courts (whether at law or in equity or admiralty) and arbitrators. "California Guarantors" means Lewis W. Osborne Inc. and United Terrazzo Supply Co., Inc. "Delaware Guarantors" means Headwaters Olysub Corporation, Chihuaha Stone LLC, Eagle Stone & Brick LLC, Eldorado Stone Acquisition Co., LLC, Eldorado Stone LLC, Eldorado Stone Operations LLC, L&S Stone LLC, L-B Stone LLC, Northwest Properties LLC, Northwest Stone & Brick LLC, StoneCraft Industries LLC, and Tempe Stone LLC. "Governmental Approval" means any authorization, consent, approval, license or exemption (or the like) of or from any governmental unit. "Governmental Registration" means any registration or filing (or the like) with, or report or notice (or the like) to, any governmental unit. "Grantor" means, with respect to any Security Interest, the grantor thereof. "Loan Documents" means each of the Agreement, the Guaranty and the Collateral Agreement, collectively. "Security" means, with respect to any Person, (a) any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all similar ownership interests in a Person (other than a corporation) and (b) any option, warrant or other right to acquire, any such shares, interests, participations, equivalents or similar ownership interests of such Person. "Texas Guarantors" means Best Masonry & Tool Supply, Inc., Don's Building Supply, L.P., Palestine Concrete Tile Company, L.P., Magna Wall, Inc., ACM Block & Brick LP, and ACM FlexCrete, LP. "Uniform Commercial Code" means the Delaware Uniform Commercial Code, Division 9 of the California Commercial Code, or the Texas Uniform Commercial Code, whichever is applicable. EXHIBIT A-2 FORM OF OPINION OF LOCAL COUNSEL Attached FORM OF OPINION OF LOCAL COUNSEL WITH RESPECT TO REAL ESTATE MATTERS __________, 2004 To: The Lenders under the Credit Agreements referred to below and to Morgan Stanley Senior Funding, Inc., as Administrative Agent, and Morgan Stanley & Co. Incorporated, as Collateral Agent Re: Headwaters Incorporated [and [**Name of Subsidiary Fee Owner**]] Ladies and Gentlemen: We have acted as special [name of State] (the "State") counsel to Headwaters Incorporated, a Delaware corporation ("Borrower") [and [**Insert name of fee owner and state and organization type**] ("Mortgagor")] in connection with the execution and delivery of the [Mortgages/Deeds of Trust] referenced below pursuant to that certain Credit Agreement dated as of September 8, 2004 (the "First Lien Credit Agreement") by and among Borrower, the Lenders (as defined therein), Morgan Stanley Senior Funding, Inc., as administrative agent (in such capacity, "Administrative Agent") for the Lenders, Morgan Stanley & Co. Incorporated,. as collateral agent (in such capacity, "Collateral Agent") for the Lenders and certain other parties named therein, and that certain Second Lien Credit Agreement dated as of September 8, 2004 (the "Second Lien Credit Agreement") by and among Borrower, the Lenders (as defined therein), Administrative Agent, Collateral Agent, and certain other parties named therein. The First Lien Credit Agreement and Second Lien Credit Agreement are collectively referred to herein as the "Credit Agreements". This opinion is rendered at the request of Borrower pursuant to Section 6.26(b)(G) of the First Lien Credit Agreement and Section 6.18(bXG) of the Second Lien Credit Agreement. Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in the [Mortgages/Deeds of Trust], or if not defined therein, in the Credit Agreements. In our capacity as such counsel, we have examined originals, or copies identified to our satisfaction as being true copies, of such records, documents or other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below, including such corporate records and documents of [Borrower/Mortgagor] and such certificates of public officials and officers of [Borrower/Mortgagor] as we have deemed necessary or appropriate for purposes of this opinion. These records, documents and instruments also included execution copies or counterparts of the following documents (collectively, the "Subject Documents"): 1. The Credit Agreements; 2. The [Mortgage/Deed of Trust], Assignment of Rents and Leases, Security Agreement and Fixture Filing dated as of ________, 2004 from [Borrower//Mortgagor], as [mortgagor/grantor], to [_____________, as trustee ("Trustee"), for the benefit of] Collateral Agent, as [mortgagee/beneficiary] (the "[First Lien. Mortgage/First Lien Deed of Trust]"), encumbering the "Mortgaged Property" described therein; 3. The [Mortgage/Deed of Trust], Assignment of Rents and Leases, Security Agreement and Fixture Filing dated as of _______, 2004 from [Borrower//Mortgagor], as [mortgagor/grantor], to [_____________, as trustee ("Trustee"), for the benefit of] Collateral Agent, as [mortgagee/beneficiary] (the "[Second Lien Mortgage/Second Lien Deed of Trust]" and, collectively with the First Lien Mortgage/First Lien Deed of Trust, the "Mortgages/Deeds of Trust"), encumbering the "Mortgaged Property" described therein[.][; and] 4. [** FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: The Uniform Commercial Code Fixture Filings naming [Borrower//Mortgagor] as debtor and Collateral Agent as secured party, relating to the Mortgaged Property (the "Fixture Filings").**] Assumptions In rendering this opinion we have assumed, without having made any independent investigation of the facts, except with respect to matters of State and federal law on which we have opined below, the following: (i) the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies; (ii) to the extent that the obligations of [Borrower/Mortgagor] may be dependent upon such matters, other than with respect to [Borrower/Mortgagor], that each party to the agreements and contracts referred to herein is duly formed, validly existing. and in good standing under the laws of its jurisdiction of formation; that each such other party has the requisite corporate or other organizational power and authority to perform its obligations under such agreements and contracts, as applicable; and that such agreements and contracts have been duly authorized, executed and delivered by, and each of them constitutes the legally valid and binding obligations of, such other parties, as applicable, enforceable against such other parties in accordance with their respective terms; (iii) that [Borrower/Mortgagor] is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation; (iv) that [Borrower/Mortgagor] has the requisite corporate power and authority to enter into and perform its obligations under the Subject Documents to which it is a party; (v) the due authorization, execution and delivery by [Borrower/Mortgagor] of the Subject Documents to which [Borrower/Mortgagor] is a party; (vi) that a part or all of the loan proceeds to be advanced pursuant to the Credit Agreements will have been advanced on or before the date hereof; (vii) that all material factual matters, including without limitation, representations and warranties, contained in the Subject Documents, are true and correct as set forth therein; (viii) that [Borrower/Mortgagor], at the time of recordation of the [Mortgages/Deeds of Trust][**FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: and filing of the Fixture Filings**), held an interest of record in the real property portions of the Mortgaged Property owned by [Borrower/Mortgagor]; [and] (ix) [**FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: that the portions of the Fixtures (as defined below) that are or are to become fixtures with respect to the Mortgaged Property are and will be located on the Mortgaged Property; and**] (x) that the Subject Documents will be governed by and construed in accordance with the internal laws of the State, notwithstanding the provisions of the Subject Documents to the contrary. Opinions On the basis of such examination, our reliance upon the assumptions contained herein and our consideration of those questions of law we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that: 1. Each [Mortgage/Deed of Trust] constitutes the legal, valid and binding obligation of [Borrower/Mortgagor], enforceable against [Borrower/Mortgagor] in accordance with its terms. 2. The execution and delivery of the Subject Documents, the performance by [Borrower/Mortgagor] of its obligations thereunder and the compliance with the terms and conditions thereof by [Borrower/Mortgagor] are not in contravention of or in conflict with any law, rule or regulation of the State applicable to [Borrower/Mortgagor]. 3. The execution and delivery by [Borrower/Mortgagor] of the Subject Documents to which it is a party and the performance of [Borrower/Mortgagor]'s obligations thereunder do not require any governmental consents, approvals, authorizations, permits, registrations, declarations or filings or other action or any notices to, consents of, orders of or filings with any governmental authority or regulatory body of the State (including those having jurisdiction over the enforcement of the environmental laws of the State), except for the recordation of the [Mortgages/Deeds of Trust] [** FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: and the Fixture Filings**] in the respective recording offices described herein. 4. Each [Mortgage/Deed of Trust] (including the acknowledgement, attestation, seal and witness requirements) is in appropriate form for recordation in the State. 5. Each [Mortgage/Deed of Trust] is in proper form sufficient to create a valid [mortgage/deed of trust lien] in favor of Collateral Agent on, and to vest [Trustee and] Agent with power of sale in, such of the Mortgaged Property described therein that constitutes real property (including fixtures, to the extent the same constitute real property). The recordation of the [Mortgages/Deeds of Trust] in the [** NAME APPROPRIATE COUNTY RECORDING OFFICE**] are the only recordation, filings or registrations necessary to perfect the liens on the Mortgaged Property created by the [Mortgages/Deeds of Trust] [** FOR MICHIGAN, GEORGIA AND NORTH CAROLINA:, except for the filing with the ** NAME APPROPRIATE COUNTY RECORDING OFFICE** of the Fixture Filings regarding that portion of the Mortgaged Property constituting fixtures**]. Upon recordation of the [Mortgages/Deeds of Trust] in the [** NAME APPROPRIATE COUNTY RECORDING OFFICE**], [Trustee/Collateral Agent] will have valid and perfected [mortgage/deed of trust liens] on the Mortgaged Property described therein. No other recordation, filing, re-recordation or re-filing is necessary in order to perfect or to maintain the priority of the liens created by the [Mortgages/Deeds of Trust]. 6. The real property descriptions attached to the [Mortgages/Deeds of Trust] are in form legally sufficient for the purpose of subjecting that portion of the Mortgaged Property that constitutes real property to the liens evidenced by the [Mortgages/Deeds of Trust][** FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: and the Fixture Filings**]. 7. Each [Mortgage/Deed of Trust] is in proper form sufficient to constitute a valid and effective fixture filing with respect to the Pic,, rises under Article 9 of the Uniform Commercial Code as in effect in the State naming [Borrower/Mortgagor] as debtor and Agent as secured party. 8. Collateral Agent is not required to qualify to transact business in the State nor will Collateral Agent incur any tax imposed by the State (including, without limitation, any tax imposed by the State on interest or on revenue paid in respect of the Credit Agreements), solely as the result of the ownership or recordation of the [Mortgages/Deeds of Trust] 9. [**FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: The Fixture Filings are in appropriate form for recordation in the State.**] 10. [**FOR MICHIGAN, GEORGIA AND NORTH CAROLINA: With respect to that portion of the Mortgaged Property in which a security interest may be perfected by the recordation of a fixture filing in the State (the "Fixtures"), the proper place to file the Fixture Filings is in the [LIST APPROPRIATE COUNTY RECORDING OFFICE] (the "Filing Office"), and no filing or recordation in any other place is necessary under the UCC to perfect a security interest in the Fixtures. Upon the recordation of the Fixture Filings with the Filing Office, Agent will have a perfected security interest in the Fixtures. Subsequent to the recordation of the Fixture Filings in accordance with the procedures set forth above, no other, further or subsequent filing, recordation, registration, re-filing, re-recordation or re-registration of the Fixture Filings or any additional financing statements or any other instrument and no other actions will be necessary or advisable to perfect or continue the perfection of the lien created thereby, except that Article 9 of the UCC requires the recordation of continuation statements within the period of six (6) months prior to the expiration of five (5) years from the date of the original recordation or the recordation of any continuation statement in order to maintain the effectiveness each of the Fixture Filings.**] 11. [Except as specifically set forth on Schedule 1 hereto, no] [No] taxes or other charges, including, without limitation, intangible, documentary, stamp, mortgage, transfer or recording taxes or similar charges are payable to the State or to any governmental authority or regulatory body located therein on account of the execution or delivery of the [Mortgages/Deeds of Trust], or the creation of the liens and security interests thereunder, or the filing, recordation or registration of the [Mortgages/Deeds of Trust], except for nominal filing or recording fees. Qualifications The foregoing opinions are subject to the following qualifications, limitations and exceptions: 1. Qualifying paragraph 1 above, the enforceability of the [Mortgages/Deeds of Trust] and the liens created thereby may be limited or affected by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. The aforesaid opinion as to enforceability of the [Mortgages/Deeds of Trust] is also subject to the qualification that certain provisions contained therein may not be enforceable, but (subject to the limitations set forth in the foregoing sentence) such unenforceability will not render the [Mortgages/Deeds of Trust] invalid as a whole or substantially interfere with realization of the principal benefits and/or security provided thereby. 2. In rendering the opinions expressed in this opinion letter, we have made no examination of and express no opinion with respect to: (i) title to or, except as to adequacy of form, descriptions of the Mortgaged Property described in the [Mortgages/Deeds of Trust]; (ii) the nature or extent of [Borrower/Mortgagor]'s rights in, or title to, the Mortgaged Property; (iii) the existence or non-existence of liens, security interests, charges or encumbrances thereon or therein actually of record; or (iv) the priority of any liens on any part of the Mortgaged Property. We have not independently certified the existence, condition, location or ownership of any of the Mortgaged Property. This opinion is given as of the date hereof, and we disclaim any obligation to update this opinion letter for events occurring after the date of this opinion letter. The foregoing opinion applies only with respect to the laws of the State and the federal laws of the United States of America and we express no opinion with respect to the laws of any other jurisdiction. This opinion is rendered only to Administrative Agent, the Collateral Agent and the Lenders and their respective successors and assigns (including any participant in any Secured Party's interest) and is solely for their benefit in connection with the transactions contemplated by the Subject Documents and may not be relied upon by Administrative Agent, Collateral Agent or any Lender or any of their respective successors or assigns for any other purpose without our prior written consent. Very truly yours, SCHEDULE 1 Mortgage Recording Taxes, Documentary Stamp Taxes and other similar Taxes and Fees [**INSERT DESCRIPTION OF AND METHOD OF CALCULATING ALL MORTGAGE RECORDING TAXES, DOCUMENTARY STAMP TAXES AND SIMILAR TAXES AND FEES**] EXHIBIT A-3 FORM OF CORPORATE FORMALITIES OPINION Attached FORM OF OPINION OF LOCAL COUNSEL WITH RESPECT TO CORPORATE FORMALITIES __________, 2004 To: The Lenders under the Credit Agreements referred to below and to Morgan Stanley Senior Funding, Inc., as Administrative Agent, and Morgan Stanley & Co. Incorporated, as Collateral Agent Re: Headwaters Incorporated [and [**Name of Subsidiary. Fee Owner**]] Ladies and Gentlemen: We have acted as special [name of State] (the "State") counsel to Headwaters Incorporated, a Delaware corporation ("Borrower"), [and [**Insert name of fee owner and state and organization type**] ("Mortgagor"),] in connection with the execution and delivery of (i) the First Lien [Mortgage/Deed of Trust] referenced below pursuant to that certain Credit Agreement dated as of September 8, 2004 (the "First Lien Credit Agreement") by and among Borrower, the lenders referred to therein (the "First Lien Lenders"), Morgan Stanley Senior Funding, Inc. ("MSSF"), as administrative agent (in such capacity, "First Lien Administrative Agent") for the First Lien Lenders, Morgan Stanley & Co. Incorporated ("MSCI"), as collateral agent (in such capacity, "First Lien Collateral Agent") for the First Lien Lenders and certain other parties named therein, and (ii) the Second Lien [Mortgage/Deed of Trust] referenced below pursuant to that certain Second Lien Credit Agreement dated as of September 8, 2004 (the "Second Lien Credit Agreement"; collectively with the First Lien Credit Agreement, the "Credit Agreements") by and among Borrower, the lenders referred to therein (the "Second Lien Lenders"; collectively with the First Lien Lenders, the "Lenders"), MSSF, as administrative agent (in such capacity, "Second Lien Administrative Agent"; collectively with First Lien Administrative Agent, "Administrative Agent") for the Second Lien Lenders, MSCI, as collateral agent (in such capacity, "Second Lien Collateral Agent"; collectively with First Lien Collateral Agent, "Collateral Agent") for the Second Lien Lenders, and certain other parties named therein. This opinion is rendered at the request of Borrower pursuant to Section 6.26(b)(G) of the First Lien Credit Agreement and Section 6.18(b)(G) of the Second Lien Credit Agreement. Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in the [Mortgages/Deeds of Trust], or if not defined therein, in the Credit Agreements. In our capacity as such counsel, we have examined originals, or copies identified to our satisfaction as being true copies, of such records, documents or other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below, including such corporate records and documents of [Borrower/Mortgagor] and such certificates of public officials and officers of [Borrower/Mortgagor] as we have deemed necessary or appropriate for purposes of this opinion. These records, documents and instruments also included execution copies or counterparts of the following documents (collectively, the "Subject Documents"): 1. The Credit Agreements; 2. The [Mortgage/Deed of Trust], Assignment Of Rents and Leases, Security Agreement and Fixture Filing ([State]) dated as of _____, 2004 from [Borrower//Mortgagor], as [mortgagor/grantor], to [__________, as trustee ("Trustee"), for the benefit of] First Lien Collateral Agent, as [mortgagee/beneficiary] (the "[First Lien Mortgage/Deed of Trust]"), encumbering the "Mortgaged Property" described therein; and 3. The [Mortgage/Deed of Trust], Assignment of Rents and Leases, Security Agreement and Fixture Filing ([State]) dated as of _____, 2004 from [Borrower//Mortgagor], as [mortgagor/grantor], to [__________, as trustee ("Trustee"), for the benefit of] Second Lien Collateral Agent, as [mortgagee/beneficiary] (the "[Second Lien Mortgage/Deed of Trust]" and, collectively with the First Lien Mortgage/Deed of Trust, the "Mortgages/Deeds of Trust"), encumbering the Mortgaged Property. Assumptions In rendering this opinion we have assumed, without having made any independent investigation of the facts, except with respect to matters of State and federal law on which we have opined below, the following: (i) the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with originals of all documents submitted to us as copies; (ii) to the extent that the obligations of [Borrower/Mortgagor] may be dependent upon such matters, other than with respect to [Borrower/Mortgagor], that each party to the agreements and contracts referred to herein is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation; that each such other party has the requisite corporate or other organizational power and authority to perform its obligations under such agreements and contracts, as applicable; and that such agreements and contracts have been duly authorized, executed and delivered by, and each of them constitutes the legally valid and binding obligations of, such other parties, as applicable, enforceable against such other parties in accordance with their respective terms; and (iii) that all material factual matters, including without limitation, representations and warranties, contained in the Subject Documents, are true and correct as set forth therein. Opinions On the basis of such examination, our reliance upon the assumptions contained herein and our consideration of those questions of law we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that: 1. [Borrower/Mortgagor] is duly organized, validly existing and in good standing under the laws of the State. 2. [Borrower/Mortgagor] has the requisite corporate power and authority to enter into and perform its obligations under the Subject Documents to which it is a party. 3. The Subject Documents to which [Borrower/Mortgagor] is a party have been duly authorized, executed and delivered by [Borrower/Mortgagor]. 4. The execution, delivery and performance by [Borrower/Mortgagor] of the Subject Documents to which it is a party do not contravene its certificate or articles of incorporation, by-laws or other organizational documents. Qualifications The foregoing opinions are subject to the following qualifications, limitations and exceptions: This opinion is given as of the date hereof, and we disclaim any obligation to update this opinion letter for events occurring after the date of this opinion letter. The foregoing opinion applies only with respect to the laws of the State and the federal laws of the United States of America and we express no opinion with respect to the laws of any other jurisdiction. This opinion is rendered only to Administrative Agent, Collateral Agent and the Lenders and their respective successors and assigns (including any participant in any Lender's interest) and is solely for their benefit in connection with the transactions contemplated by the Subject Documents and may not be relied upon by Administrative Agent, Collateral Agent or any Lender or any of their respective successors or assigns for any other purpose without our prior written consent. Very truly yours, EXHIBIT B FORM OF COMPLIANCE CERTIFICATE To: The Lenders under the Credit Agreement described below This Compliance Certificate is furnished pursuant to that certain Second Lien Credit Agreement, dated as of September 8, 2004 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Headwaters Incorporated, a Delaware corporation, as the Borrower (the "Borrower"), the Lenders and Morgan Stanley Senior Funding, Inc., as Administrative Agent (the "Administrative Agent") for the Lenders. Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the meanings ascribed thereto in the Credit Agreement. THE UNDERSIGNED HEREBY CERTIFIES THAT: 1. I am the duly elected __________ of the Borrower;(1) 2. I have reviewed the terms of the Credit Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower and its Subsidiaries during the accounting period ending on ________ __, 20__ and covered by the attached financial statements; 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Default or Unmatured Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; 4. Schedule I attached hereto sets forth financial data and computations evidencing the Borrower's compliance with certain covenants of the Credit Agreement, all of which data and computations are true, complete and correct; 5. (a) Schedule II attached hereto sets forth any new applications to register patentable inventions, trademarks and copyrights filed by the Borrower or any Domestic Subsidiary which have not been previously disclosed to the Administrative Agent and (b) attached hereto is a second lien intellectual property security agreement supplement in the form of Annex A hereto executed and delivered as of the date hereof by the Borrower or such Domestic Subsidiary that has filed such new applications to register patentable inventions, trademarks and copyrights; and 6. (a) Schedule III attached hereto set forth any new commercial tort claims (the "Commercial Tort Claims") belonging to the Borrower or any Domestic Subsidiary which have not been previously disclosed to the Administrative Agent and (b) attached hereto is a pledge and security agreement supplement in the form of Annex B executed as of the date hereof by the Borrower or such Domestic Subsidiary to whom such new commercial tort claims belong. - ------------------ (1) Per Section 6.15.3 of the Credit Agreement, this certificate is to be completed and executed by the chief financial officer or treasurer. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event: --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this ___ day of ____________, 20__. HEADWATERS INCORPORATED, as Borrower By: ________________________________ Name: Title: SCHEDULE I TO COMPLIANCE CERTIFICATE Compliance as of _________, ____ (the "Compliance Date") with Provisions of Sections 6.17 and certain other Sections of the Credit Agreement(2) I. FINANCIAL COVENANTS A. TOTAL LEVERAGE RATIO (Section 6.17) 1. Consolidated Funded Indebtedness (a) Outstanding funded Consolidated Indebtedness $___________ (b) Undrawn amount of all Letters of Credit + $___________ (c) Principal component of all Capitalized Lease Obligations + $___________ (d) Aggregate amount of Off-Balance Sheet Liabilities + $___________ (e) Contingent Obligations with respect to A(1)(a) through A(1)(d) + $___________ (f) Consolidated Funded Indebtedness (Sum of A)(1)(a) through A(1)(e)) $___________ 2. Consolidated EBITDA(3) (a) Consolidated Net Income $___________ (b) Consolidated Interest Expense + $___________ (c) Expense for taxes paid or accrued + $___________ (d) Depreciation + $___________ (e) Amortization + $___________ - --------------- (2) In case of any inconsistency between the provisions of this Schedule and the provisions of the Credit Agreement, the Credit Agreement shall prevail. (3) For the periods indicated on Schedule I to the Credit Agreement, Consolidated EBITDA shall be deemed to be the amounts set forth therein. (f) Non-cash charges for impairments of goodwill and intangible assets + $___________ (g) Tax credits under Section 29 of the Code as a result of Permitted Alternative Fuel Acquisition [Maximum: $20,000,000 in any fiscal year] + $___________ (h) Interest income - $___________ (i) Consolidated EBITDA (Sum of A)(2)(a) through A(2)(h)) = $___________ 3. Total Leverage Ratio (Ratio of A(1)(d) to A(2)(i)) _____ to 1.00 4. Maximum Total Leverage Ratio for the applicable period _____ to 1.00 II. OTHER MISCELLANEOUS PROVISIONS A. SALE OF ASSETS (Section 6.10) (1) State whether any asset sales (other than asset sales permitted pursuant to Sections 6.10(a)(i) through 6.10(a)(ii) inclusive) have occurred. Yes/No (2) State whether the Net Cash Proceeds from the asset sales exceed 1% of Consolidated Total Assets Yes/No SCHEDULE II TO COMPLIANCE CERTIFICATE New Applications to Register Patentable Inventions, Trademarks and Copyrights SCHEDULE III TO COMPLIANCE CERTIFICATE New Commercial Tort Claims [Describe parties, case number (if applicable), nature of dispute] ANNEX A TO COMPLIANCE CERTIFICATE FORM OF SECOND LIEN INTELLECTUAL PROPERTY SECURITY AGREEMENT SUPPLEMENT This SECOND LIEN INTELLECTUAL PROPERTY SECURITY AGREEMENT SUPPLEMENT (this "Second Lien IP Security Agreement Supplement") dated September 8, 2004, is made by the Person listed on the signature page hereof (the "Grantor") in favor of MORGAN STANLEY & CO. INCORPORATED ("MSI"), as second lien collateral agent (the "Collateral Agent") for the Holders of the Obligations (as defined in the Credit Agreement referred to below). WHEREAS, HEADWATERS INCORPORATED, a Delaware corporation, has entered into a Second Lien Credit Agreement dated as of September 8, 2004 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), with, among others, MORGAN STANLEY SENIOR FUNDING, INC., as Administrative Agent, MSI, as Collateral Agent, and the Lenders party thereto. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as defined in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Grantor and certain other Persons have executed and delivered that certain Second Lien Pledge and Security Agreement dated September 8, 2004 made by the Grantor and such other Persons to the Collateral Agent (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Second Lien Security Agreement") and that certain Second Lien Intellectual Property Security Agreement dated September 8, 2004 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Second Lien IP Security Agreement"). WHEREAS, under the terms of the Second Lien Security Agreement, the Grantor has granted to the Collateral Agent, for the ratable benefit of the Holders of the Obligations, a security interest in the Additional Collateral (as defined in Section 1 below) of the Grantor and has agreed as a condition thereof to execute this IP Security Agreement Supplement for recording with the U.S. Patent and Trademark Office, the United States Copyright Office and other governmental authorities. WHEREAS, in order to secure the obligations under the First Lien Credit Agreement, the Grantor is concurrently granting to the First Lien Collateral Agent, for the benefit of the lenders party to the First Lien Credit Agreement, a first priority lien and security interest in the Collateral (as defined below), it being understood that the relative rights and priorities of the grantees under this Second Lien IP Security Agreement Supplement and under the First Lien Collateral Documents are governed by the Intercreditor Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor agrees as follows: SECTION 1. Grant of Security. The Grantor hereby grants to the Collateral Agent, for the ratable benefit of the Holders of the Obligations, a security interest in all of such Grantor's right, title and interest in and to the patents, trademarks, copyrights and license agreements set forth in Schedule A hereto (the "Additional Collateral"). Notwithstanding anything herein to the contrary, the lien and security interest granted to the Collateral Agent pursuant to this Second Lien IP Security Agreement Supplement and the exercise of any right or remedy by the Collateral Agent hereunder are subject to the provisions of the Intercreditor Agreement, dated as of September 8, 2004 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Intercreditor Agreement"), among Morgan Stanley & Co. Incorporated, as first lien collateral agent and as second lien collateral agent and Morgan Stanley Senior Funding, Inc. as first lien administrative agent and as second lien administrative agent, Headwaters Incorporated and certain other persons party or that may become party thereto from time to time. In the event of any conflict between the terms of the Intercreditor Agreement and this Second Lien IP Security Agreement Supplement, the terms of the Intercreditor Agreement shall govern and control. SECTION 2. Supplement to Second Lien Security Agreement. Exhibit B to the Second Lien Security Agreement is, effective as of the date hereof, hereby supplemented to add to such Schedule the Additional Collateral. SECTION 3. Security for Obligations. The grant of a security interest in the Additional Collateral by the Grantor under this Second Lien IP Security Agreement Supplement secures the payment of all Obligations of the Grantor now or hereafter existing under or in respect of the Loan Documents, whether direct or indirect, absolute or contingent, and whether for principal, reimbursement obligations, interest, premiums, penalties, fees, indemnifications, contract causes of action, costs, expenses or otherwise. Upon the termination of the pledge and security interest granted under the Second Lien Security Agreement in accordance with Section 7.4 of the Second Lien Security Agreement, the Collateral Agent shall execute, acknowledge, and deliver to the Grantor an instrument in writing releasing the security interest in Additional Collateral acquired under this Second Lien IP Security Agreement Supplement. SECTION 4. Recordation. The Grantor authorizes and requests that the Register of Copyrights, the Commissioner for Patents and the Commissioner for Trademarks and any other applicable government officer to record this Second Lien IP Security Agreement Supplement. SECTION 5. Grants, Rights and Remedies. This Second Lien IP Security Agreement Supplement has been entered into in conjunction with the provisions of the Second Lien Security Agreement. The Grantor does hereby acknowledge and confirm that the grant of the security interest hereunder to, and the rights and remedies of, the Collateral Agent with respect to the Additional Collateral are more fully set forth in the Second Lien Security Agreement, the terms and provisions of which are incorporated herein by reference as if fully set forth herein. SECTION 6. Governing Law. This Second Lien IP Security Agreement Supplement shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the Grantor has caused this Second Lien IP Security Agreement Supplement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. [NAME OF GRANTOR] By _________________________________ Name: Title: Address for Notices: ____________________________________ ____________________________________ ____________________________________ ANNEX B TO COMPLIANCE CERTIFICATE FORM OF PLEDGE AND SECURITY AGREEMENT SUPPLEMENT This PLEDGE AND SECURITY AGREEMENT SUPPLEMENT (this "Supplement") dated ________, ____, is made by the Person listed on the signature page hereof (the "Grantor") in favor of MORGAN STANLEY & CO. INCORPORATED, as collateral agent (the "Collateral Agent") for the Holders of Secured Obligations (as defined in the Credit Agreement referred to below). WHEREAS, HEADWATERS INCORPORATED, a Delaware corporation, has entered into a Second Lien Credit Agreement dated as of September 8, 2004 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), with among others, MORGAN STANLEY SENIOR FUNDING, INC., as administrative agent, the Collateral Agent, and the Lenders party thereto. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as defined in the Credit Agreement. WHEREAS, pursuant to the Credit Agreement, the Grantor and certain other Persons have executed and delivered that certain Second Lien Pledge and Security Agreement dated September 8, 2004 made by the Grantor and such other Persons to the Collateral Agent (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Second Lien Security Agreement"). WHEREAS, the Grantor has identified a new commercial tort claim that is listed and described on Schedule I hereto as belonging to it (the "Additional Collateral"). WHEREAS, under the terms of the Second Lien Security Agreement, the Grantor has agreed to execute and deliver to the Collateral Agent a supplement to the Second Lien Security Agreement to evidence the grant of a security interest in the Additional Collateral. WHEREAS, in order to secure the obligations under the First Lien Credit Agreement, the Grantor is concurrently granting to the First Lien Collateral Agent, for the benefit of the lenders party to the First Lien Credit Agreement, a first priority lien and security interest in the Additional Collateral, it being understood that the relative rights and priorities of the grantees under this Supplement and under the First Lien Collateral Documents are governed by the Intercreditor Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor agrees as follows: SECTION 1. Grant of Security. The Grantor hereby grants to the Collateral Agent, on behalf of and for the ratable benefit of the Holders of the Obligations, a security interest in all of the Grantor's right, title and interest, in and to the Additional Collateral. Notwithstanding anything herein to the contrary, the lien and security interest granted to the Collateral Agent pursuant to this Supplement and the exercise of any right or remedy by the Collateral Agent hereunder are subject to the provisions of the Intercreditor Agreement, dated as of September 8, 2004 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Intercreditor Agreement"), among Morgan Stanley & Co. Incorporated, as first lien collateral agent and as second lien collateral agent and Morgan Stanley Senior Funding, Inc. as first lien administrative agent and as second lien administrative agent, Headwaters Incorporated and certain other persons party or that may become party thereto from time to time. In the event of any conflict between the terms of the Intercreditor Agreement and this Supplement, the terms of the Intercreditor Agreement shall govern and control. SECTION 2. Supplement to Second Lien Security Agreement. Exhibit E to the Second Lien Security Agreement is, effective as of the date hereof, hereby supplemented to add to such Exhibit the Additional Collateral. SECTION 3. Security for Obligations. The grant of a security interest in the Additional Collateral by the Grantor under this Supplement secures the payment of all Obligations of the Grantor now or hereafter existing under or in respect of the Loan Documents, whether direct or indirect, absolute or contingent, and whether for principal, reimbursement obligations, interest, premiums, penalties, fees, indemnifications, contract causes of action, costs, expenses or otherwise. Upon the termination of the pledge and security interest granted under the Second Lien Security Agreement in accordance with Section 7.4 of the Second Lien Security Agreement, the Collateral Agent shall execute, acknowledge, and deliver to the Grantor an instrument in writing releasing the security interest in Additional Collateral acquired under this Supplement. SECTION 4. Perfection. The Grantor agrees to perform all acts necessary to perfect the Collateral Agent's security interest in the Additional Collateral, including the filing of a UCC-1 naming the Collateral Agent as secured party and describing the collateral in a manner sufficient to perfect the Collateral Agent's security interest in the Additional Collateral under the Uniform Commercial Code. SECTION 5. Grants, Rights and Remedies. This Supplement has been entered into in conjunction with the provisions of the Second Lien Security Agreement. The Grantor does hereby acknowledge and confirm that the grant of the security interest hereunder to, and the rights and remedies of, the Collateral Agent with respect to the Additional Collateral are more fully set forth in the Second Lien Security Agreement, the terms and provisions of which are incorporated herein by reference as if fully set forth herein. SECTION 6. Governing Law. This Supplement shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the Grantor has caused this Supplement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. [NAME OF GRANTOR] By ________________________ Name: Title: SCHEDULE I TO THE FORM OF PLEDGE AND SECOND LIEN SECURITY AGREEMENT SUPPLEMENT [Described Commercial Tort Claim] EXHIBIT C FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT This Assignment and Assumption (the "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full. For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below, the interest in and to all of the Assignor's rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto that represents the amount and percentage interest identified below of all of the Assignor's outstanding rights and obligations under the facility identified below (including, without limitation, any guaranties included in such facility and, to the extent permitted to be assigned under applicable law, all claims (including without limitation contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity), suits, causes of action and any other right of the Assignor against any Person whether known or unknown arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby) (the "Assigned Interest"). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor. 1. Assignor:____________________________________________________________________ 2. Assignee:____________________________________ Fund of [identify Lender] (1) [and is an Affiliate/Approved 3. Borrower: HEADWATERS INCORPORATED 4. Agent: Morgan Stanley Senior Funding, Inc. as the Administrative Agent under the Credit Agreement - ------------------ (1) Select as applicable. 5. Credit Agreement: The Second Lien Credit Agreement dated as of September 8, 2004 among the Borrower, the Lenders, and the Administrative Agent. 6. Assigned Interest:
- --------------------- ------------------------ ------------------ ---------------------- Aggregate Amount of Amount of Commitment/Loans for all Commitment/Loans Percentage Assigned of Facility Assigned Lenders* Assigned* Commitment/Loans(2) - --------------------- ------------------------ ------------------ ---------------------- ____________ $ $ _______% ____________ $ $ _______% ____________ $ $ _______% - --------------------- ------------------------ ------------------ ----------------------
7. Trade Date: (3)______________________________________________________________ Effective Date: ____________, 20__ [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER BY THE ADMINISTRATIVE AGENT.] The terms set forth in this Assignment and Assumption are hereby agreed to: ASSIGNOR [NAME OF ASSIGNOR] By:______________________________________ Title: ASSIGNEE [NAME OF ASSIGNEE] By:_______________________________________ Title: - ---------------------- *Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. (2) Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder. (3) Insert if satisfaction of minimum amounts is to be determined as of the Trade Date. [Consented to and](4) Accepted: MORGAN STANLEY SENIOR FUNDING, INC., as Administrative Agent By: ___________________________ Title: [Consented to:](5) [HEADWATERS INCORPORATED, as Borrower] By: ___________________________ Title: - ------------------------ (4) To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement. (5) To be added only if the consent of the Borrower is required by the terms of the Credit Agreement. ANNEX 1 TERMS AND CONDITIONS FOR ASSIGNMENT AND ASSUMPTION 1. Representations and Warranties. 1.1 Assignor. The Assignor represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency, perfection, priority, collectibility, or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document, (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document, (v) inspecting any of the property, books or records of the Borrower, or any guarantor, or (vi) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loans or the Loan Documents. 1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iii) agrees that its payment instructions and notice instructions are as set forth in Schedule 1 to this Assignment and Assumption, (iv) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be "plan assets" under ERISA, (v) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment and Assumption, (vi) it has received a copy of the Credit Agreement, together with copies of financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (vii) attached as Schedule 1 to this Assignment and Assumption is any documentation required to be delivered by the Assignee with respect to its tax status pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. 2. Payments. The Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date. 3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the internal law of the State of New York. SCHEDULE 1 ADMINISTRATIVE QUESTIONNAIRE (Schedule to be supplied by Closing Unit or Trading Documentation Unit) US AND NON-US TAX INFORMATION REPORTING REQUIREMENTS (Schedule to be supplied by Closing Unit or Trading Documentation Unit) EXHIBIT D FORM OF LOAN/ CREDIT RELATED MONEY TRANSFER INSTRUCTIONS To Morgan Stanley Senior Funding, Inc., as Administrative Agent (the "Administrative Agent") under the Credit Agreement described below. Re: Second Lien Credit Agreement, dated as of September 8, 2004 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Headwaters Incorporated (the "Borrower"), the Lenders, and the Administrative Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. The Administrative Agent is specifically authorized and directed to act upon the following standing money transfer instructions with respect to the proceeds of Advances or other extensions of credit from time to time until receipt by the Administrative Agent of a specific written revocation of such instructions by the Borrower, provided, however, that the Administrative Agent may otherwise transfer funds as hereafter directed in writing by the Borrower in accordance with Section 13.1 of the Credit Agreement or based on any telephonic notice made in accordance with Section 2.12 of the Credit Agreement. Facility Identification Number(s)______________________________________________ Customer/Account Name Headwaters Incorporated Transfer Funds To______________________________________________________________ _______________________________________________________________________________ For Account No.________________________________________________________________ Reference/Attention To_________________________________________________________ Authorized Officer (Customer Representative) Date______________________ _______________________________________________ __________________________ (Please Print) Signature Bank Officer Name Date______________________ _______________________________________________ __________________________ (Please Print) Signature EXHIBIT E FORM OF PROMISSORY NOTE $_______________ September [__], 2004 HEADWATERS INCORPORATED, a Delaware corporation (the "Borrower"), promises to pay to the order of [LENDER] or its registered assigns (the "Lender") the aggregate unpaid principal amount of the Loan made by the Lender to Borrower pursuant to Article II of the Agreement (as hereinafter defined), in immediately available funds at the main office of Morgan Stanley Senior Funding, Inc., as Administrative Agent (the "Administrative Agent"), together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay, in Dollars, the principal of and accrued and unpaid interest on the Loan in full on the Maturity Date. The principal indebtedness evidenced hereby shall be payable as set forth in Article II of the Agreement with a final installment payable on the Maturity Date. The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of the Loan and the date and amount of each principal payment hereunder. This Promissory Note (this "Note") is one of the Notes issued pursuant to, and is entitled to the benefits of, the Second Lien Credit Agreement, dated as of September 8, 2004 (which, as it may be amended, restated, supplemented or otherwise modified and in effect from time to time, is herein called the "Agreement"), among the Borrower, the Lenders and the Administrative Agent, to which Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement. This Note is secured by the Collateral Documents. Reference is hereby made to the Collateral Documents for a description of the collateral thereby mortgaged, warranted, bargained, sold, releases, conveyed, assigned, transferred, pledged and hypothecated, the nature and extent of the security for this Note, the rights of the holder of this Note, the Administrative Agent in respect of such security and otherwise. This Note shall be governed by, and construed in accordance with, the internal laws, but without regard to the conflict of law provisions, of the State of New York, but giving effect to federal laws applicable to national banks. HEADWATERS INCORPORATED, as the Borrower By: ____________________________________ Name: Title: SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL TO PROMISSORY NOTE OF HEADWATERS INCORPORATED DATED [________] Principal Maturity Principal Amount of of Interest Amount Unpaid Date Loan Period Paid Balance - ------------- --------------- ---------------- ---------------- ---------------- EXHIBIT F FORM OF OFFICER'S CERTIFICATE OFFICER'S CERTIFICATE I, the undersigned, hereby certify to the Administrative Agent and the Lenders (each as defined below) that I am the _________________ of HEADWATERS INCORPORATED, a corporation duly organized and existing under the laws of the State of Delaware (the "Borrower"). Capitalized terms used herein and not otherwise defined herein are as defined in that certain Second Lien Credit Agreement dated as of September 8, 2004 by and among the Borrower, the institutions from time to time parties thereto as Lenders (the "Lenders") and Morgan Stanley Senior Funding, Inc., as the "Administrative Agent" (as the same may be amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Agreement"). Capitalized terms used herein shall have the meanings set forth in the Credit Agreement. I further certify to the Administrative Agent and the Lenders, as such officer and not individually, that, pursuant to Section 6.15.3 of the Credit Agreement, as of the date hereof: 1. No Default or Unmatured Default exists [other than the following (describe the nature of the Default or Unmatured Default and the status thereof)]. IN WITNESS WHEREOF, I hereby subscribe my name on behalf of the Borrower on this ____ day of ___________, 200_. HEADWATERS INCORPORATED, as Borrower By:_________________________ [Insert Name of Officer] EXHIBIT G CLOSING DOCUMENTS NOT OTHERWISE LISTED IN SECTION 4.1 Capitalized terms used herein shall have the meaning ascribed to them in the Second Lien Credit Agreement (the "Credit Agreement") by and among Headwaters Incorporated, a Delaware corporation (the "Borrower"), the institutions from time to time parties thereto as Lenders (the "Lenders"), Morgan Stanley Senior Funding, Inc., as Administrative Agent, Joint Lead Arranger, and Joint Book Runner, Morgan Stanley & Co. Incorporated as Collateral Agent and JPMorgan Chase Bank as Syndication Agent, Joint Lead Arranger and Joint Lead Bookrunner. 1. Guaranty made by each Guarantor (each such Guarantor and the Borrower, herein being the "U.S. Credit Parties") in favor of the Agent for the benefit of the Holders of the Obligations. 2. Second Lien Pledge and Security Agreement executed by each U.S. Credit Party evidencing its grant of a security interest in substantially all of its respective personal property in favor of the Agent for the benefit of the Holders of the Obligations, together with: (a) To the extent they exist, certificates representing the pledged Securities referred to therein accompanied by undated stock powers executed in blank; (b) The originals of all Instruments referred to therein indorsed in blank; (c) UCC, tax and judgment lien search reports naming each U.S. Credit Party from the appropriate offices in those jurisdictions. deemed necessary or advisable by the Administrative Agent, and copies of all effective financing statements filed in such jurisdictions that list any of the U.S. Credit Parties as debtors; (d) UCC Financing Statements naming each U.S. Credit Party as debtor and the Agent as secured party as filed with the appropriate offices in those jurisdictions deemed necessary or advisable by the Administrative Agent in order to perfect and protect the second priority liens and security interests created under the Second Lien Pledge and Security Agreement; (e) Evidence of the terms of the insurance required by the Credit Agreement; and (f) Evidence of completion of all other filings of or with respect to the Second Lien Pledge and Security Agreement that the Collateral Agent may deem necessary or desirable in order to perfect and protect the Liens created thereby. 3. Intercreditor Agreement executed by the Borrower, the First Lien Administrative Agent, the Second Lien Administrative Agent, the First Lien Collateral Agent and the Second Lien Collateral Agent. 4. Second Lien Intellectual Property Security Agreement made by the U.S. Credit Parties, in favor of the Agent for the benefit of the Holders of the Obligations. 5. Good Standing Certificates (or the equivalent thereof) for each U.S. Credit Party from its respective jurisdiction of organization and those other jurisdictions where its ownership, lease or operation of properties or the conduct of its business requires it to be qualified to do business and in good standing, dated near the closing date together with bring downs dated the Closing Date. 6. Opinion letters of the Borrower's and the other US Credit Parties' domestic counsel Pillsbury Winthrop LLP, addressed to the Agent and the Lenders, relating to, among other things, enforceability, creation and perfection of security interests (with respect to US Credit Parties organized under the laws of the States of Delaware, Texas and California), and non-contravention of applicable laws or of the indenture in respect of Tapco's 12%:% notes. 7. Opinion letters of local counsel to the U.S.. Credit Parties addressed to the Agent and the Lenders, relating to, among other things, perfection of security interests, good standing, incorporation, due authorization and non-contravention of laws or organizational documents, etc. with respect to U.S.. Credit Parties organized in states other than Delaware, Texas and California, as agreed between the Borrower and the Lenders, except as may be otherwise provided in the opinion referred to. in paragraph 8 below. 8. Opinion letter of in-house counsel to. the U.S. Credit Parties (other than Tapco and its Subsidiaries) addressed to the Agent and the Lenders, relating to, among other things, good standing, incorporation, due authorization and non-contravention of organizational documents. EXHIBIT H DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING ([____________]) by and from [ ], "Grantor" to [_____________], "Trustee" for the benefit of MORGAN STANLEY & CO. INCORPORATED, in its capacity as Agent, "Beneficiary" Dated as of [_______________], 2004 Location: [____________] Municipality: [____________] County: [____________] State: [____________] THE SECURED PARTY (BENEFICIARY) DESIRES THIS FIXTURE FILING TO BE INDEXED AGAINST THE RECORD OWNER OF THE REAL ESTATE DESCRIBED HEREIN. PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: Shearman & Sterling LLP 599 Lexington Avenue New York, New York 10022-6069 Attention: Malcolm M. Kratzer, Esq. File #5822/2942 DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING ([____________]) THIS DEED OF TRUST, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING ([____________]) (this "Deed of Trust") is dated as of [______], 2004 by and from [_____________], a [___________] [corporation][limited partnership] ("Grantor"), whose address is [__________________], to [__________________], a [__________________] ("Trustee"), with an address at [________________________], for the benefit of MORGAN STANLEY & CO. INCORPORATED, a ________, as collateral agent (in such capacity, "Agent" or "Collateral Agent") for the Lenders as defined in the Credit Agreement (defined below), having an address at 1633 Broadway, 25th Floor, New York, New York 10019 (Agent, together with its successors and assigns, "Beneficiary"). ARTICLE 1 DEFINITIONS Section 1.1 Definitions. All capitalized terms used herein without definition shall have the respective meanings ascribed to them in that certain Credit Agreement dated as of September 8, 2004 as the same may be amended, amended and restated, supplemented or otherwise modified from time to time (the "Credit Agreement"), among Headwaters Incorporated ("Borrower"), Agent, Morgan Stanley Senior Funding, Inc., ("Administrative Agent"), the Lenders identified therein and certain other parties named therein. As used herein, the following terms shall have the following meanings: (a) "Event of Default": An Event of Default under and as defined in the Credit Agreement. (b) "Guaranty": That certain Guaranty Agreement by and from Grantor and the other guarantors referred to therein for the benefit of the Lender Parties dated as of even date herewith, as the same may hereafter be amended, amended and restated, supplemented or otherwise modified from time to time. (c) "Indebtedness": (1) All indebtedness of Grantor to Beneficiary or any of the other Lender Parties under the Credit Agreement or any other Loan Document, including, without limitation (except as otherwise set forth in Section 2(b) of the Guaranty Agreement), the sum of all (a) principal, interest and other amounts owing under or evidenced or secured by the Loan Documents, (b) principal, interest and other amounts which may hereafter be lent by Beneficiary or any of the other Lender Parties under or in connection with the Credit Agreement or any of the other Loan Documents, whether evidenced by a promissory note or other instrument which, by its terms, is secured hereby, and (c) obligations and liabilities of any nature now or hereafter existing under or arising in connection with Facility LCs and other extensions of credit under the Credit Agreement or any of the other Loan Documents and reimbursement obligations in respect thereof, together with interest and other amounts payable with respect thereto, and (2) all other indebtedness, obligations and liabilities now or hereafter existing of any kind of Grantor to Beneficiary or any of the other Lender Parties under documents which recite that they are intended to be secured by this Deed of Trust. The Indebtedness secured hereby includes, without limitation, all interest and expenses accruing after the commencement by or against Grantor or any of its affiliates of a proceeding under the Bankruptcy Code (defined below) or any similar law for the relief of debtors. The Credit Agreement contains a revolving credit facility which permits Borrower to borrow certain principal amounts, repay all or a portion of such principal amounts, and reborrow the amounts previously paid to the Lender Parties, all upon satisfaction of certain conditions stated in the Credit Agreement. This Deed of Trust secures all advances and re-advances under the Credit Agreement, including, without limitation, those under the revolving credit facility contained therein. (d) "Lender Parties": Any Lender, Administrative Agent and Collateral Agent. (e) "Mortgaged Property": The fee interest in the real property described in Exhibit A attached hereto and incorporated herein by this reference, together with any greater estate therein as hereafter may be acquired by Grantor (the "Land"), and all of Grantor's right, title and interest in and to (1) all improvements now owned or hereafter acquired by Grantor, now or at any time situated, placed or constructed upon the Land (the "Improvements"; the Land and Improvements are collectively referred to as the "Premises"), (2) all materials, supplies, equipment, apparatus and other items of personal property now owned or hereafter acquired by Grantor and now or hereafter attached to, installed in or used in connection with any of the Improvements or the Land, and water, gas, electrical, telephone, storm and sanitary sewer facilities and all other utilities whether or not situated in easements (the "Fixtures"), (3) all goods, accounts, inventory, general intangibles, instruments, documents, contract rights and chattel paper, including all such items as defined in the UCC (defined below), now owned or hereafter acquired by Grantor and now or hereafter affixed to, placed upon, used in connection with, arising from or otherwise related to the Premises (the "Personalty"), (4) all reserves, escrows or impounds required under the Credit Agreement or any of the other Loan Documents and all deposit accounts maintained by Grantor with respect to the Mortgaged Property (the "Deposit Accounts"), (5) all leases, licenses, concessions, occupancy agreements or other agreements (written or oral, now or at any time in effect) which grant to any Person a possessory interest in, or the right to use, all or any part of the Mortgaged Property, together with all related security and other deposits (the "Leases"), (6) all of the rents, revenues, royalties, income, proceeds, profits, accounts receivable, security and other types of deposits, and other benefits paid or payable by parties to the Leases for using, leasing, licensing possessing, operating from, residing in, selling or otherwise enjoying the Mortgaged Property (the "Rents"), (7) all other agreements, such as construction contracts, architects' agreements, engineers' contracts, utility contracts, maintenance agreements, management agreements, service contracts, listing agreements, guaranties, warranties, permits, licenses, certificates and entitlements in any way relating to the construction, use, occupancy, operation, maintenance, enjoyment or ownership of the Mortgaged Property (the "Property Agreements"), (8) all rights, privileges, tenements, hereditaments, rights-of-way, easements, appendages and appurtenances appertaining to the foregoing, (9) all property tax refunds payable with respect to the Mortgaged Property (the "Tax Refunds"), (10) all accessions, replacements and substitutions for any of the foregoing and all proceeds thereof (the "Proceeds"), (11) all insurance policies, unearned premiums therefor and proceeds from such policies covering any of the above property now or hereafter acquired by Grantor (the "Insurance"), and (12) all awards, damages, remunerations, reimbursements, settlements or compensation heretofore made or hereafter to be made by any governmental authority pertaining to any condemnation or other taking (or any purchase in lieu thereof) of all or any portion of the Land, Improvements, Fixtures or Personalty (the "Condemnation Awards"). As used in this Deed of Trust, the term "Mortgaged Property" shall mean all or, where the context permits or requires, any portion of the above or any interest therein. (f) "Obligations": All of the agreements, covenants, conditions, warranties, representations and other obligations of Grantor (including, without limitation, the obligation to repay the Indebtedness) under the Credit Agreement and the other Loan Documents to which it is a party. (g) "Permitted Liens": Liens described in Section 6.15 of the Credit Agreement other than those Liens described in Sections 6.15.9 and 6.15.17. (h) "Security Agreement": That certain Security Agreement by and from Grantor and the other grantors referred to therein to Agent and the other Lender Parties dated as of even date herewith, as the same may hereafter be amended, amended and restated, supplemented or otherwise modified from time to time. (i) "UCC": The Uniform Commercial Code of [________________] or, if the creation, perfection and enforcement of any security interest herein granted is governed by the laws of a state other than [___________________], then, as to the matter in question, the Uniform Commercial Code in effect in that state. ARTICLE 2 GRANT Section 2.1 Grant. To secure the full and timely payment of the Indebtedness and the full and timely performance of the Obligations, Grantor GRANTS, BARGAINS, ASSIGNS, SELLS, CONVEYS and CONFIRMS, to Trustee the Mortgaged Property, subject, however, only to the matters that are set forth on Exhibit B attached hereto (the "Permitted Encumbrances") and to Permitted Liens, TO HAVE AND TO HOLD the Mortgaged Property, IN TRUST, WITH POWER OF SALE, and Grantor does hereby bind itself, its successors and assigns to WARRANT AND FOREVER DEFEND the title to the Mortgaged Property unto Trustee. ARTICLE 3 WARRANTIES, REPRESENTATIONS AND COVENANTS Grantor warrants, represents and covenants to Beneficiary as follows: Section 3.1 Title to Mortgaged Property and Lien of this Instrument. Grantor owns the Mortgaged Property free and clear of any liens, claims or interests, except the Permitted Encumbrances and the Permitted Liens. This Deed of Trust creates valid, enforceable first priority liens and security interests against the Mortgaged Property. Section 3.2 First Lien Status. Grantor shall preserve and protect the first lien and security interest status of this Deed of Trust and the other Loan Documents. If any lien or security interest other than a Permitted Encumbrance or a Permitted Lien is asserted against the Mortgaged Property, Grantor shall promptly, and at its expense, (a) give Beneficiary a detailed written notice of such lien or security interest (including origin, amount and other terms), and (b) pay the underlying claim in full or take such other action so as to cause it to be released or contest the same in compliance with the requirements of the Credit Agreement (including the requirement of providing a bond or other security satisfactory to Beneficiary). Section 3.3 Payment and Performance. Grantor shall pay the Indebtedness when due under the Credit Agreement and the other Loan Documents and shall perform the Obligations in full when they are required to be performed. Section 3.4 Replacement of Fixtures and Personalty. Grantor shall not, without the prior written consent of Beneficiary, permit any of the Fixtures or Personalty owned or leased by Grantor to be removed at any time from the Land or Improvements, unless the removed item is removed temporarily for maintenance and repair or is permitted to be removed by the Credit Agreement. Section 3.5 Inspection. Grantor shall permit Beneficiary and the other Lender Parties and their respective agents, representatives and employees, upon reasonable prior notice to Grantor, to inspect the Mortgaged Property and all books and records of Grantor located thereon, and to conduct such environmental and engineering studies as Beneficiary or the other Lender Parties may require, provided that such inspections and studies shall not materially interfere with the use and operation of the Mortgaged Property. Section 3.6 Other Covenants. All of the covenants in the Credit Agreement are incorporated herein by reference and, together with covenants in this Article 3, shall be covenants running with the Land. Section 3.7 Insurance; Condemnation Awards and Insurance Proceeds. (a) Insurance. Grantor shall maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to the Mortgaged Property against loss or damage of the kinds customarily carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses. Each such policy of insurance shall name Beneficiary as the loss payee (or, in the case of liability insurance, an additional insured) thereunder for the ratable benefit of the Lender Parties, shall (except in the case of liability insurance) name Beneficiary as the "mortgagee" under a so-called "New York" long form non-contributory endorsement and shall provide for at least 30 days' prior written notice of any material modification or cancellation of such policy. In addition to the foregoing, if any portion of the Mortgaged Property is located in an area identified by the Federal Emergency Management Agency as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968 (or any amendment or successor act thereto), then Grantor shall maintain, or cause to be maintained, with a financially sound and reputable insurer, flood insurance in an amount sufficient to comply with all applicable rules and regulations promulgated pursuant to such Act. (b) Condemnation Awards. Grantor assigns all Condemnation Awards to Beneficiary and authorizes Beneficiary to collect and receive such Condemnation Awards and to give proper receipts and acquittances therefor, subject to the terms of the Credit Agreement (including, without limitation, Section 2.2(b) thereof). (c) Insurance Proceeds. Grantor assigns to Beneficiary all proceeds of any insurance policies insuring against loss or damage to the Mortgaged Property. Subject to the terms of the Credit Agreement (including, without limitation, Section 2.2(b) thereof), Grantor authorizes Beneficiary to collect and receive such proceeds and authorizes and directs the issuer of each of such insurance policies to make payment for all such losses directly to Beneficiary, instead of to Grantor and Beneficiary jointly. ARTICLE 4 [Intentionally Omitted] ARTICLE 5 DEFAULT AND FORECLOSURE Section 5.1 Remedies. Upon the occurrence and during the continuance of an Event of Default, Beneficiary may, at Beneficiary's election and by or through Trustee or otherwise, exercise any or all of the following rights, remedies and recourses: (a) Acceleration. Subject to any provisions of the Loan Documents providing for the automatic acceleration of the Indebtedness upon the occurrence of certain Events of Default, declare the Indebtedness to be immediately due and payable, without further notice, presentment, protest, notice of intent to accelerate, notice of acceleration, demand or action of any nature whatsoever (each of which hereby is expressly waived by Grantor), whereupon the same shall become immediately due and payable. (b) Entry on Mortgaged Property. Enter the Mortgaged Property and take exclusive possession thereof and of all books, records and accounts relating thereto or located thereon. If Grantor remains in possession of the Mortgaged Property following the occurrence and during the continuance of an Event of Default and without Beneficiary's prior written consent, Beneficiary may invoke any legal remedies to dispossess Grantor. (c) Operation of Mortgaged Property. Hold, lease, develop, manage, operate or otherwise use the Mortgaged Property upon such terms and conditions as Beneficiary may deem reasonable under the circumstances (making such repairs, alterations, additions and improvements and taking other actions, from time to time, as Beneficiary deems necessary or desirable), and apply all Rents and other amounts collected by Trustee or Beneficiary in connection therewith in accordance with the provisions of Section 5.7. (d) Foreclosure and Sale. Institute proceedings for the complete foreclosure of this Deed of Trust by judicial action or by power of sale, in which case the Mortgaged Property may be sold for cash or credit in one or more parcels as Beneficiary may determine. With respect to any notices required or permitted under the UCC, Grantor agrees that ten (10) days' prior written notice shall be deemed commercially reasonable. At any such sale by virtue of any judicial proceedings, power of sale, or any other legal right, remedy or recourse, the title to and right of possession of any such property shall pass to the purchaser thereof, and to the fullest extent permitted by law, Grantor shall be completely and irrevocably divested of all of its right, title, interest, claim, equity, equity of redemption, and demand whatsoever, either at law or in equity, in and to the property sold and such sale shall be a perpetual bar both at law and in equity against Grantor, and against all other Persons claiming or to claim the property sold or any part thereof, by, through or under Grantor. Beneficiary or any of the other Lender Parties may be a purchaser at such sale. If Beneficiary or such other Lender Party is the highest bidder, Beneficiary or such other Lender Party may credit the portion of the purchase price that would be distributed to Beneficiary or such other Lender Party against the Indebtedness in lieu of paying cash. In the event this Deed of Trust is foreclosed by judicial action, appraisement of the Mortgaged Property is waived. (e) Receiver. Make application to a court of competent jurisdiction for, and obtain from such court as a matter of strict right and without notice to Grantor or regard to the adequacy of the Mortgaged Property for the repayment of the Indebtedness, the appointment of a receiver of the Mortgaged Property, and Grantor irrevocably consents to such appointment. Any such receiver shall have all the usual powers and duties of receivers in similar cases, including the full power to rent, maintain and otherwise operate the Mortgaged Property upon such terms as may be approved by the court, and shall apply such Rents in accordance with the provisions of Section 5.7. (f) Other. Exercise all other rights, remedies and recourses granted under the Loan Documents or otherwise available at law or in equity. Section 5.2 Separate Sales. The Mortgaged Property may be sold in one or more parcels and in such manner and order as Trustee in its sole discretion may elect. The right of sale arising out of any Event of Default shall not be exhausted by any one or more sales. Section 5.3 Remedies Cumulative, Concurrent and Nonexclusive. Trustee, Beneficiary and the other Lender Parties shall have all rights, remedies and recourses granted in the Loan Documents and available at law or equity (including the UCC), which rights (a) shall be cumulative and concurrent, (b) may be pursued separately, successively or concurrently against Grantor or others obligated under the Loan Documents, or against the Mortgaged Property, or against any one or more of them, at the sole discretion of Trustee, Beneficiary or such other Lender Party, as the case may be, (c) may be exercised as often as occasion therefor shall arise, and the exercise or failure to exercise any of them shall not be construed as a waiver or release thereof or of any other right, remedy or recourse, and (d) are intended to be, and shall be, nonexclusive. No action by Trustee, Beneficiary or any other Lender Party in the enforcement of any rights, remedies or recourses under the Loan Documents or otherwise at law or equity shall be deemed to cure any Event of Default. Section 5.4 Release of and Resort to Collateral. Beneficiary may release, regardless of consideration and without the necessity for any notice to or consent by the holder of any subordinate lien on the Mortgaged Property, any part of the Mortgaged Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interest created in or evidenced by the Loan Documents or their status as a first and prior lien and security interest in and to the Mortgaged Property. For payment of the Indebtedness, Beneficiary may resort to any other security in such order and manner as Beneficiary may elect. Section 5.5 Waiver of Redemption, Notice and Marshalling of Assets. To the fullest extent permitted by law, Grantor hereby irrevocably and unconditionally waives and releases (a) all benefit that might accrue to Grantor by virtue of any present or future statute of limitations or law or judicial decision exempting the Mortgaged Property from attachment, levy or sale on execution or providing for any stay of execution, exemption from civil process, redemption or extension of time for payment, (b) all notices of any Event of Default or of any election by Trustee or Beneficiary to exercise or the actual exercise of any right, remedy or recourse provided for under the Loan Documents, and (c) any right to a marshalling of assets or a sale in inverse order of alienation. Section 5.6 Discontinuance of Proceedings. If Trustee, Beneficiary or any other Lender Party shall have proceeded to invoke any right, remedy or recourse permitted under the Loan Documents and shall thereafter elect to discontinue or abandon it for any reason, Trustee, Beneficiary or such other Lender Party, as the case may be, shall have the unqualified right to do so and, in such an event, Grantor, Trustee, Beneficiary and the other Lender Parties shall be restored to their former positions with respect to the Indebtedness, the Obligations, the Loan Documents, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Trustee, Beneficiary and the other Lender Parties shall continue as if the right, remedy or recourse had never been invoked, but no such discontinuance or abandonment shall waive any Event of Default which may then exist or the right of Trustee, Beneficiary or any other Lender Party thereafter to exercise any right, remedy or recourse under the Loan Documents for such Event of Default. Section 5.7 Application of Proceeds. The proceeds of any sale of, and the Rents and other amounts generated by the holding, leasing, management, operation or other use of the Mortgaged Property, shall be applied by Beneficiary or Trustee (or the receiver, if one is appointed) in the following order unless otherwise required by applicable law: (a) to the payment of the costs and expenses of taking possession of the Mortgaged Property and of holding, using, leasing, repairing, improving and selling the same, including, without limitation (1) trustee's and receiver's fees and expenses, including the repayment of the amounts evidenced by any receiver's certificates, (2) court costs, (3) attorneys' and accountants' fees and expenses, and (4) costs of advertisement; (b) to the payment of the Indebtedness and performance of the Obligations in such manner and order of preference as Beneficiary in its sole discretion may determine; and (c) the balance, if any, to the Persons legally entitled thereto. Section 5.8 Occupancy After Foreclosure. Any sale of the Mortgaged Property or any part thereof in accordance with Section 5.1(d) will divest all right, title and interest of Grantor in and to the property sold. Subject to applicable law, any purchaser at a foreclosure sale will receive immediate possession of the property purchased. If Grantor retains possession of such property or any part thereof subsequent to such sale, Grantor will be considered a tenant at sufferance of the purchaser, and will, if Grantor remains in possession after demand to remove, be subject to eviction and removal, forcible or otherwise, with or without process of law. Section 5.9 Additional Advances and Disbursements; Costs of Enforcement. (a) Upon the occurrence and during the continuance of any Event of Default, Beneficiary and each of the other Lender Parties shall have the right, but not the obligation, to cure such Event of Default in the name and on behalf of Grantor. All sums advanced and expenses incurred at any time by Beneficiary or any other Lender Party under this Section 5.9, or otherwise under this Deed of Trust or any of the other Loan Documents or applicable law, shall bear interest from the date that such sum is advanced or expense incurred, to and including the date of reimbursement, computed at the highest rate at which interest is then computed on any portion of the Indebtedness, and all such sums, together with interest thereon, shall be secured by this Deed of Trust. (b) Grantor shall pay all expenses (including reasonable attorneys' fees and expenses) of or incidental to the perfection and enforcement of this Deed of Trust and the other Loan Documents, or the enforcement, compromise or settlement of the Indebtedness or any claim under this Deed of Trust and the other Loan Documents, and for the curing thereof, or for defending or asserting the rights and claims of Beneficiary in respect thereof, by litigation or otherwise. Section 5.10 No Mortgagee in Possession. Neither the enforcement of any of the remedies under this Article 5, the assignment of the Rents and Leases under Article 6, the security interests under Article 7, nor any other remedies afforded to Beneficiary under the Loan Documents, at law or in equity shall cause Trustee, Beneficiary or any other Lender Party to be deemed or construed to be a mortgagee in possession of the Mortgaged Property, to obligate Trustee, Beneficiary or any other Lender Party to lease the Mortgaged Property or attempt to do so, or to take any action, incur any expense, or perform or discharge any obligation, duty or liability whatsoever under any of the Leases or otherwise. ARTICLE 6 ASSIGNMENT OF RENTS AND LEASES Section 6.1 Assignment. In furtherance of and in addition to the assignment made by Grantor in Section 2.1 of this Deed of Trust, Grantor hereby absolutely and unconditionally assigns, sells, transfers and conveys to Trustee (for the benefit of Beneficiary) and to Beneficiary all of its right, title and interest in and to all Leases, whether now existing or hereafter entered into, and all of its right, title and interest in and to all Rents. This assignment is an absolute assignment and not an assignment for additional security only. So long as no Event of Default shall have occurred and be continuing, Grantor shall have a revocable license from Trustee and Beneficiary to exercise all rights extended to the landlord under the Leases, including the right to receive and collect all Rents and to hold the Rents in trust for use in the payment and performance of the Obligations and to otherwise use the same. The foregoing license is granted subject to the conditional limitation that no Event of Default shall have occurred and be continuing. Upon the occurrence and during the continuance of an Event of Default, whether or not legal proceedings have commenced, and without regard to waste, adequacy of security for the Obligations or solvency of Grantor, the license herein granted shall automatically expire and terminate, without notice to Grantor by Trustee or Beneficiary (any such notice being hereby expressly waived by Grantor to the extent permitted by applicable law). Section 6.2 Perfection Upon Recordation. Grantor acknowledges that Beneficiary and Trustee have taken all actions necessary to obtain, and that upon recordation of this Deed of Trust Beneficiary and Trustee shall have, to the extent permitted under applicable law, a valid and fully perfected, first priority, present assignment of the Rents arising out of the Leases and all security for such Leases. Grantor acknowledges and agrees that upon recordation of this Deed of Trust Trustee's and Beneficiary's interest in the Rents shall be deemed to be fully perfected, "choate" and enforced as to Grantor and to the extent permitted under applicable law, all third parties, including, without limitation, any subsequently appointed trustee in any case under Title 11 of the United States Code (the "Bankruptcy Code"), without the necessity of commencing a foreclosure action with respect to this Deed of Trust, making formal demand for the Rents, obtaining the appointment of a receiver or taking any other affirmative action. Section 6.3 Bankruptcy Provisions. Without limitation of the absolute nature of the assignment of the Rents hereunder, Grantor, Trustee and Beneficiary agree that (a) this Deed of Trust shall constitute a "security agreement" for purposes of Section 552(b) of the Bankruptcy Code, (b) the security interest created by this Deed of Trust extends to property of Grantor acquired before the commencement of a case in bankruptcy and to all amounts paid as Rents and (c) such security interest shall extend to all Rents acquired by the estate after the commencement of any case in bankruptcy. Section 6.4 No Merger of Estates. So long as part of the Indebtedness and the Obligations secured hereby remain unpaid and undischarged, the fee and leasehold estates to the Mortgaged Property shall not merge, but shall remain separate and distinct, notwithstanding the union of such estates either in Grantor, Beneficiary, any tenant or any third party by purchase or otherwise. ARTICLE 7 SECURITY AGREEMENT Section 7.1 Security Interest. This Deed of Trust constitutes a "security agreement" on personal property within the meaning of the UCC and other applicable law and with respect to the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards. To this end, Grantor grants to Beneficiary a first and prior security interest in the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance, Condemnation Awards and all other Mortgaged Property which is personal property to secure the payment of the Indebtedness and performance of the Obligations, and agrees that Beneficiary shall have all the rights and remedies of a secured party under the UCC with respect to such property. Any notice of sale, disposition or other intended action by Beneficiary with respect to the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards sent to Grantor at least ten (10) days prior to any action under the UCC shall constitute reasonable notice to Grantor. In the event of any inconsistency between the terms of this Deed of Trust and the terms of the Security Agreement with respect to the collateral covered both therein and herein, the Security Agreement shall control and govern to the extent of any such inconsistency. Section 7.2 Financing Statements. Grantor shall prepare and deliver to Beneficiary such financing statements, and shall execute and deliver to Beneficiary such other documents, instruments and further assurances, in each case in form and substance satisfactory to Beneficiary, as Beneficiary may, from time to time, reasonably consider necessary to create, perfect and preserve Beneficiary's security interest hereunder. Grantor hereby irrevocably authorizes Beneficiary to cause financing statements (and amendments thereto and continuations thereof) and any such documents, instruments and assurances to be recorded and filed, at such times and places as may be required or permitted by law to so create, perfect and preserve such security interest. Grantor represents and warrants to Beneficiary that Grantor's jurisdiction of organization is the State of [________________]. After the date of this Deed of Trust, Grantor shall not change its name, type of organization, organizational identification number (if any), jurisdiction of organization or location (within the meaning of the UCC) without giving at least thirty (30) days' prior written notice to Beneficiary. Section 7.3 Fixture Filing. This Deed of Trust shall also constitute a "fixture filing" for the purposes of the UCC against all of the Mortgaged Property which is or is to become fixtures. The information provided in this Section 7.3 is provided so that this Deed of Trust shall comply with the requirements of the UCC for a mortgage instrument to be filed as a financing statement. Grantor is the "Debtor" and its name and mailing address are set forth in the preamble of this Deed of Trust immediately preceding Article 1. Beneficiary is the "Secured Party" and its name and mailing address from which information concerning the security interest granted herein may be obtained are also set forth in the preamble of this Deed of Trust immediately preceding Article 1. A statement describing the portion of the Mortgaged Property comprising the fixtures hereby secured is set forth in Section 1.1(c) of this Deed of Trust. Grantor represents and warrants to Beneficiary that Grantor is the record owner of the Mortgaged Property, the employer identification number of Grantor is [_____________] and the organizational identification number of Grantor is [____________]. ARTICLE 8 CONCERNING THE TRUSTEE Section 8.1 Certain Rights. With the approval of Beneficiary, Trustee shall have the right to select, employ and consult with counsel. Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by it hereunder, believed by it in good faith to be genuine. Trustee shall be entitled to reimbursement for actual, reasonable expenses incurred by it in the performance of its duties and to reasonable compensation for Trustee's services hereunder as shall be rendered. Grantor shall, from time to time, pay the compensation due to Trustee hereunder and reimburse Trustee for, and indemnify, defend and save Trustee harmless against, all liability and reasonable expenses which may be incurred by it in the performance of its duties, including those arising from joint, concurrent, or comparative negligence of Trustee; provided, however, that Grantor shall not be liable under such indemnification to the extent such liability or expenses result solely from Trustee's gross negligence or willful misconduct. Grantor's obligations under this Section 8.1 shall not be reduced or impaired by principles of comparative or contributory negligence. Section 8.2 Retention of Money. All moneys received by Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other moneys (except to the extent required by law), and Trustee shall be under no liability for interest on any moneys received by Trustee hereunder. Section 8.3 Successor Trustees. If Trustee or any successor Trustee shall die, resign or become disqualified from acting in the execution of this trust, or Beneficiary shall desire to appoint a substitute Trustee, Beneficiary shall have full power to appoint one or more substitute Trustees and, if preferred, several substitute Trustees in succession who shall succeed to all the estates, rights, powers and duties of Trustee. Such appointment may be executed by any authorized agent of Beneficiary and as so executed, such appointment shall be conclusively presumed to be executed with authority, valid and sufficient, without further proof of any action. Section 8.4 Perfection of Appointment. Should any deed, conveyance or instrument of any nature be required from Grantor by any successor Trustee to more fully and certainly vest in and confirm to such successor Trustee such estates, rights, powers and duties, then, upon request by such Trustee, all such deeds, conveyances and instruments shall be made, executed, acknowledged and delivered and shall be caused to be recorded and/or filed by Grantor. Section 8.5 Trustee Liability. In no event or circumstance shall Trustee or any substitute Trustee hereunder be personally liable under or as a result of this Deed of Trust, either as a result of any action by Trustee (or any substitute Trustee) in the exercise of the powers hereby granted or otherwise. ARTICLE 9 MISCELLANEOUS Section 9.1 Notices. Any notice required or permitted to be given under this Deed of Trust shall be given in accordance with Section 13.1 of the Credit Agreement. Section 9.2 Covenants Running with the Land. All Obligations contained in this Deed of Trust are intended by Grantor, Beneficiary and Trustee to be, and shall be construed as, covenants running with the Land. As used herein, "Grantor" shall refer to the party named in the first paragraph of this Deed of Trust and to any subsequent owner of all or any portion of the Mortgaged Property. All Persons who may have or acquire an interest in the Mortgaged Property shall be deemed to have notice of, and be bound by, the terms of the Credit Agreement and the other Loan Documents; provided, however, that no such party shall be entitled to any rights thereunder without the prior written consent of Beneficiary. Section 9.3 Attorney-in-Fact. Grantor hereby irrevocably appoints Beneficiary as its attorney-in-fact, which agency is coupled with an interest and with full power of substitution, with full authority in the place and stead of Grantor and in the name of Grantor or otherwise (a) to execute and/or record any notices of completion, cessation of labor or any other notices that Beneficiary deems appropriate to protect Beneficiary's interest, if Grantor shall fail to do so within ten (10) days after written request by Beneficiary, (b) upon the issuance of a deed pursuant to the foreclosure of this Deed of Trust or the delivery of a deed in lieu of foreclosure, to execute all instruments of assignment, conveyance or further assurance with respect to the Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards in favor of the grantee of any such deed and as may be necessary or desirable for such purpose, (c) to prepare and file or record financing statements and continuation statements, and to prepare, execute and file or record applications for registration and like papers necessary to create, perfect or preserve Beneficiary's security interests and rights in or to any of the Mortgaged Property, and (d) after the occurrence and during the continuance of any Event of Default, to perform any obligation of Grantor hereunder; provided, however, that (1) Beneficiary shall not under any circumstances be obligated to perform any obligation of Grantor; (2) any sums advanced by Beneficiary in such performance shall be added to and included in the Indebtedness and shall bear interest at the highest rate at which interest is then computed on any portion of the Indebtedness; (3) Beneficiary as such attorney-in-fact shall only be accountable for such funds as are actually received by Beneficiary; and (4) Beneficiary shall not be liable to Grantor or any other person or entity for any failure to take any action which it is empowered to take under this Section 9.3. Section 9.4 Successors and Assigns. This Deed of Trust shall be binding upon and inure to the benefit of Beneficiary, the Lender Parties, Trustee and Grantor and their respective successors and assigns. Grantor shall not, without the prior written consent of Beneficiary, assign any rights, duties or obligations hereunder. Section 9.5 No Waiver. Any failure by Beneficiary, the other Lender Parties or Trustee to insist upon strict performance of any of the terms, provisions or conditions of the Loan Documents shall not be deemed to be a waiver of same, and Beneficiary, the other Lender Parties and Trustee shall have the right at any time to insist upon strict performance of all of such terms, provisions and conditions. Section 9.6 Credit Agreement. If any conflict or inconsistency exists between this Deed of Trust and the Credit Agreement, the Credit Agreement shall govern. Section 9.7 Release or Reconveyance. Upon payment in full of the Indebtedness and performance in full of the Obligations or upon a sale or other disposition of the Mortgaged Property permitted by the Credit Agreement, Beneficiary, at Grantor's request and expense, shall release the liens and security interests created by this Deed of Trust or reconvey the Mortgaged Property to Grantor. Section 9.8 Waiver of Stay, Moratorium and Similar Rights. Grantor agrees, to the full extent that it may lawfully do so, that it will not at any time insist upon or plead or in any way take advantage of any stay, marshalling of assets, extension, redemption or moratorium law now or hereafter in force and effect so as to prevent or hinder the enforcement of the provisions of this Deed of Trust or the Indebtedness or Obligations secured hereby, or any agreement between Grantor and Beneficiary or any rights or remedies of Trustee, Beneficiary or any other Lender Party. Section 9.9 Applicable Law. The provisions of this Deed of Trust regarding the creation, perfection and enforcement of the liens and security interests herein granted shall be governed by and construed under the laws of the state in which the Mortgaged Property is located. All other provisions of this Deed of Trust shall be governed by the laws of the State of New York (including, without limitation, Section 5-1401 of the General Obligations Law of the State of New York). Section 9.10 Headings. The Article, Section and Subsection titles hereof are inserted for convenience of reference only and shall in no way alter, modify or define, or be used in construing, the text of such Articles, Sections or Subsections. Section 9.11 Severability. If any provision of this Deed of Trust shall be held by any court of competent jurisdiction to be unlawful, void or unenforceable for any reason, such provision shall be deemed severable from and shall in no way affect the enforceability and validity of the remaining provisions of this Deed of Trust. Section 9.12 Entire Agreement. This Deed of Trust and the other Loan Documents embody the entire agreement and understanding between Grantor and Beneficiary relating to the subject matter hereof and thereof and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. Section 9.13 Beneficiary as Agent; Successor Agents. (a) Agent has been appointed to act as Agent hereunder by the other Lender Parties. Agent shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of the Mortgaged Property) in accordance with the terms of the Credit Agreement, any related agency agreement among Agent and the other Lender Parties (collectively, as amended, amended and restated, supplemented or otherwise modified or replaced from time to time, the "Agency Documents") and this Deed of Trust. Grantor and all other Persons shall be entitled to rely on releases, waivers, consents, approvals, notifications and other acts of Agent, without inquiry into the existence of required consents or approvals of the Lender Parties therefor. (b) Beneficiary shall at all times be the same Person that is Agent under the Agency Documents. Written notice of resignation by Agent pursuant to the Agency Documents shall also constitute notice of resignation as Agent under this Deed of Trust. Removal of Agent pursuant to any provision of the Agency Documents shall also constitute removal as Agent under this Deed of Trust. Appointment of a successor Agent pursuant to the Agency Documents shall also constitute appointment of a successor Agent under this Deed of Trust. Upon the acceptance of any appointment as Agent by a successor Agent under the Agency Documents, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Agent as the Beneficiary under this Deed of Trust, and the retiring or removed Agent shall promptly (i) assign and transfer to such successor Agent all of its right, title and interest in and to this Deed of Trust and the Mortgaged Property, and (ii) execute and deliver to such successor Agent such assignments and amendments and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Agent of the liens and security interests created hereunder, whereupon such retiring or removed Agent shall be discharged from its duties and obligations under this Deed of Trust. After any retiring or removed Agent's resignation or removal hereunder as Agent, the provisions of this Deed of Trust and the Agency Documents shall inure to its benefit as to any actions taken or omitted to be taken by it under this Deed of Trust while it was Agent hereunder. ARTICLE 10 LOCAL LAW PROVISIONS [To Come] [The remainder of this page has been intentionally left blank] IN WITNESS WHEREOF, Grantor has on the date set forth in the acknowledgement hereto, effective as of the date first above written, caused this instrument to be duly EXECUTED AND DELIVERED by authority duly given. GRANTOR: [ ] a __________ [corporation/limited partnership] By: __________________________________________ Name: Title: [Insert form of notary acknowledgement for applicable state] State of ______________ ) ) ss. County of _____________ ) On [___], 2004, before me, personally appeared ____________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s) or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. [SEAL] ______________________ My Commission expires: Notary Public ______________________________ EXHIBIT A LEGAL DESCRIPTION Legal Description of premises located at [_______________________________]: [See Attached Page(s) For Legal Description] EXHIBIT B PERMITTED ENCUMBRANCES Those exceptions set forth in Schedule B of that certain policy of title insurance issued to Beneficiary by [___________] on or about the date hereof pursuant to commitment number [________]. EX-12 5 ex12k093004.txt COMPUTATION OF RATIOS TO FIXED CHARGES Exhibit 12 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
(thousands of dollars) Year Ended September 30, --------------------------------------------------------------- 2000 2001 2002 2003 2004 --------------------------------------------------------------- Fixed Charges Computation Interest expensed and capitalized $ 3,603 $ 145 $ 417 $12,060 $ 13,857 Amortized premiums, discounts, and capitalized expenses related to indebtedness 3,034 79 136 3,857 6,031 Reasonable approximation of interest within rental expense 26 20 72 1,139 1,462 --------------------------------------------------------------- Total Fixed Charges 6,663 244 625 17,056 21,350 Preferred equity dividends 378 113 - - - --------------------------------------------------------------- Total Fixed Charges and Preferred Equity Dividends $ 7,041 $ 357 $ 625 $17,056 $ 21,350 =============================================================== Earnings Computation Pre-tax income from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees $ 8,642 $14,468 $40,236 $60,081 $105,107 Plus Fixed charges 7,041 357 625 17,056 21,350 Minus Interest capitalized - - - 230 435 --------------------------------------------------------------- Total Earnings $15,683 $14,825 $40,861 $76,907 $126,022 =============================================================== Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 2.23 41.53 65.38 4.51 5.90
EX-21 6 ex21k093004.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 HEADWATERS INCORPORATED Subsidiaries The ownership of each direct and indirect subsidiary is 100%, except where indicated below: Global Climate Reserve - ---------------------- 1. Global Climate Reserve Corporation, a Utah corporation Headwaters Construction Materials - --------------------------------- 1. Headwaters Construction Materials, Inc. (fka American Construction Materials, Inc.), a Utah corporation The following subsidiaries are part of the HCM Mortar & Stucco group: - --------------------------------------------------------------------- HCM Mortar & Stucco Holding, LLC, a Utah limited liability company Best Masonry & Tool Supply, LP (fka Best Masonry & Tool Supply, Inc.), a Texas limited Partnership Dons Building Supply, LP, a Texas limited partnership HCM Mortar & Stucco Partner, LLC (fka ISG Partner, Inc.), a Utah limited liability company HCM Mortar & Stucco, Inc. (fka ISG Manufactured Products, Inc.), a Utah corporation HCM Utah, Inc., a Utah corporation The following subsidiaries are part of the HCM Block & Brick group: - ------------------------------------------------------------------- HCM Block & Brick, LLC (HCM-BB), a Utah limited liability company HCM Block & Brick General, Inc., a Utah corporation HCM Block & Brick Partner, LLC, a Utah limited liability company HCM Block & Brick, LP, a Texas limited partnership HCM FlexCrete, LP, a Texas limited partnership Palestine Concrete Tile Co., LP, a Texas limited partnership The following subsidiaries are part of the HCM Stone group: - ----------------------------------------------------------- Eldorado Stone LLC, a Delaware limited liability company Chihuahua Stone LLC, a Utah limited liability company Eagle Stone & Brick LLC, a Utah limited liability company Eldorado G-Acquisition Co., a Utah corporation Eldorado SC-Acquisition Co., a Utah corporation Eldorado Stone Acquisition Co., LLC, a Delaware limited liability company Eldorado Stone Corporation, a Washington corporation Eldorado Stone Funding Co., LLC, a Utah limited liability company Eldorado Stone Operations LLC, a Utah limited liability company HCM Stone, LLC (fka Eldorado Acquisition, LLC) L&S Stone LLC, a Utah limited liability company L-B Stone LLC, a Utah limited liability company Northwest Properties LLC, a Delaware limited liability company Northwest Stone & Brick Co., Inc., a Washington corporation Northwest Stone & Brick LLC, a Utah limited liability company StoneCraft Industries LLC, a Utah limited liability company Tempe Stone LLC, a Utah limited liability company Tapco - ----- Tapco Holdings, Inc., a Michigan corporation Atlantic Shutter Systems, Inc., a South Carolina corporation Builders Edge, Inc. (fka Specialty Building Products International Corporation), a Pennsylvania corporation Comaco, Inc. (fka Kool-Vent Metal Awning Company of Pittsburgh), a Pennsylvania corporation Metamora Products Corporation of Elkland, a Pennsylvania corporation Metamora Products Corporation, a Michigan corporation MTP, Inc., an Ohio corporation Tapco Europe Limited (fka Landpride Limited), formed in the United Kingdom Tapco International Corporation, a Michigan corporation Vantage Building Products Corporation, a Michigan corporation Wamco Corporation, a Michigan corporation Headwaters Energy Services - -------------------------- Headwaters Energy Services Corp. (fka Headwaters Clean Coal Corp), a Utah corporation Covol Engineered Fuels, LC, a Utah limited liability company Covol Services Corporation, a Utah corporation; Environmental Technologies Group, LLC, a Utah limited liability company, of which Headwaters Incorporated is a 50% member (and manager) Headwaters Synfuel Investments, LLC, a Utah limited liability company Headwaters Resources - -------------------- Headwaters Resources, Inc. (fka ISG Resources, Inc.), a Utah corporation FlexCrete Building Systems, LC, a Utah limited liability company, of which HRI is a 90% member (and manager) Florida N-Viro L.P., a Delaware limited partnership, in which VFL is a 51.5% member Florida N-Viro Management, LLC, a Delaware limited liability company, of which VFL is a 52% member ISG Canada, Inc., formed in New Brunswick, Canada ISG Services Corporation (fka ISG Capital Corporation), a Utah corporation VFL Technology Corporation, a Pennsylvania corporation Headwaters Technology Innovation Group - -------------------------------------- Headwaters Technology Innovation Group, Inc., a Utah corporation Degussa Headwaters LLP, formed in the United Kingdom, of which Headwaters Incorporated is a 50% member FT Solutions LLC, a Delaware limited liability company, of which HTI is a 50% member Headwaters Heavy Oil, LLC (fka Headwaters Heavy Oil, Inc.), a Utah limited liability company Headwaters NanoKinetix, Inc., a Utah corporation Hydrocarbon Technologies of Canada, Inc., formed in Alberta, Canada Hydrocarbon Technologies, Inc., a Utah corporation EX-23.1 7 ex231k093004.txt CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-34488, 333-67371, 333-76724, 333-96919, 333-100322 and 333-117492) and on Form S-8 (File Nos. 333-39674, 333-39676, 333-39678, 333-103527, and 333-113704) of Headwaters Incorporated of our report dated November 10, 2004 with respect to the consolidated financial statements of Headwaters Incorporated included in this Annual Report (Form 10-K) for the year ended September 30, 2004. /s/ Ernst & Young LLP Salt Lake City, Utah December 10, 2004 EX-31.1 8 ex311k093004.txt CEO CERTIFICATION REQUIRED UNDER SECTION 302 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Kirk A. Benson, certify that: 1. I have reviewed this Annual Report on Form 10-K of the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 10, 2004 /s/ Kirk A. Benson - -------------------------- Kirk A. Benson Chief Executive Officer EX-31.2 9 ex312k093004.txt CFO CERTIFICATION REQUIRED UNDER SECTION 302 Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Steven G. Stewart, certify that: 1. I have reviewed this Annual Report on Form 10-K of the registrant; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 10, 2004 /s/ Steven G. Stewart - -------------------------- Steven G. Stewart Chief Financial Officer EX-32 10 ex32k093004.txt CERTIFICATIONS REQUIRED UNDER SECTION 906 Exhibit 32 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report of Headwaters Incorporated (the "Company") on Form 10-K for the year ended September 30, 2004 (the "Report"), we, Kirk A. Benson, Chief Executive Officer of the Company, and Steven G. Stewart, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kirk A. Benson - ------------------------ Kirk A. Benson Chief Executive Officer December 10, 2004 /s/ Steven G. Stewart - ------------------------ Steven G. Stewart Chief Financial Officer December 10, 2004 EX-99.1.1 11 ex9911k093004.txt AMENDED 2000 EMPLOYEE STOCK PURCHASE PLAN Exhibit 99.1.1 HEADWATERS INCORPORATED 2000 EMPLOYEE STOCK PURCHASE PLAN (Adopted by the Board on May 25, 2000 and amended by the Board on February 23, 2001, April 23, 2001, 29 January 2002, and July 27, 2004) Table of Contents Page ---- SECTION 1 Purpose Of The Plan............................................1 SECTION 2 Definitions....................................................1 (a) "Board"....................................................1 (b) "Code".....................................................1 (c) "Committee"................................................1 (d) "Company"..................................................1 (e) "Compensation".............................................1 (f) "Corporate Reorganization".................................1 (g) "Eligible Employee"........................................1 (h) "Employee".................................................2 (i) "Exchange Act".............................................2 (j) "Fair Market Value"........................................2 (k) "Offering Period"..........................................3 (l) "Participant"..............................................3 (m) "Participating Company"....................................3 (n) "Plan".....................................................3 (o) "Plan Account".............................................3 (p) "Purchase Price"...........................................3 (q) "Stock"....................................................3 (r) "Subsidiary"...............................................3 SECTION 3 Administration Of The Plan.....................................3 (a) Committee Composition......................................3 (b) Committee Responsibilities.................................3 SECTION 4 Enrollment And Participation...................................3 (a) Offering Periods...........................................3 (b) Enrollment.................................................4 (c) Duration of Participation..................................4 SECTION 5 Employee Contributions.........................................4 (a) Frequency of Payroll Deductions............................4 (b) Amount of Payroll Deductions...............................4 (c) Changing Withholding Rate..................................4 (d) Discontinuing Payroll Deductions...........................4 SECTION 6 Withdrawal From The Plan.......................................5 (a) Withdrawal.................................................5 (b) Re-enrollment After Withdrawal............................5 SECTION 7 Change In Employment Status....................................5 (a) Termination of Employment..................................5 (b) Leave of Absence...........................................5 -i- (c) Death......................................................5 SECTION 8 Plan Accounts And Purchase Of Shares...........................5 (a) Plan Accounts..............................................5 (b) Purchase Price.............................................5 (c) Number of Shares Purchased.................................6 (d) Available Shares Insufficient..............................6 (e) Issuance of Stock..........................................6 (f) Unused Cash Balances.......................................6 (g) Stockholder Approval.......................................6 SECTION 9 Limitations On Stock Ownership.................................7 (a) Five Percent Limit.........................................7 (b) Dollar Limit...............................................7 SECTION 10 Rights Not Transferable.......................................7 SECTION 11 No Rights As An Employee......................................8 SECTION 12 No Rights As A Stockholder....................................8 SECTION 13 Securities Law Requirements...................................8 SECTION 14 Stock Offered Under The Plan..................................8 (a) Authorized Shares..........................................8 (b) Antidilution Adjustments...................................8 (c) Reorganizations............................................8 SECTION 15 Amendment Or Discontinuance...................................8 SECTION 16 Execution.....................................................9 -ii- HEADWATERS INCORPORATED 2000 EMPLOYEE STOCK PURCHASE PLAN SECTION 1 Purpose Of The Plan. The Plan was adopted by the Board on May 25, 2000, effective as of June 1, 2000. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock in the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code. SECTION 2 Definitions. (a) "Board" means the Board of Directors of the Company, as constituted from time to time. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" means a committee of the Board, as described in Section 3. (d) "Company" means Headwaters Incorporated, a Delaware Corporation. (e) "Compensation" means (i) the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, bonuses, incentive compensation, commissions, overtime pay and shift premiums, plus (ii) any pre-tax contributions made by the Participant under section 401(k) or 125 of the Code. "Compensation" shall exclude all non-cash items, moving or relocation allowances, cost-of-living equalization payments, car allowances, tuition reimbursements, imputed income attributable to cars or life insurance, severance pay, fringe benefits, contributions or benefits received under employee benefit plans, income attributable to the exercise of stock options, and similar items. The Committee shall determine whether a particular item is included in Compensation. (f) "Corporate Reorganization" means: (i) The consummation of a merger or consolidation of the Company with or into another entity, or any other corporate reorganization; or (ii) The sale, transfer or other disposition of all or substantially all of the Company's assets or the complete liquidation or dissolution of the Company. (g) "Eligible Employee" means any Employee of a Participating Company who meets both of the following requirements: (i) His or her customary employment is for more than five months per calendar year and for more than 20 hours per week; and -1- (ii) He or she has been an Employee of a Participating Company for not less than three consecutive months. The foregoing notwithstanding, Employees employed on the Plan's effective date do not have to satisfy the service requirements specified above. The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan. (h) "Employee" means an individual paid from W-2 Payroll of the Company or a Subsidiary. If, during any period, the Company (or Subsidiary, as applicable) has not treated an individual as an Employee and, for that reason, has not paid such individual in a manner which results in the issuance of a Form W-2 and withheld taxes with respect to him or her, then that individual shall not be eligible to participate in the Plan for that period, even if any person, court of law or government agency determines, retroactively, that such individual is or was a common-law employee during all or any portion of that period. "W-2 Payroll" means whatever mechanism or procedure that the Company or a Subsidiary uses to pay any individual which results in the issuance of Form W-2 to the individual. "W-2 Payroll" does not include any mechanism or procedure which results in the issuance of any form other than a Form W-2 to an individual, including, but not limited to, any Form 1099 which may be issued to an independent contractor, an agency employee or a consultant. Whether a mechanism or procedure qualifies as a "W-2 Payroll" shall be determined in the absolute discretion of the Company (or Subsidiary, as applicable), and the Company's or Subsidiary's determination shall be conclusive and binding on all persons. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (j) "Fair Market Value" with respect to a Share, shall mean the market price of one Share of Stock, determined by the Committee as follows: (i) If the Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted or, if the Stock is not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; (ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock Market; (iii) If the Stock was traded on a United States stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported for such date by the applicable composite-transactions report; and -2- (iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons. (k) "Offering Period" means a three month period beginning December 1, March 1, June 1, and September 1 with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 4(a). (l) "Participant" means an Eligible Employee who elects to participate in the Plan, as provided in Section 4(b). (m) "Participating Company" means (i) the Company and (ii) each present or future Subsidiary designated by the Committee as a Participating Company. (n) "Plan" means this Headwaters Incorporated 2000 Employee Stock Purchase Plan, as it may be amended from time to time. (o) "Plan Account" means the account established for each Participant pursuant to Section 8(a). (p) "Purchase Price" means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 8(b). (q) "Stock" means the Common Stock of the Company. (r) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 3 Administration Of The Plan. (a) Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board. (b) Committee Responsibilities. The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. SECTION 4 Enrollment And Participation. (a) Offering Periods. While the Plan is in effect, one Offering Period shall commence in each of the three month periods of December 1st through the -3- last day of February, March 1st through May 31st, June 1st through August 31st, and September 1st through November 30th; provided, that there shall be a transitional Offering Period between October 1 and November 30, 2004. The Offering Periods shall consist of the three month periods commencing on the first day of each such three month period and ending on the last day of each three month period. (b) Enrollment. Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location not later than 15 days prior to the commencement of such Offering Period. (c) Duration of Participation. Once enrolled in the Plan, a Participant shall continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 6(a) or reaches the end of the Offering Period in which his or her employee contributions were discontinued under Section 5(d) or 9(b). A Participant who discontinued employee contributions under Section 5(d) or withdrew from the Plan under Section 6(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (b) above. A Participant whose employee contributions were discontinued automatically under Section 9(b) shall automatically resume participation at the beginning of the first Offering Period beginning in the next calendar year, if he or she then is an Eligible Employee. SECTION 5 Employee Contributions. (a) Frequency of Payroll Deductions. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan. (b) Amount of Payroll Deductions. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% and not more than 10%. (c) Changing Withholding Rate. A Participant may change the rate of withholding once every six months. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing the prescribed form with the Company at the time specified. The new withholding rate shall be effective as of the first day of the December or June next following the date such form has been timely received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% and not more than 10%. (d) Discontinuing Payroll Deductions. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing the prescribed form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. (In addition, employee contributions may be -4- discontinued automatically pursuant to Section 9(b).) A Participant who has discontinued employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding shall resume effective as of the first day of the January or July next following the date such form has been timely received by the Company. SECTION 6 Withdrawal From The Plan. (a) Withdrawal. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Offering Period. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant's Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted. (b) Re-enrollment After Withdrawal. A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 4(c). Re-enrollment shall be effective as of the first day of the January or July next following the date the enrollment form has been timely received by the Company. SECTION 7 Change In Employment Status. (a) Termination of Employment. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 6(a). (A transfer from one Participating Company to another shall not be treated as a termination of employment.) (b) Leave of Absence. For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute guarantees his or her right to return to work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work. (c) Death. In the event of the Participant's death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant's estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participant's death. SECTION 8 Plan Accounts And Purchase Of Shares. (a) Plan Accounts. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant's Compensation under the Plan, such amount shall be credited to the Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Company's general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts. (b) Purchase Price. The Purchase Price for each share of Stock purchased at the close of an Offering Period shall be the lower of: -5- (i) 85% of the Fair Market Value of such share on the last trading day in such Offering Period; or (ii) 85% of the Fair Market Value of such share on the last trading day before the commencement of such Offering Period. (c) Number of Shares Purchased. As of the last day of each Offering Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 6(a). The amount then in the Participant's Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant's Plan Account. The foregoing notwithstanding, no Participant shall purchase more than 3,600 shares of Stock with respect to any Offering Period nor more than the amounts of Stock set forth in Sections 9(b) and 14(a). The Committee may determine with respect to all Participants that any fractional share, as calculated under this Subsection (c), shall be (i) rounded down to the next lower whole share or (ii) credited as a fractional share. (d) Available Shares Insufficient. In the event that the aggregate number of shares that all Participants elect to purchase during an Offering Period exceeds the maximum number of shares remaining available for issuance under Section 14(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase. (e) Issuance of Stock. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Offering Period, except that the Committee may determine that such shares shall be held for each Participant's benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property. (f) Unused Cash Balances. Any amount remaining in the Participant's Plan Account that represents the Purchase Price for a fractional share shall be carried over in the Participant's Plan Account to the next Offering Period. Any amount remaining in the Participant's Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 9(b) or Section 14(a) shall be refunded to the Participant in cash, without interest. (g) Stockholder Approval. The Company's stockholders must approve the adoption of the Plan within twelve months after the Plan is adopted by the Board of Directors of the Company. -6- SECTION 9 Limitations On Stock Ownership. (a) Five Percent Limit. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply: (i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code; (ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan; (iii) Each Participant shall be deemed to have the right to purchase 3,600 shares of Stock under this Plan with respect to each Offering Period. (b) Dollar Limit. Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value in excess of the following limit: (i) In the case of Stock purchased during an Offering Period that commenced in the current calendar year, the limit shall be equal to (A) $25,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased in the current calendar year (under this Plan and all other employee stock purchase plans of the Company or Subsidiary of the Company). (ii) Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value in excess of $25,000 per calendar year (under this Plan and all other employee stock purchase plans of the Company or any Subsidiary of the Company). For purposes of this Subsection (b), the Fair Market Value of Stock shall be determined in each case as of the beginning of the Offering Period in which such Stock is purchased. Employee stock purchase plans not described in section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Offering Period ending in the next calendar year (if he or she then is an Eligible Employee). SECTION 10 Rights Not Transferable. The rights of any Participant under the Plan, or any Participant's interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 6(a). -7- SECTION 11 No Rights As An Employee Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause. SECTION 12 No Rights As A Stockholder. A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Offering Period. SECTION 13 Securities Law Requirements. Shares of Stock shall not be issued under the Plan unless the issuance and delivery of such shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company's securities may then be traded. SECTION 14 Stock Offered Under The Plan. (a) Authorized Shares. The aggregate number of shares of Stock available for purchase under the Plan shall be 500,000, subject to adjustment pursuant to this Section 14. The Company may either use authorized but unissued stock, treasury stock, or stock purchased on the open market in order to fulfill its obligations under the Plan. (b) Antidilution Adjustments. The aggregate number of shares of Stock offered under the Plan, the 3,600 share limitation described in Section 8(c), and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company's stockholders or a similar event. (c) Reorganizations. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Corporate Reorganization, the Offering Period then in progress shall terminate and shares shall be purchased pursuant to Section 8, unless the Plan is assumed by the surviving corporation or its parent corporation pursuant to the plan of merger or consolidation. The Plan shall in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization. SECTION 15 Amendment Or Discontinuance. The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 14, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be -8- subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation. SECTION 16 Execution. To record the adoption of the Plan by the Board as of the date first above written, as amended, the Company has caused its authorized officer to execute the same. Headwaters Incorporated /s/ Steven G. Stewart ---------------------------- Steven G. Stewart, CFO -9- EX-99.3.1 12 ex9931k093004.txt INCENTIVE BONUS PLAN DATED 10/01/04 Exhibit 99.3.1 HEADWATERS INCORPORATED INCENTIVE BONUS PLAN Effective 1 October 2004 1. PURPOSE The purpose of this Incentive Bonus Plan is to promote the success of Headwaters Incorporated and Headwaters' subsidiaries, by providing financial incentive for employees to strive for more effective operation of the business through ongoing development and use of their knowledge, skill, ingenuity, resourcefulness and industry. The Plan provides that annual Awards may be made to employees who are responsible for successful operation and management of the Company. 2. DEFINITIONS The following definitions shall be applicable throughout the Plan: (a) "Award" means the total dollar amount that may be paid to a Participant following a given Performance Year. (b) "Base Compensation" means the annualized W2 wages of a Participant determined on the last day of a Performance Year. (c) "Board" means the Board of Directors of Headwaters Incorporated. (d) "Bonus Percent" means the percentages associated with each Participant based on position, responsibility, and other factors, listed on the appropriate Participation Schedule as defined on Schedule 1. (e) "Change in Control" means: (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; (ii) The sale, transfer or other disposition of all or substantially all of the Company's assets; (iii) Any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company Page 1 Headwaters Incorporated Incentive Bonus Plan representing at least 50% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this Paragraph (iii), the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934 but shall exclude (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a parent or subsidiary of the Company and (B) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. (f) "Committee" means the Headwaters' Compensation Committee, or such other committee comprised of members of the Board designated by the Board to oversee the Plan. (g) "Company" means collectively Headwaters Incorporated and certain subsidiaries named on Schedule 1. (h) "Completion Factor" means the percentage completion of IBO commitments of the Participants. (i) "EVA" means the net operating profit before taxes, as adjusted pursuant to items identified in Schedule 1, ("NOPAT"), less the average cost of capital employed by the Company during the Performance Year. (j) "EVA Multiplier" means that factor identified on the EVA Multiplier Table for the Company, associated with different levels of EVA obtained during the Performance Year that exceeds the Threshold EVA. (k) "Individual Business Objective or IBO" means the goals established by each Participant used to determine his/her Performance Adjustment Factor. (l) "Participant" means a full time employee of the Company, employed by the Company on the last day of a Performance Year and who otherwise meets the eligibility requirements for participation set forth in section 4. (m) "Performance Adjustment Factor or PAF" means the multiplier obtained by combining the completion factors from the IBO commitments of the Participants. The Performance Adjustment Factor can vary from 0% to 100% depending upon the attainment of the Participant's IBOs. Page 2 Headwaters Incorporated Incentive Bonus Plan (n) "Performance Year" means a designated fiscal year of the Company during which Company and individual performance will be measured and Participant services will be rendered for which an Award may be granted. (o) "Plan" means this Headwaters Incorporated Incentive Bonus Plan. (p) "Chief Executive Officer" means the Chief Executive Officer of Headwaters Incorporated. (q) "Retrospective Review" means the formal report prepared annually which details the Company's and the Participants' performance during the Performance Year and provides the basis for the Committee's determination of the Performance Adjustment Factor and Participant Awards. (r) "Threshold EVA" means the level of EVA performance below which there will be no Award. 3. POWERS AND ADMINISTRATION The Committee shall have such powers and duties as are conferred upon it under this Plan, or any amendments thereto, or by the Board. The Committee shall have the authority to determine the time or times when approved Participant Awards shall be paid each year; and the Committee shall determine Plan participation and Award amounts for Participant's pursuant to Section 6(a). The Committee shall take whatever action is necessary in fulfilling the purposes and intent of the Plan. The Committee is authorized and empowered to interpret the terms and conditions of the Plan, to promulgate any rules, regulations and schedules of general applicability and to adopt such forms deemed necessary to carry out the purposes of the Plan. However, no such interpretation, rule or regulation shall be contrary to the clearly expressed provisions of the Plan. The Committee may prescribe rules and procedures for the allocation of responsibilities among the agents appointed by the Committee for the performance of ministerial duties. 4. ELIGIBILITY FOR PARTICIPATION (a) Those employees of the Company employed by the Company on the last day of the Performance Year who: (i) have achieved relevant Plan performance criteria; (ii) are not otherwise eligible to receive regularized, periodic performance-based bonus compensation under some established plan of the Company or its business units or subsidiaries; and Page 3 Headwaters Incorporated Incentive Bonus Plan (iii) are identified on Schedule I or are added to the Plan during the Performance Year. (b) Those employees of the Company who are eligible to participate are entitled to receive a copy of this Plan document. (c) Participation in a given Performance Year does not entitle participation in any subsequent Performance Year. 5. CALCULATION OF AWARDS An Award shall be computed as follows: EVA Multiplier X Base Compensation X Bonus Percent X PAF 6. PARTICIPANT SELECTION AND AWARD DETERMINATION (a) Chief Executive Officer. Each year the Chief Executive Officer shall present to the Committee the list of Participants, their PAF and the computation of the proposed Award, and the Award amounts recommended for each Participant. (b) Committee. The Committee shall consider the Chief Executive Officer's report referred to in Section 6(a) and approve the total Awards to be granted for the Performance Year. 7. INDIVIDUAL AWARDS (a) A Participant's Award shall be prorated based upon number of months of service in a given Performance Year or if the Participant is in different employment categories during a Performance year. (b) The actual Award granted to any individual Participant hereunder shall be based upon the Company's overall performance and individual performance considerations and shall be determined by the Committee, in its sole discretion. (c) No Award will be granted if the Company's overall performance is below Threshold EVA or if a Participant's individual performance is unsatisfactory, as determined by the Committee in its sole discretion, upon the recommendation of the Chief Executive Officer. 8. FORM AND TIME OF PAYMENT Page 4 Headwaters Incorporated Incentive Bonus Plan (a) An Award shall be paid to the Participant in cash, less applicable federal, state, local and FICA taxes, as soon as practicable after the date on which all awards are approved by Committee. (b) If Banking applies to a Participant as shown on Schedule 1, then 50% of the amount of the Award that is in excess of the Award that would be computed if the EVA multiplier were 1, shall be withheld from payment. Payment of the withheld Award shall be made over the two years immediately subsequent to the Performance Plan Year (50% of the withheld year in the first subsequent year and 50% in the second subsequent year) if the Company reaches the Threshold EVA in the subsequent years. If the Company fails to achieve the Threshold EVA in the subsequent two years, the withheld amounts are forfeited. Any Banked Awards will be paid to a Participant upon the occurrence of (i) the Participant's retirement from the Company after reaching age 60; or (ii) a Change in Control of the Company. 9. RETIREMENT, TERMINATION, DISABILITY, INCOMPETENCY AND DEATH (a) In the event of the Participant's disability, incompetency or death, or retirement such Participant may receive an Award, prorated to the effective date of such event, at the sole discretion of the Committee. Any such prorated Award shall be determined and paid in accordance with the regular procedures of the Plan. (b) Should an Award be approved under Section 9(a), such Award shall be paid in cash, less applicable federal, state, local and FICA taxes, on the normal Award payout date to the Participant, or, in the event of the Participant's death, to the Participant's estate, or to the person or persons who have acquired, by will or by the laws of descent and distribution or by other legal proceedings, the right to such Award. 10. NO RESERVE OR TRUST Nothing contained in the Plan shall require the Company to segregate any monies from its general funds, or to create any trust or make any special deposit in respect of any amounts payable under the Plan to or for any Participant or group of Participants. All amounts payable under the Plan shall be paid out of the general funds of the Company. 11. NO RIGHT TO ASSIGN No right or interest of any Participant in the Plan or in any unpaid Award shall be assignable or transferable in whole or in part, either voluntarily or by operation of law or otherwise, or be subject to payment of debts of any Participant by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner. Page 5 Headwaters Incorporated Incentive Bonus Plan 12. NO EMPLOYMENT RIGHTS CONFERRED Nothing contained in the Plan or any Award shall confer upon any employee any right with respect to continuation of employment with the Company in any capacity or interfere in any way with the right of the Company to terminate an employee's employment at any time or guarantee any right of participation in any other employee benefit plan of the Company. 13. SUCCESSORS AND MERGERS, CONSOLIDATIONS OR CHANGE IN CONTROL The terms and conditions of this Plan shall inure to the benefit of and bind the Company, the Participants, their successors, assignees, and personal representatives. If substantially all of the stock or assets of the Company are acquired by another corporation or entity or if the Company is merged into, or consolidated with another corporation or entity, then upon such event the Banked portion of any Awards shall be immediately payable to the Participants and all other obligations created hereunder shall be obligations of the acquirer or successor corporation or entity without the requirement of further action by the acquirer or successor corporation or entity. 14. GOVERNING STATE LAW The provisions of this Plan shall be construed and administered in accordance with the laws of the State of Utah. 15. AMENDMENT The Committee may from time to time amend, suspend, terminate or reinstate any or all of the provisions of the Plan. However, the Committee may not cancel awards, including any banked awards, payable on account of a completed Performance Year. 16. EFFECTIVE DATE AND TERM OF THE PLAN The Plan shall become effective for the Performance Year commencing October 1, 2004 upon adoption by the Committee and shall remain in effect until such time as the Committee may terminate it. Approved by Committee: 4 November 2004 /s/ Kirk A. Benson ------------------------------ Kirk A. Benson, Chairman & CEO Page 6 EX-99.4 13 ex994k093004.txt 2002 STOCK INCENTIVE PLAN Exhibit 99.4 HEADWATERS INCORPORATED 2002 STOCK INCENTIVE PLAN (Adopted by the Board on November 9, 2001) TABLE OF CONTENTS Page ---- SECTION 1. ESTABLISHMENT AND PURPOSE..........................................1 SECTION 2. DEFINITIONS........................................................1 (a) "Affiliate"..........................................................1 (b) "Award"..............................................................1 (c) "Board of Directors".................................................1 (d) "Change in Control"..................................................1 (e) "Code"...............................................................2 (f) "Committee"..........................................................2 (g) "Company"............................................................2 (h) "Consultant".........................................................2 (i) "Employee"...........................................................2 (j) "Exchange Act".......................................................2 (k) "Exercise Price".....................................................2 (l) "Fair Market Value"..................................................2 (m) "ISO"................................................................3 (n) "Nonstatutory Option" or "NSO".......................................3 (o) "Offeree"............................................................3 (p) "Option".............................................................3 (q) "Optionee"...........................................................3 (r) "Outside Director"...................................................3 (s) "Parent".............................................................3 (t) "Participant"........................................................3 (u) "Plan"...............................................................3 (v) "Purchase Price".....................................................3 (w) "Restricted Share"...................................................3 (x) "Restricted Share Agreement "........................................4 (y) "SAR"................................................................4 (z) "SAR Agreement"......................................................4 (aa) "Service"............................................................4 (bb) "Share"..............................................................4 (cc) "Stock"..............................................................4 (dd) "Stock Option Agreement".............................................4 (ee) "Stock Purchase Agreement"...........................................4 (ff) "Stock Unit".........................................................4 (gg) "Stock Unit Agreement"...............................................4 (hh) "Subsidiary".........................................................4 (ii) "Total and Permanent Disability".....................................4 SECTION 3. ADMINISTRATION.....................................................4 (a) Committee Composition................................................4 (b) Committee for Non-Officer Grants.....................................5 -i- (c) Committee Procedures.................................................5 (d) Committee Responsibilities...........................................5 SECTION 4. ELIGIBILITY........................................................6 (a) General Rule.........................................................6 (b) Outside Directors....................................................6 (c) Limitation On Grants.................................................8 (d) Ten-Percent Stockholders.............................................8 (e) Attribution Rules....................................................8 (f) Outstanding Stock....................................................8 SECTION 5. STOCK SUBJECT TO PLAN..............................................8 (a) Basic Limitation.....................................................8 (b) Annual Increase in Shares............................................8 (c) Additional Shares....................................................8 (d) Dividend Equivalents.................................................9 SECTION 6. RESTRICTED SHARES..................................................9 (a) Restricted Share Agreement...........................................9 (b) Payment for Awards...................................................9 (c) Vesting..............................................................9 (d) Voting and Dividend Rights..........................................10 SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES.....................10 (a) Duration of Offers and Nontransferability of Rights.................10 (b) Purchase Price......................................................10 (c) Withholding Taxes...................................................10 (d) Restrictions on Transfer of Shares..................................10 SECTION 8. TERMS AND CONDITIONS OF OPTIONS...................................10 (a) Stock Option Agreement..............................................10 (b) Number of Shares....................................................10 (c) Exercise Price......................................................11 (d) Withholding Taxes...................................................11 (e) Exercisability and Term.............................................11 (f) Nontransferability..................................................11 (g) Exercise of Options Upon Termination of Service.....................11 (h) Effect of Change in Control.........................................11 (i) Leaves of Absence...................................................11 (j) No Rights as a Stockholder..........................................12 (k) Modification, Extension and Renewal of Options......................12 (l) Restrictions on Transfer of Shares..................................12 (m) Buyout Provisions...................................................12 SECTION 9. PAYMENT FOR SHARES................................................12 (a) General Rule........................................................12 (b) Surrender of Stock..................................................12 -ii- (c) Services Rendered...................................................13 (d) Cashless Exercise...................................................13 (e) Exercise/Pledge.....................................................13 (f) Promissory Note.....................................................13 (g) Other Forms of Payment..............................................13 SECTION 10. STOCK APPRECIATION RIGHTS........................................13 (a) SAR Agreement.......................................................13 (b) Number of Shares....................................................13 (c) Exercise Price......................................................14 (d) Exercisability and Term.............................................14 (e) Effect of Change in Control.........................................14 (f) Exercise of SARs....................................................14 (g) Special Holding Period..............................................14 (h) Special Exercise Window.............................................14 (i) Modification or Assumption of SARs..................................15 SECTION 11. STOCK UNITS......................................................15 (a) Stock Unit Agreement................................................15 (b) Payment for Awards..................................................15 (c) Vesting Conditions..................................................15 (d) Voting and Dividend Rights..........................................15 (e) Form and Time of Settlement of Stock Units..........................15 (f) Death of Recipient..................................................16 (g) Creditors' Rights...................................................16 SECTION 12. ADJUSTMENT OF SHARES.............................................16 (a) Adjustments.........................................................16 (b) Dissolution or Liquidation..........................................17 (c) Reorganizations.....................................................17 (d) Reservation of Rights...............................................17 SECTION 13. DEFERRAL OF AWARDS...............................................17 SECTION 14. AWARDS UNDER OTHER PLANS.........................................18 PAYMENT OF DIRECTOR'S FEES IN SECURITIES..................................18 (a) Effective Date......................................................18 (b) Elections to Receive NSOs, Restricted Shares or Stock Units.........18 (c) Number and Terms of NSOs, Restricted Shares or Stock Units..........18 SECTION 16. LEGAL AND REGULATORY REQUIREMENTS................................19 SECTION 17. WITHHOLDING TAXES................................................19 (a) General.............................................................19 (b) Share Withholding...................................................19 -iii- SECTION 18. LIMITATION ON PARACHUTE PAYMENTS.................................19 (a) Scope of Limitation.................................................19 (b) Basic Rule..........................................................19 (c) Reduction of Payments...............................................19 (d) Overpayments and Underpayments......................................20 (e) Related Corporations................................................20 SECTION 19. NO EMPLOYMENT RIGHTS.............................................20 SECTION 20. DURATION AND AMENDMENTS..........................................20 (a) Term of the Plan....................................................20 (b) Right to Amend or Terminate the Plan................................21 (c) Effect of Amendment or Termination..................................21 SECTION 21. EXECUTION........................................................21 -iv- HEADWATERS INCORPORATED 2002 STOCK INCENTIVE PLAN (Adopted by the Board on November 9, 2001) SECTION 1. ESTABLISHMENT AND PURPOSE. The Plan was adopted by the Board of Directors effective November 9, 2001. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights. SECTION 2. DEFINITIONS. (a) "Affiliate" shall mean any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than 50% of such entity. (b) "Award" shall mean any award of an Option, a SAR, a Restricted Share or a Stock Unit under the Plan. (c) "Board of Directors" shall mean the Board of Directors of the Company, as constituted from time to time. (d) "Change in Control" shall mean the occurrence of either of the following events: (i) A change in the composition of the Board of Directors, as a result of which fewer than one-half of the incumbent directors are directors who either: (A) Had been directors of the Company 24 months prior to such change; or (B) Were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or (ii) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who by the acquisition or aggregation of securities, is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty (20%) or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the -1- right to vote at elections of directors (the "Base Capital Stock"); except that any change in the relative beneficial ownership of the Company's securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. For purposes of this subsection (d)(ii), the term "person" shall exclude a trustee or other fiduciary holding securities under an employee benefit plan maintained by the Company or a Parent or Subsidiary. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended. (f) "Committee" shall mean the committee designated by the Board of Directors, which is authorized to administer the Plan, as described in Section 3 hereof. (g) "Company" shall mean Headwaters Incorporated, a Delaware corporation. (h) "Consultant" shall mean a consultant or advisor who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a Consultant shall be considered Service for all purposes of the Plan. (i) "Employee" shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (k) "Exercise Price" shall mean, in the case of an Option, the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. "Exercise Price," in the case of a SAR, shall mean an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR. (l) "Fair Market Value" with respect to a Share, shall mean the market price of one Share of Stock, determined by the Committee as follows: (i) If the Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted or, if the Stock is not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; -2- (ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock Market; (iii) If the Stock was traded on a United States stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported for such date by the applicable composite-transactions report; and (iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons. (m) "ISO" shall mean an employee incentive stock option described in Code Section 422 of the Code. (n) "Nonstatutory Option" or "NSO" shall mean an employee stock option that is not an ISO. (o) "Offeree" shall mean an individual to whom the Committee has offered the right to acquire Shares under the Plan (other than upon exercise of an Option). (p) "Option" shall mean an ISO or Nonstatutory Option granted under the Plan and entitling the holder to purchase Shares. (q) "Optionee" shall mean an individual or estate who holds an Option or SAR. (r) "Outside Director" shall mean a member of the Board of Directors who is not a common-law employee of the Company, a Parent or a Subsidiary. Service as an Outside Director shall be considered Service for all purposes of the Plan. (s) "Parent" shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be a Parent commencing as of such date. (t) "Participant" shall mean an individual or estate who holds an Award. (u) "Plan" shall mean this 2002 Stock Incentive Plan of Headwaters Incorporated, as amended from time to time. (v) "Purchase Price" shall mean the consideration for which one Share may be acquired under the Plan (other than upon exercise of an Option), as specified by the Committee. (w) "Restricted Share" shall mean a Share awarded under the Plan. -3- (x) "Restricted Share Agreement " shall mean the agreement between the Company and the recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to such Restricted Shares. (y) "SAR" shall mean a stock appreciation right granted under the Plan. (z) "SAR Agreement" shall mean the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR. (aa) "Service" shall mean service as an Employee, Consultant or Outside Director. (bb) "Share" shall mean one share of Stock, as adjusted in accordance with Section 9 (if applicable). (cc) "Stock" shall mean the Common Stock of the Company. (dd) "Stock Option Agreement" shall mean the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option. (ee) "Stock Purchase Agreement" shall mean the agreement between the Company and an Offeree who acquires Shares under the Plan that contains the terms, conditions and restrictions pertaining to the acquisition of such Shares. (ff) "Stock Unit" shall mean a bookkeeping entry representing the equivalent of one Share, as awarded under the Plan. (gg) "Stock Unit Agreement" shall mean the agreement between the Company and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit. (hh) "Subsidiary" shall mean any corporation, if the Company and/or one or more other Subsidiaries own not less than 50% of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. (ii) "Total and Permanent Disability" shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted, or can be expected to last, for a continuous period of not less than 12 months. SECTION 3. ADMINISTRATION. (a) Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist of two or more directors of the Company who shall satisfy the requirements of Rule 16b-3 (or its successor) under the Exchange Act with respect to the grant of Awards to persons who are officers or directors of the Company under Section 16 of the Exchange Act or the Board itself. -4- (b) Committee for Non-Officer Grants. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need satisfy the requirements of Section 3(a), who may administer the Plan with respect to Employees who are not considered officers or directors of the Company under Section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and may determine all terms of such grants. Within the limitations of the preceding sentence, any reference in the Plan to the Committee shall include such committee or committees appointed pursuant to the preceding sentence. (c) Committee Procedures. The Board of Directors shall designate one of the members of the Committee as chairman. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. (d) Committee Responsibilities. Subject to the provisions of the Plan, the Committee shall have full authority and discretion to take the following actions: (i) To interpret the Plan and to apply its provisions; (ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan; (iii) To authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; (iv) To determine when Shares are to be awarded or offered for sale and when Options are to be granted under the Plan; (v) To select the Offerees and Optionees; (vi) To determine the number of Shares to be offered to each Offeree or to be made subject to each Option; (vii) To prescribe the terms and conditions of each award or sale of Shares, including (without limitation) the Purchase Price, the vesting of the award (including accelerating the vesting of awards) and to specify the provisions of the Stock Purchase Agreement relating to such award or sale; (viii) To prescribe the terms and conditions of each Option, including (without limitation) the Exercise Price, the vesting or duration of the Option (including accelerating the vesting of the Option), to determine whether such Option is to be classified as an ISO or as a Nonstatutory Option, and to specify the provisions of the Stock Option Agreement relating to such Option; (ix) To amend any outstanding Stock Purchase Agreement or Stock Option Agreement, subject to applicable legal restrictions and to the consent of the Offeree or Optionee who entered into such agreement; -5- (x) To prescribe the consideration for the grant of each Option or other right under the Plan and to determine the sufficiency of such consideration; (xi) To determine the disposition of each Option or other right under the Plan in the event of an Optionee's or Offeree's divorce or dissolution of marriage; (xii) To determine whether Options or other rights under the Plan will be granted in replacement of other grants under an incentive or other compensation plan of an acquired business; (xiii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Stock Option Agreement or any Stock Purchase Agreement; and (xiv) To take any other actions deemed necessary or advisable for the administration of the Plan. Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Options or other rights under the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and other actions of the Committee shall be final and binding on all Offerees, all Optionees, and all persons deriving their rights from an Offeree or Optionee. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan, any Option, or any right to acquire Shares under the Plan. SECTION 4. ELIGIBILITY. (a) General Rule. Only Employees, Consultants and Outside Directors shall be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs. In addition, only Employees shall be eligible for the grant of ISOs. An Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, a Parent or Subsidiary shall not be eligible for the grant of an ISO unless the requirements set forth in Section 422(c)(6) of the Code are satisfied. (b) Outside Directors. Any other provision of the Plan notwithstanding, the participation of Outside Directors in the Plan shall be subject to the following restrictions: (i) Outside Directors shall only be eligible for the grant of Restricted Shares, Stock Units, Nonstatutory Options and SARs. (ii) The Exercise Price of all Nonstatutory Options granted to an Outside Director under this Section 4(b) shall be not less than 100% of the Fair Market Value of a Share on the date of grant, payable in one of the forms described in Section 9(a), (b) and (d). (iii) Unless otherwise stated in the Stock Option Agreement, each Option granted under Section 4(b)(ii) shall become exercisable in -6- three equal annual installments on each of the first three anniversaries of the date of grant. Each Option that has been outstanding for not less than six months shall become exercisable in full in the event that a Change in Control occurs with respect to the Company. (iv) Subject to Sections 4(b)(vii) and (viii), all Nonstatutory Options granted to an Outside Director under this Section 4(b) shall terminate on the tenth anniversary of the date of grant of such Options. (v) If an Optionee's Service terminates for any reason other than death, then his or her Options shall expire on the earliest of the following occasions: (A) The expiration date determined pursuant to Section 4(b)(vi) above; (B) The date 24 months after the termination of the Optionee's Service, if the termination occurs because of his or her Total and Permanent Disability; or (C) The date six months after the termination of the Optionee's Service for any reason other than Total and Permanent Disability. The Optionee may exercise all or part of his or her Options at any time before the expiration of such Options under the preceding sentence, but only to the extent that such Options had become exercisable before his or her Service terminated. The balance of such Options shall lapse when the Optionee's Service terminates. In the event that the Optionee dies after the termination of his or her Service but before the expiration of his or her Options, all or part of such Options may be exercised at any time prior to their expiration by the executors or administrators of the Optionee's estate or by any person who has acquired such Options directly from him or her by bequest, inheritance or beneficiary designation under the Plan, but only to the extent that such Options had become exercisable before his or her Service terminated. (vi) If an Optionee dies while he or she is in Service, then his or her Options shall expire on the earlier of the following dates: (A) The expiration date determined pursuant to Section 4(b)(vi) above; or (B) The date 24 months after his or her death. All or part of the Optionee's Options may be exercised at any time before the expiration of such Options under the preceding sentence by the executors or administrators of his or her estate or by any person who has acquired such Options directly from him or her by bequest, inheritance or beneficiary designation under the Plan. (vii) No Option shall be transferable by the Optionee other than by will, by written beneficiary designation or by the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by the Optionee or by the Optionee's -7- guardian or legal representative. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. (c) Limitation On Grants. No Employee or Consultant shall be granted Options to purchase more than 250,000 Shares in any fiscal year of the Company, except that Options granted to a new Employee or Consultant in the fiscal year of the Company in which his or her Service first commences shall not cover more than 300,000 Shares (in each case subject to adjustment in accordance with Section 12). (d) Ten-Percent Stockholders. An Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, a Parent or Subsidiary shall not be eligible for the grant of an ISO unless such grant satisfies the requirements of Section 422(c)(6) of the Code. (e) Attribution Rules. For purposes of Section 4(d) above, in determining stock ownership, an Employee shall be deemed to own the stock owned, directly or indirectly, by or for such Employee's brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its shareholders, partners or beneficiaries. (f) Outstanding Stock. For purposes of Section 4(d) above, "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant. "Outstanding stock" shall not include shares authorized for issuance under outstanding options held by the Employee or by any other person. SECTION 5. STOCK SUBJECT TO PLAN. (a) Basic Limitation. Shares offered under the Plan shall be authorized but unissued Shares or treasury Shares. The maximum aggregate number of Options, SARs, Stock Units and Restricted Shares awarded under the Plan shall not exceed 2,000,000 Shares, plus the additional Shares described in Sections (b) and (c), but in no event more than 3,000,000 Shares. The limitation of this Section 5(a) shall be subject to adjustment pursuant to Section 12. (b) Annual Increase in Shares. As of January 1 of each year, commencing with the year 2003, the aggregate number of Options, SARs, Stock Units and Restricted Shares that may be awarded under the Plan shall automatically increase by a number equal to the lesser of (i) 500,000 shares, (ii) 2% of the outstanding shares of Stock of the Company on such date or (iii) a lesser amount determined by the Board. The aggregate number of Shares that may be issued under the Plan shall at all times be subject to adjustment pursuant to Section 12. The number of Shares that are subject to Options or other rights outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan. (c) Additional Shares. If Restricted Shares or Shares issued upon the exercise of Options are forfeited, then such Shares shall again become available -8- for Awards under the Plan. If Stock Units, Options or SARs are forfeited or terminate for any other reason before being exercised, then the corresponding Shares shall again become available for Awards under the Plan. If Stock Units are settled, then only the number of Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 5(a) and the balance shall again become available for Awards under the Plan. If SARs are exercised, then only the number of Shares (if any) actually issued in settlement of such SARs shall reduce the number available in Section 5(a) and the balance shall again become available for Awards under the Plan. The foregoing notwithstanding, the aggregate number of Shares that may be issued under the Plan upon the exercise of ISOs shall not be increased when Restricted Shares or other Shares are forfeited. (d) Dividend Equivalents. Any dividend equivalents paid or credited under the Plan shall not be applied against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units. SECTION 6. RESTRICTED SHARES (a) Restricted Share Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Share Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Share Agreements entered into under the Plan need not be identical. (b) Payment for Awards. Subject to the following sentence, Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, full-recourse promissory notes, past services and future services. To the extent that an Award consists of newly issued Restricted Shares, the Award recipient shall furnish consideration with a value not less than the par value of such Restricted Shares in the form of cash, cash equivalents, or past services rendered to the Company (or a Parent or Subsidiary), as the Committee may determine. (c) Vesting. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Share Agreement. The Committee may include among such conditions the requirement that the performance of the Company or a business unit of the Company for a specified period of one or more years equal or exceed a target determined in advance by the Committee. The Committee may specify that Such performance shall be determined by the Company's independent auditors. The Committee shall determine such target not later than the 90th day of such period. In no event shall the number of Restricted Shares which are subject to performance based vesting conditions exceed [50% of the Restricted Shares], subject to adjustment in accordance with Section 12. A Restricted Share Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. The Committee may determine, at the time of granting Restricted Shares of thereafter, that all or part of such Restricted Shares shall become vested in the event that a Change in Control occurs with respect to the Company. -9- (d) Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders. A Restricted Share Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES. (a) Duration of Offers and Nontransferability of Rights. Any right to acquire Shares under the Plan (other than an Option) shall automatically expire if not exercised by the Offeree 30 days after the grant of such right was communicated to him by the Committee. Such right shall not be transferable and shall be exercisable only by the Offeree to whom such right was granted. (b) Purchase Price. The Purchase Price shall be determined by the Committee at its sole discretion. The Purchase Price shall be payable in one of the forms described in Sections 9(a), (b) or (c). (c) Withholding Taxes. As a condition to the purchase of Shares, the Offeree shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such purchase. (d) Restrictions on Transfer of Shares. Any Shares awarded or sold under the Plan shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Purchase Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. SECTION 8. TERMS AND CONDITIONS OF OPTIONS. (a) Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee's other compensation. A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in a form described in Section 9. (b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 12. Options granted to an Optionee in a single fiscal year of the Company shall not cover more than 250,000 Shares, except that Options granted to a new Employee or Consultant in the fiscal year of the Company in which his or her Service first commences shall not pertain to more than 300,000 Shares. -10- (c) Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the Fair Market Value of a Share on the date of grant, except as otherwise provided in Section 4(d). Subject to the foregoing in this Section 8(c), the Exercise Price under any Option shall be determined by the Committee at its sole discretion. The Exercise Price shall be payable in one of the forms described in Section 9. (d) Withholding Taxes. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option. (e) Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant (five years for Employees described in Section 4(d)). A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability, or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. Subject to the foregoing in this Section 8(e), the Committee at its sole discretion shall determine when all or any installment of an Option is to become exercisable and when an Option is to expire. (f) Nontransferability. During an Optionee's lifetime, his Option(s) shall be exercisable only by him or her and shall not be transferable by operation of law or agreement. In the event of an Optionee's death, his or her Option(s) shall not be transferable other than by will or by the laws of descent and distribution. (g) Exercise of Options Upon Termination of Service. Each Stock Option Agreement shall set forth the extent to which the Optionee shall have the right to exercise the Option following termination of the Optionee's Service with the Company and its Subsidiaries, and the right to exercise the Option of any executors or administrators of the Optionee's estate or any person who has acquired such Option(s) directly from the Optionee by bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service. (h) Effect of Change in Control. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Shares subject to such Option in the event that a Change in Control occurs with respect to the Company, subject to the following limitation: In the case of an ISO, the acceleration of exercisability shall not occur without the Optionee's written consent. (i) Leaves of Absence. An Employee's Service shall cease when such Employee ceases to be actively employed by, or a consultant or adviser to, the -11- Company (or any subsidiary) as determined in the sole discretion of the Board of Directors. For purposes of Options, Service does not terminate when an Employee goes on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of determining whether an Option is entitled to ISO status, an Employee's Service will be treated as terminating 90 days after such Employee went on leave, unless such Employee's right to return to active work is guaranteed by law or by a contract. Service terminates in any event when the approved leave ends, unless such Employee immediately returns to active work. The Company determines which leaves count toward Service, and when Service terminates for all purposes under the Plan. (j) No Rights as a Stockholder. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder with respect to any Shares covered by his Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 12. (k) Modification, Extension and Renewal of Options. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding options or may accept the cancellation of outstanding options (to the extent not previously exercised), whether or not granted hereunder, in return for the grant of new Options for the same or a different number of Shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair his rights or increase his obligations under such Option. (l) Restrictions on Transfer of Shares. Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. (m) Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish. SECTION 9. PAYMENT FOR SHARES. (a) General Rule. The entire Exercise Price of Shares issued under the Plan shall be payable in lawful money of the United States of America at the time when such Shares are purchased, except as provided in Sections 9(b) through 9(g) below. (b) Surrender of Stock. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by surrendering, or attesting to the ownership of, Shares which have already been owned by the Optionee or his representative for more than 6 months. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Shares in payment -12- of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes. (c) Services Rendered. At the discretion of the Committee, Shares may be awarded under the Plan in consideration of services rendered to the Company or a Subsidiary prior to the award. If Shares are awarded without the payment of a Purchase Price in cash, the Committee shall make a determination (at the time of the award) of the value of the services rendered by the Offeree and the sufficiency of the consideration to meet the requirements of Section 6(c). (d) Cashless Exercise. At the discretion of the Company and to the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. (e) Exercise/Pledge. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker or lender to pledge Shares, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of the aggregate Exercise Price. (f) Promissory Note. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivering (on a form prescribed by the Company) a full-recourse promissory note. However, the par value of the Common Shares being purchased under the Plan, if newly issued, shall be paid in cash or cash equivalents. (g) Other Forms of Payment. To the extent that a Stock Option Agreement so provides, payment may be made in any other form that is consistent with applicable laws, regulations and rules. SECTION 10. STOCK APPRECIATION RIGHTS. (a) SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee's other compensation. (b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Section 12. SARs granted to any Optionee in a single calendar year shall in no event pertain to more than 250,000 Shares, except that SARs granted to a new Employee or Consultant in the fiscal year of the Company in which his or her Service first commences shall not pertain to more than 300,000 Shares. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Section 12. -13- (c) Exercise Price. Each SAR Agreement shall specify the Exercise Price. A SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding. (d) Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control. (e) Effect of Change in Control. The Committee may determine, at the time of granting a SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company, subject to the following sentence. If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to be treated as a "pooling of interests" for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of exercisability shall not occur to the extent that the Company's independent accountants and such other party's independent accountants separately determine in good faith that such acceleration would preclude the use of "pooling of interests" accounting. (f) Exercise of SARs. Upon exercise of a SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Shares, (b) cash or (c) a combination of Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Shares subject to the SARs exceeds the Exercise Price. If, on the date when a SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. (g) Special Holding Period. To the extent required by Section 16 of the Exchange Act or any rule thereunder, an SAR shall not be exercised for cash unless both it and the related Option have been outstanding for more than six months. (h) Special Exercise Window. To the extent required by Section 16 of the Exchange Act or any rule thereunder, an SAR may only be exercised for cash during a period which (a) begins on the third business day following a date when the Company's quarterly summary statement of sales and earnings is released to the public and (b) ends on the third business day following such date. This Section 10(h) shall not apply if the exercise occurs automatically on the date when the related Option expires, and the Committee may determine that it shall not apply to limited SARs that are exercisable only in the event of a Change in Control. -14- (i) Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of a SAR shall, without the consent of the Optionee, may alter or impair his or her rights or obligations under such SAR. SECTION 11. STOCK UNITS. (a) Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient's other compensation. (b) Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients. (c) Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. The Committee may determine, at the time of granting Stock Units or thereafter, that all or part of such Stock Units shall become vested in the event that a Change in Control occurs with respect to the Company, except as provided in the next following sentence. If the Company and the other party to the transaction constituting a Change in Control agree that such transaction is to be treated as a "pooling of interests" for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of vesting shall not occur to the extent that the Company's independent accountants and such other party's independent accountants separately determine in good faith that such acceleration would preclude the use of "pooling of interests" accounting. (d) Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions (including without limitation, any forfeiture conditions) as the Stock Units to which they attach. (e) Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based -15- on the average Fair Market Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 12. (f) Death of Recipient. Any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's estate. (g) Creditors' Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement. SECTION 12. ADJUSTMENT OF SHARES. (a) Adjustments. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of: (i) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Section 5; (ii) The limitations set forth in Sections 4(c), 8(b) and 10(b); (iii) The number of NSOs to be granted to Outside Directors under Section 4(b); (iv) The number of Shares covered by each outstanding Option and SAR; (v) The Exercise Price under each outstanding Option and SAR; or (vi) The number of Stock Units included in any prior Award which has not yet been settled. Except as provided in this Section 12, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities -16- convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. (b) Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company. (c) Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement shall provide for: (i) The continuation of the outstanding Awards by the Company, if the Company is a surviving corporation; (ii) The assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary; (iii) The substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards; (iv) Full exercisability or vesting and accelerated expiration of the outstanding Awards; or (v) Settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards. (d) Reservation of Rights. Except as provided in this Section 12, an Optionee or Offeree shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 13. DEFERRAL OF AWARDS. The Committee (in its sole discretion) may permit or require a Participant to: a) Have cash that otherwise would be paid to such Participant as a result of the exercise of a SAR or the settlement of Stock Units credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company's books; -17- b) Have Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR converted into an equal number of Stock Units; or c) Have Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR or the settlement of Stock Units converted into amounts credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company's books. Such amounts shall be determined by reference to the Fair Market Value of such Shares as of the date when they otherwise would have been delivered to such Participant. A deferred compensation account established under this Section 13 may be credited with interest or other forms of investment return, as determined by the Committee. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the applicable agreement between such Participant and the Company. If the deferral or conversion of Awards is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such Awards, including (without limitation) the settlement of deferred compensation accounts established under this Section 13. SECTION 14. AWARDS UNDER OTHER PLANS. The Company may grant awards under other plans or programs. Such awards may be settled in the form of Shares issued under this Plan. Such Shares shall be treated for all purposes under the Plan like Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Shares available under Section 5. SECTION 15. PAYMENT OF DIRECTOR'S FEES IN SECURITIES. (a) Effective Date. No provision of this Section 15 shall be effective unless and until the Board has determined to implement such provision. (b) Elections to Receive NSOs, Restricted Shares or Stock Units. An Outside Director may elect to receive his or her annual retainer payments and/or meeting fees from the Company in the form of cash, NSOs, Restricted Shares or Stock Units, or a combination thereof, as determined by the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An election under this Section 15 shall be filed with the Company on the prescribed form. (c) Number and Terms of NSOs, Restricted Shares or Stock Units. The number of NSOs, Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms of such NSOs, Restricted Shares or Stock Units shall also be determined by the Board. -18- SECTION 16. LEGAL AND REGULATORY REQUIREMENTS. Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Company's securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable. SECTION 17. WITHHOLDING TAXES. (a) General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied. (b) Share Withholding. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. SECTION 18. LIMITATION ON PARACHUTE PAYMENTS. (a) Scope of Limitation. This Section 18 shall apply to an Award unless the Committee, at the time of making an Award under the Plan or at any time thereafter, specifies in writing that such Award shall not be subject to this Section 18. If this Section 18 applies to an Award, it shall supersede any contrary provision of the Plan or of any Award granted under the Plan. (b) Basic Rule. In the event that the independent auditors most recently selected by the Board (the "Auditors") determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a "Payment") would be nondeductible by the Company for federal income tax purposes because of the provisions concerning "excess parachute payments" in Section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section 18, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. (c) Reduction of Payments. If the Auditors determine that any Payment would be nondeductible by the Company because of Section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall -19- advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Section 18, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Auditors under this Section 18 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. (d) Overpayments and Underpayments. As a result of uncertainty in the application of Section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company that should not have been made (an "Overpayment") or that additional Payments that will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant that the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company, together with interest at the applicable federal rate provided in Section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount subject to taxation under Section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in Section 7872(f)(2) of the Code. (e) Related Corporations. For purposes of this Section 18, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with Section 280G(d)(5) of the Code. SECTION 19. NO EMPLOYMENT RIGHTS. No provision of the Plan, nor any right or Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee. The Company and its Subsidiaries reserve the right to terminate any person's Service at any time and for any reason, with or without notice. SECTION 20. DURATION AND AMENDMENTS. (a) Term of the Plan. The amended and restated Plan, as set forth herein, shall terminate automatically on the10th anniversary of date of Plan and may be terminated on any earlier date pursuant to Subsection (b) below. -20- (b) Right to Amend or Terminate the Plan. The Board of Directors may amend the Plan at any time and from time to time. Rights and obligations under any Option granted before amendment of the Plan shall not be materially impaired by such amendment, except with consent of the person to whom the Option was granted. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. (c) Effect of Amendment or Termination. No Shares shall be issued or sold under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan. SECTION 21. EXECUTION. To record the adoption of the amended and restated Plan by the Board of Directors effective as of November 9, 2001, the Company has caused its authorized officer to execute the same. Headwaters Incorporated By /s/ Kirk A. Benson ---------------------------- Kirk A. Benson Chief Executive Officer -21- -----END PRIVACY-ENHANCED MESSAGE-----