SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material under
section 240.14a-12
HEADWATERS INCORPORATED
-----------------------
(Name of Registrant as Specified in Its Charter)
-----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
HEADWATERS INCORPORATED
10653 South Riverfront Parkway, Suite 300
South Jordan, Utah 84095
January 27, 2003
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of Headwaters Incorporated, which will be held on Friday, March 14, 2003, at
2:00 p.m., Mountain Standard Time, at the University Park Marriott, 480 Wakara
Way, Salt Lake City, Utah 84108 (801-581-1000). In addition to the matters to be
acted upon at the meeting, which are described in the attached Notice of Annual
Meeting of Stockholders and Proxy Statement, there will be a report with respect
to the current status of Headwaters' operations and an opportunity for you to
ask questions.
Whether or not you plan to attend the meeting, please complete, date,
sign and return the enclosed proxy card or voting instruction form in the
accompanying envelope as promptly as possible to ensure that your shares are
represented and voted in accordance with your wishes.
The Proxy Statement contains a more extensive discussion of each
proposal and therefore you should read the Proxy Statement carefully. After you
have read the Proxy Statement and the accompanying instructions, you should
execute and return the enclosed form of proxy card or voting instructions with
respect to the proposed matters. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU APPROVE ALL PROPOSALS.
Only stockholders of record at the close of business on January 17,
2003 are entitled to vote at the meeting. You are cordially invited to attend
the meeting in person. However, to assure your representation at the meeting,
please complete, date and sign the enclosed proxy card and return it promptly.
If you choose, you may still vote in person at the meeting even though you
previously submitted a proxy card.
If you have any questions after reading the Proxy Statement and other
materials we have sent, please call Sharon Madden, Headwaters' Director of
Investor Relations, at 1-800-316-6214.
Sincerely,
/s/ Kirk A. Benson
---------------------------------
Kirk A. Benson
Chairman and Chief Executive Officer
THE BOARD ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ACCOMPANYING ENVELOPE. THE
PROXY MAY BE REVOKED AT ANY TIME BEFORE THE SHARES ARE VOTED AT THE MEETING.
STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR SHARES PERSONALLY EVEN THOUGH
THEY HAVE SENT THEIR PROXIES.
HEADWATERS INCORPORATED
10653 South Riverfront Parkway, Suite 300
South Jordan, Utah 84095
--------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, MARCH 14, 2003
--------------------
To the Stockholders of Headwaters Incorporated:
The 2003 Annual Meeting of Stockholders (the "Meeting") of Headwaters
Incorporated, a Delaware corporation ("Headwaters"), will be held on Friday,
March 14, 2003, starting at 2:00 p.m., Mountain Standard Time, at the University
Park Marriott, 480 Wakara Way, Salt Lake City, Utah 84108 (801-581-1000), for
the following purposes:
1. To elect two Class III directors of Headwaters to serve until
the 2006 annual meeting, or until their successors are duly
elected and qualified;
2. To ratify the selection by the Board of Directors of Ernst &
Young LLP as independent auditors of Headwaters for the fiscal
year ending September 30, 2003;
3. To approve a new stock incentive plan which was approved by
Headwaters' Board of Directors in January 2003 and which
authorizes 1,000,000 shares available for grant thereunder;
and
4. To transact such other business as may properly come before
the Meeting and any and all adjournments or postponements
thereof.
The Board has fixed the close of business on Friday, January 17, 2003
as the record date for determining the stockholders entitled to notice of, and
to vote at, the Meeting. Only stockholders of record as of the record date are
entitled to notice of, and to vote at, the Meeting and any adjournments or
postponements thereof. A copy of Headwaters' Proxy Statement and a proxy card
accompany this notice. These materials will be first sent to stockholders on or
about February 7, 2003.
Stockholders are cordially invited to attend the Meeting in person.
However, to assure your representation at the Meeting, please complete, date and
sign the enclosed proxy card and return it promptly. If you choose, you may
still vote in person at the Meeting even though you previously submitted a proxy
card.
By Order of the Board of Directors,
/s/ Harlan M. Hatfield
----------------------
Harlan M. Hatfield
Secretary
South Jordan, Utah
January 27, 2003
Your vote is important.
You are urged to date, sign and promptly return your proxy card so that your
shares may be voted in accordance with your wishes and that the presence of a
quorum may be assured. The prompt return of your signed proxy card, regardless
of the number of shares you hold, will aid Headwaters in avoiding the expense of
additional proxy solicitations. Giving your proxy does not affect your right to
vote in person at the meeting or your right to resubmit later dated proxy cards.
HEADWATERS INCORPORATED
10653 South Riverfront Parkway, Suite 300
South Jordan, Utah 84095
--------------------
PROXY STATEMENT
Annual Meeting of Stockholders
To Be Held on Friday, March 14, 2003
--------------------
GENERAL INFORMATION
This Proxy Statement is being furnished to the stockholders of
Headwaters Incorporated ("Headwaters"), in connection with the solicitation of
proxies on behalf of the Board of Directors of Headwaters (the "Board") for use
at Headwaters' Annual Meeting of Stockholders and any and all adjournments or
continuations thereof (the "Meeting"), to be held Friday, March 14, 2003,
starting at 2:00 p.m., Mountain Standard Time, at the University Park Marriott,
480 Wakara Way, Salt Lake City, Utah 84108 (801-581-1000), for the purposes set
forth in the accompanying Notice of Annual Meeting of Stockholders (the
"Notice"). These materials will be first mailed to stockholders on or about
February 7, 2003.
PURPOSE OF ANNUAL MEETING
At the Meeting, stockholders will be asked: (1) to elect two Class III
directors of Headwaters to serve until the 2006 annual meeting, or until their
successors are duly elected and qualified; (2) to ratify the selection by the
Board of Directors of Ernst & Young LLP as independent auditors of Headwaters
for the fiscal year ending September 30, 2003; (3) to approve a new stock
incentive plan which was approved by the Board in January 2003; and (4) to
transact such other business as may properly come before the Meeting and any and
all adjournments or postponements thereof.
The Board recommends a vote "FOR" each of the proposals. The Board
knows of no other matters which are likely to be brought before the Meeting. If
any other matters properly come before the Meeting, however, the person named in
the enclosed proxy, or his duly appointed substitute acting at the Meeting, will
be authorized to vote or otherwise act thereon in accordance with his judgment
on such matters.
QUORUM, VOTING RIGHTS AND OTHER MATTERS
Headwaters' Common Stock, $.001 par value (the "Common Stock"), will be
entitled to vote at the Meeting. Only stockholders of record at the close of
business on Friday, January 17, 2003 (the "Record Date"), will be entitled to
notice of, and to vote at, the Meeting. As of the Record Date, there were
27,414,764 shares of Common Stock outstanding. Holders of Common Stock as of the
Record Date are entitled to one vote for each share held for each of the
proposals.
The presence, in person or by proxy, of the holders of a majority of
the shares of the Common Stock entitled to vote is necessary to constitute a
quorum at the Meeting. Under Delaware law, an abstaining vote and a broker
"non-vote" are counted as present and are, therefore, included for purposes of
determining whether a quorum of shares is present at a Meeting. Broker
"non-votes" are not included in the tabulation of the voting results on the
election of directors or issues requiring approval of a majority of the shares
present or represented by proxy and entitled to vote at the Meeting and,
therefore, do not have an effect on the outcome of Proposals 1, 2 and 3. A
broker "non-vote" occurs when a nominee holding shares for a beneficial owner
does not vote on a particular proposal because the nominee does not have the
discretionary voting instructions with respect to that item and has not received
instructions from the beneficial owner. Shares held by brokers who do not have
discretionary authority to vote on a particular matter and have not received
voting instructions from their customers are not counted or deemed to be present
or represented for purposes of determining whether stockholders have approved
that matter.
1
<page>
With respect to Proposal 1, a plurality of the votes duly cast is
required for the election of directors (i.e., the nominees receiving the
greatest number of votes will be elected). Abstentions are not counted for
purposes of the election of directors.
With respect to Proposals 2 and 3 and any other matters (other than the
election of directors) on which stockholders of Headwaters are entitled to vote,
the affirmative vote of the holders of a majority of the stockholders' shares
present in person or represented by proxy and entitled to vote, is required. For
the purpose of determining whether the stockholders have approved matters other
than the election of directors, abstentions are treated as shares present or
represented and voting, so abstaining has the same effect as a negative vote.
If stockholders hold their shares through a broker, bank or other
nominee and do not instruct them how to vote, the broker may have authority to
vote the shares. However, the New York Stock Exchange has adopted new
regulations that prohibit brokers or other nominees that are NYSE member
organizations from voting in favor of proposals relating to equity compensation
plans unless they receive specific instructions from the beneficial owner of the
shares to vote in that manner. Therefore, for shares held through a broker or
other nominee who is an NYSE member organization, those shares will only be
voted in favor of Proposal 3 if the stockholder has provided specific voting
instructions to the broker or other nominee to vote the shares in favor of that
proposal.
All shares of Common Stock represented by properly executed proxies
will, unless such proxies have previously been revoked, be voted in accordance
with the instructions indicated in such proxies. If no such instructions are
indicated, such shares will be voted in favor of (i.e., "FOR") the items listed
in the Notice.
Any stockholder executing a proxy has the power to revoke such proxy at
any time prior to its exercise. A proxy may be revoked prior to exercise by (i)
filing with Headwaters a written revocation of the proxy, (ii) appearing at the
Meeting and casting a vote contrary to that indicated on the proxy, or (iii)
submitting a duly executed proxy bearing a later date.
The cost of preparing, printing, assembling and mailing this Proxy
Statement and other material furnished to stockholders in connection with the
solicitation of proxies will be borne by Headwaters. In addition to the mail
solicitation of proxies, officers, directors, employees and agents of Headwaters
may solicit proxies by written communication, telephone or personal call. Such
persons are to receive no special compensation for any solicitation activities.
Headwaters has retained Morrow & Co., a shareholder services company, to assist
in this proxy solicitation. Headwaters will pay Morrow & Co. approximately
$7,500 for its services, plus reimbursement of out-of-pocket expenses. Also,
Headwaters will reimburse banks, brokers and other persons holding Common Stock
for their expenses in forwarding proxy solicitation materials to beneficial
owners of Common Stock.
EXECUTIVE OFFICERS
The following table sets forth (i) the names of the executive officers,
(ii) their ages as of the Record Date and (iii) the capacities in which they
currently serve Headwaters:
Name Age Position(s) Officer Since
---- --- ----------- -------------
<c>
Kirk A. Benson 52 Chief Executive Officer 1999
and Chairman of the
Board
Steven G. Stewart 54 Chief Financial Officer 1998
Harlan M. Hatfield 42 Vice President, General Counsel 1998
and Secretary
J. I. Everest, II 46 Vice President of Corporate Development, 2002
Treasurer
R Steve Creamer 51 Director of Headwaters and Chief 2002
Executive Officer of ISG
See "Proposal No. 1 -- Election of Directors, Nominees for Election as
Directors" for biographical information regarding Messrs. Benson and Creamer.
2
<page>
Steven G. Stewart was appointed Chief Financial Officer of Headwaters
in July 1998 and served as Vice President of Finance and Treasurer from April
1998 through July 1998. From October 1996 through March 1998, Mr. Stewart was a
business assurance partner at PricewaterhouseCoopers LLP (formerly Coopers &
Lybrand LLP), with primary responsibility for public companies operating in the
high technology, mining and extractive industries. From January 1994 through
September 1996, Mr. Stewart was self-employed and provided consulting and
accounting services to high technology companies, assisted in the negotiation
and establishment of strategic alliances, advised companies on alternative
valuation methods applicable to acquisition targets and negotiated
acquisition/sale transactions. Prior to 1994, Mr. Stewart was an audit partner
with Ernst & Young (formerly Arthur Young) and was the Salt Lake City office
Director of High Technology and Entrepreneurial Services. Mr. Stewart graduated
with a B.S. degree in accounting from Brigham Young University in 1973 and is a
Certified Public Accountant.
Harlan M. Hatfield has served as Corporate Counsel since October 1996,
as Vice President and General Counsel since July 1998, and as Secretary since
July 1999. His primary activities with Headwaters have been the development of
synthetic fuel projects, including licensing, financing, permitting,
construction, feedstocks, site selection, and other aspects of project
development. As General Counsel he oversees the legal staff and outside legal
counsel, litigation, regulatory disputes, contracts, and other legal matters.
Prior to his employment with Headwaters, he was in private practice at the
Seattle law firm of Oles, Morrison and Rinker for more than nine years where he
was a partner. Mr. Hatfield obtained a B.A. degree in Public Policy from Brigham
Young University in 1984 and a Juris Doctorate from the University of Minnesota
in 1987.
J. I. Everest, II has served as Vice President of Corporate Development
and Treasurer since September 2002. Mr. Everest was the Chief Financial Officer,
Treasurer and Assistant Secretary of Industrial Services Group, Inc. and its
wholly-owned subsidiary, ISG Resources, Inc. (together "ISG"), from 1997 to
September 2002, at which time it was acquired by Headwaters. In those positions,
Mr. Everest was responsible for all financial functions of ISG. From 1993 to
1997 he served as Vice President of Finance for ECDC Environmental, L.C. From
1988 to 1993, he was Director of Financial Analysis/Treasury of USPCI, Inc. Mr.
Everest earned an M.B.A. degree (Finance Concentration) in 1994 from the
University of Texas at Austin and a B.B.A. degree in 1979 from Southern
Methodist University. Mr. Everest is a Certified Public Accountant.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following sets forth the compensation of Headwaters' Chief
Executive Officer and each of the other executive officers (collectively "Named
Executives") as of September 30, 2002, whose total annual salary and bonus
exceeded $100,000 in fiscal 2002. Unless otherwise noted, the amounts shown
represent what was earned in the respective fiscal years.
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
------------------------------------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#)(2) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------
Kirk A. Benson........ 2002 316,583 912,914 1,815 - 61,000 - 15,363
Chief Executive Officer 2001 250,000 590,424 6,600 - 50,000 - 2,625
2000 197,500 517,362 6,600 - 300,000 - 1,513
Brent M. Cook (1)...... 2002 217,000 373,889 48,335 - 30,000 - 28,317
President 2001 210,000 283,848 53,120 - 35,000 - 72,501 (1)
2000 187,500 271,615 53,120 - 150,000 - 2,835
Steven G. Stewart..... 2002 181,000 237,202 1,815 - 25,000 - 15,363
Chief Financial Officer 2001 174,000 171,223 6,600 - 25,000 - 2,625
2000 149,907 150,035 6,600 - 100,000 - 1,413
Harlan M. Hatfield.... 2002 169,000 191,519 1,815 - 25,000 - 15,363
Vice President 2001 162,000 150,043 6,600 - 25,000 - 2,625
2000 130,500 139,688 1,925 - 75,000 - 1,428
3
- ------------------
(1) Mr. Cook resigned as President of Headwaters in October 2002. For
Mr. Cook, $46,520 of other annual compensation in each year presented represents
compensation expense from the grant of options to purchase Common Stock which
had an exercise price at grant date below market value. Compensation is
recognized during the periods the stock options vest. Included in Mr. Cook's all
other compensation for 2001 is $68,351 representing payment for accrued personal
time off which was earned primarily in prior years.
(2) All option grants shown above for 2000 and 2001 were granted under
the 1995 Stock Option Plan. All option grants for 2002 were granted under the
2002 Stock Incentive Plan.
Option Grants in Fiscal 2002
The following table sets forth certain information concerning options
to purchase Common Stock granted during fiscal 2002 to the executives named in
the Summary Compensation Table.
OPTION GRANTS IN FISCAL 2002
- -------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise Expiration Grant Date
Name Granted (#) 2002 (1) Price ($/Sh) (2) Date Value ($) (3)
- -------------------------------------------------------------------------------------------------------------------
Kirk A. Benson...... 61,000 10.0% 13.73 June 2012 456,900
Brent M. Cook...... 30,000 4.9% 13.73 June 2012 224,705
Steven G. Stewart ... 25,000 4.1% 13.73 June 2012 187,254
Harlan M. Hatfield . 25,000 4.1% 13.73 June 2012 187,254
- ------------------
(1) The percentages reflected in the table above were computed based on the
total number of options granted or issued in fiscal 2002, or 610,500.
(2) The fair market value on the date of grant, determined by the closing price
of the Common Stock as reported by the Nasdaq Stock Market, was $13.73 per
share for all options.
(3) The fair value of each stock option grant was determined using the
Black-Scholes option pricing model and the following assumptions: expected
stock price volatility of 50%, risk-free interest rates ranging from 3.3%
to 3.8%, weighted average expected option life of five 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 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
the fair value, in management's opinion, the existing models do not
necessarily provide a reliable measure of the fair value of stock options.
(4) All of the options granted in fiscal 2002 vest ratably over three years,
beginning on the first year anniversary following the grant date.
4
<page>
Aggregated Option Exercises in Fiscal 2002 and Fiscal Year-End Option Values
The following table summarizes for the Named Executives of Headwaters
the number of stock options exercised during fiscal 2002, the aggregate dollar
value realized upon exercise, the total number of unexercised options held at
September 30, 2002 and the aggregate dollar value of in-the-money unexercised
options held at September 30, 2002. Value realized upon exercise is the
difference between the fair market value of the underlying stock on the exercise
date (based upon the average of the high and low prices of Common Stock as
reported by the Nasdaq Stock Market) and the exercise price of the option.
Options are in-the-money if the fair market value of the underlying securities
exceeds the exercise price of the option. The value of unexercised, in-the-money
options at September 30, 2002 is the aggregate amount of the difference between
their exercise price and $13.82 per share, the fair market value of the
underlying stock on September 30, 2002, based on the closing price of the Common
Stock on that date. The underlying options have not been and may never be
exercised. The actual gains, if any, on exercise will depend on the value of the
Common Stock on the actual date of exercise. There can be no assurance that
these values will be realized.
AGGREGATED OPTION EXERCISES IN FISCAL 2002 AND FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money Options at
on Exercise Realized Options at 9/30/02 (#) 9/30/02 ($)
Name (#) ($) Exercisable / Unexercisable Exercisable / Unexercisable
- -------------------------------------------------------------------------------------------------------------------
Kirk A. Benson...... 0 0 491,667 / 169,333 4,851,460 / 946,530
Brent M. Cook...... 60,230 925,450 350,000 / 136,000 1,479,555 / 723,965
Steven G. Stewart ... 30,695 441,108 99,307 / 85,834 504,209 / 449,456
Harlan M. Hatfield . 20,000 327,000 150,835 / 69,165 794,680 / 284,345
Stock Option Plans
1995 Stock Option Plan. Until April 2002, Headwaters had only one stock
option plan, the 1995 Stock Option Plan (the "1995 Plan"), under which 2,400,000
shares of Common Stock are reserved for ultimate issuance. A committee of
Headwaters' Board of Directors, or in its absence, the Board (the "Committee")
administers and interprets the 1995 Plan. This Committee is authorized to grant
options under the terms of the 1995 Plan to eligible employees and consultants
and to grant options and other awards outside the 1995 Plan to eligible
employees, officers, directors, and consultants of Headwaters. The 1995 Plan
provides for the granting of both incentive stock options ("ISOs") and
nonstatutory stock options ("NSOs"). Terms of options granted under the 1995
Plan, including vesting requirements, are determined by the Committee. Options
granted under the 1995 Plan vest over periods ranging from 0 to ten years,
expire no more than ten years from the date of grant and are not transferable
other than by will or by the laws of descent and distribution. ISO grants must
meet the requirements of the Internal Revenue Code and the 1995 Plan and may be
made only to employees of Headwaters.
2002 Stock Incentive Plan. In April 2002, the Board of Directors
approved the 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is
intended to be a "broad-based" plan for purposes of the NASD listing standards.
The share reserve under the 2002 Plan is currently 850,000. Non-statutory stock
options, restricted stock, stock appreciation rights (SARs) and stock units may
be granted under the 2002 Plan. ISOs may not be granted under the 2002 Plan.
Employees, directors and consultants of Headwaters are eligible for awards under
the 2002 Plan, which expires ten years after adoption unless terminated earlier
by the Board. The administration of the 2002 Plan is generally consistent with
the administration of the 1995 Plan.
2003 Stock Incentive Plan. In January 2003, the Board of Directors
approved a new stock option plan, the 2003 Stock Incentive Plan (the "2003
Plan"), which is described in detail in "Proposal No. 3 - Approval of 2003 Stock
Incentive Plan."
Other Options. In addition to options granted under the 1995 Plan and
the 2002 Plan (the "Option Plans"), Headwaters has in prior years granted
options for the purchase of Common Stock to employees, officers, directors and
consultants outside those plans that were not qualified as ISOs for tax
purposes. There were no such option grants during fiscal 2002.
5
<page>
Summary Information about Equity Compensation Plans. The following
table provides information as of September 30, 2002 about Headwaters' Common
Stock that may be issued upon the exercise of options, warrants and rights
granted to employees, consultants or members of the Board of Directors under all
of Headwaters' existing equity compensation plans and individual arrangements.
As described above, Headwaters has two primary stock option plans under which
options have been granted. Headwaters has also issued several options outside of
any plan. The 1995 Plan was approved by stockholders; the 2002 Plan has not been
approved by stockholders. The amounts included in the caption "not approved by
stockholders" in the table below represent amounts applicable under (i) the 2002
Plan and (ii) all stock options granted outside of any stock option plan,
excluding the 2003 Stock Incentive Plan.
(thousands of shares)
------------------------------------ ----------------------- ------------------------- -----------------------------
Shares to be issued Weighted-average Shares remaining available
upon exercise of exercise price of for future issuance under
Plan Category outstanding options outstanding options existing equity
compensation plans
------------------------------------ ----------------------- ------------------------- -----------------------------
Option plan approved by
stockholders................... 1,981 $7.58 46
Option plans not approved by
stockholders................... 1,009 7.51 168 (1)
----------------------- ------------------------- -----------------------------
Total............................. 2,990 $7.56 214
======================= ========================= =============================
- ------------------
(1) Under the 2002 Plan, all of these shares may be issued as restricted stock
or upon the exercise or settlement of stock appreciation rights and stock
units.
2000 Employee Stock Purchase Plan
The Board approved the 2000 Employee Stock Purchase Plan ("ESPP") in
May 2000 to provide eligible employees with an opportunity to increase their
proprietary interest in the success of Headwaters by purchasing Common Stock in
Headwaters on favorable terms and to pay for such purchases through payroll
deductions. The Board subsequently amended the ESPP in February 2001 and in
April 2001. The Board believes that this plan is mutually beneficial to
employees and Headwaters and its stockholders because such a plan enhances the
interest of employees in the continued success of Headwaters and further aligns
the interests of employees and stockholders. In addition, the Board is of the
opinion that employee stock purchase plans provide an aid in recruiting
qualified and talented employees. For these reasons, the Board authorized the
adoption of the ESPP. The ESPP was approved by stockholders in September 2000 at
a Special Meeting of Stockholders.
Substantially all employees of Headwaters are eligible to participate
in the ESPP after three months of employment. Non-employee directors are not
eligible. A total of 500,000 shares of stock are reserved for issuance under the
ESPP, of which 92,650 shares have been issued through January 17, 2003. Under
the ESPP, employees purchase shares of Common Stock directly from Headwaters,
which shares are made available primarily from treasury shares repurchased on
the open market or from authorized but unissued shares, if necessary. The ESPP
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 from 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 of the offering period or the end of the offering period.
Participation in the ESPP is voluntary and each eligible employee will
make his or her own election whether and to what extent to participate in the
ESPP. It is therefore not possible to determine the benefits or amounts that
will be received in the future by individual employees or groups of employees,
including the Named Executives.
Incentive Bonus Plan
The Incentive Bonus Plan ("Bonus Plan"), approved annually by the
Compensation Committee of the Board of Directors ("Compensation Committee"),
which is comprised only of independent directors, provides for annual cash
bonuses to be paid if Headwaters accomplishes certain financial goals and if
employees meet individual goals. A participant's cash bonus is based on
Headwaters' success in exceeding specified financial performance targets
established by the Compensation Committee, the employee's base pay, and
individual performance during the year. Headwaters' financial goals are based
upon an economic value added concept ("EVA"), which purports to more closely
align with a company's share price than other measurements of performance. EVA
is a concept that is founded on the assumption that "free cash flow" is the
primary driver of corporate value over time. This concept and EVA-based
compensation plans began in the early 1970s and are still used today by some of
the most successful companies in the U.S.
6
<page>
Under the terms of the Bonus Plan, annual cash awards can be earned by
participants who are employed at the end of the fiscal year, provided
Headwaters' and the participant's individual goals are met or exceeded. Through
September 30, 2002, participants included all full-time employees except those
directly involved in the operations of alternative fuel facilities owned by a
licensee, who are covered under a separate production incentive plan. Beginning
October 1, 2002, participants in the Bonus Plan include only officers and
certain management level personnel. The amount of the cash awards is dependent
on several factors, the most important of which is the EVA multiplier, or a
factor determined by how much Headwaters' performance exceeds a financial
threshold ("EVA target") established by the Compensation Committee for each
fiscal year. No awards are earned if the EVA target is not achieved. EVA profit,
which varies from traditional accrual accounting earnings, is determined each
fiscal year and is then compared to the EVA target, which determines the EVA
multiplier. EVA profit is defined as net income, plus or minus economic
adjustments, minus the cost of capital.
A portion of annual cash awards "earned" by management personnel are
banked, meaning that the full amount of the awards are not actually earned and
paid unless the EVA target is achieved in each of the two succeeding fiscal
years. This banking mechanism helps motivate management and employees to achieve
long-term sustainable stockholder value and discourages short-term performance
at the expense of long-term stockholder value creation. The bonus amounts for
2000 reflected in the Summary Compensation Table represent the cash awards paid
to the Named Executives for fiscal 2000, but do not include the banked amounts
because those were required to be earned by achieving the EVA targets in fiscal
2001 and 2002. The bonus amounts for 2001 in the Summary Compensation Table
represent the cash awards paid to the Named Executives for fiscal 2001, and
include 50% of the banked amounts from fiscal 2000, which were earned in 2001.
The bonus amounts for 2002 in the Summary Compensation Table represent the cash
awards paid to the Named Executives for fiscal 2002, and include 50% of the
banked amounts from fiscal 2000 and fiscal 2001, which were earned in 2002. The
total bonus amounts for 2000, 2001 and 2002 for all officers and employees was
$1,746,846, $1,859,725 and $2,784,749, respectively.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Kirk A. Benson. In October 2002, Headwaters and Mr. Benson entered into
an employment agreement covering Mr. Benson's "at will" employment. The
agreement calls for payment of a gross annual salary of not less than $400,000
for the 12-month period ending April 2003, $450,000 for the 12-month period
ending April 2004, and $500,000 for the 12-month period ending April 2005. The
employment agreement further provides for participation in Headwaters' incentive
bonus plan, the grant of stock options, the payment of severance pay, and other
standard benefits such as vacation, participation in Headwaters' employee
benefit plans and reimbursement for necessary and reasonable business expenses.
With regard to option grants, the agreement provides for the grant of
options in February 2003, April 2003 and April 2004. The February 2003 grant
shall be for a number of shares equal to the greater of 164,000 or the number
that when combined with the option covering 61,000 shares that was granted in
June 2002, will have a value equal to the value of a hypothetical option
covering 225,000 shares granted in June 2002. This option grant will vest in
three equal installments in March 2003, March 2004, and March 2005. The April
2003 and April 2004 option grants will be for 137,500 shares each and will vest
over a three-year period beginning on the one-year anniversary of the grant
dates. All options will have a minimum exercise price equal to the fair market
value of a share of Headwaters Common Stock on the grant date, and an expiration
date 10 years from date of grant, with full vesting upon disability or death. If
Headwaters terminates Mr. Benson's employment without cause or if Mr. Benson
resigns all of his positions with Headwaters for good reason, as defined
(including any change in control of Headwaters), he is entitled to termination
benefits equal to 300% of his annual base salary in effect when employment
terminates. In event of termination or upon a change in control, all of Mr.
Benson's options shall immediately become fully vested and exercisable. Mr.
Benson's current annual salary is $400,000.
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Brent M. Cook. In April 1998, Headwaters and Mr. Cook entered into an
employment agreement covering the succeeding five year term. Mr. Cook resigned
his positions as president and director of Headwaters in October 2002, at which
time his employment agreement was amended. The amended agreement extends Mr.
Cook's period of employment through April 2004 and provides for the payment of
$220,000 of severance pay, required by the original agreement, over the 12-month
period ending October 2003. In addition, Mr. Cook is to be compensated for
actual hours worked during his period of employment and continuing through April
2005, as a consultant, at the rate of $150 per hour. Mr. Cook is also entitled
to continue to participate in Headwaters' standard health and dental insurance
programs, but is not entitled to participate in Headwaters' 401(k) Profit
Sharing Plan, the 2000 Employee Stock Purchase Plan, or the Incentive Bonus
Plan. Mr. Cook's outstanding options will continue to vest through April 2004
and will remain exercisable through July 2004, in accordance with the terms of
the original option grants.
Steven G. Stewart. Effective May 1998, Headwaters and Mr. Stewart
entered into an employment agreement covering a continuous three-year period,
unless terminated by Headwaters for cause or disability, or by Mr. Stewart for
good cause or without good reason provided 90 days prior written notice is
given. The employment agreement further provides for participation in
Headwaters' incentive bonus plan, if any, as in effect from time to time, and
the grant of stock options. Specifically, the agreement provided for the grant
of options for 50,000 shares of Common Stock at an exercise price of $12.63 per
share, to vest on a pro rata basis over 60 months beginning May 1998, which
grant was made in fiscal 1998. In addition, Mr. Stewart receives other benefits
comparable to those generally available to Headwaters employees. If his
employment is terminated by Headwaters without cause or is terminated by Mr.
Stewart for good reason, he is entitled to termination benefits equal to 200% of
his then annual base salary and all outstanding options vest immediately. Mr.
Stewart's current annual salary is $265,000.
J. I. Everest, II. Effective October 1997, ISG and Mr. Everest entered
into an employment agreement covering an initial three-year period. The
agreement was amended in October 2001 and currently has an expiration date of
December 31, 2003. The agreement as amended automatically renews for one-year
terms, unless terminated by ISG or Mr. Everest by written notice to be given
prior to October of each year. The amended employment agreement provided for a
base salary of $260,000, to be reviewed annually, and a potential bonus, to be
determined by ISG's Board of Directors. In addition, Mr. Everest receives other
benefits comparable to those generally available to other employees. The
agreement does not provide for any severance benefits. Mr. Everest's current
annual salary is $260,000.
R Steve Creamer. Effective October 1997, ISG and Mr. Creamer entered
into an employment agreement covering an initial three-year period. The
agreement was amended in October 2001 and currently has an expiration date of
December 31, 2003. The agreement as amended automatically renews for one-year
terms, unless terminated by ISG or Mr. Creamer by written notice to be given
prior to October of each year. The amended employment agreement provided for a
base salary of $360,000, to be reviewed annually, and a potential bonus, to be
determined by ISG's Board of Directors. In addition, Mr. Creamer receives other
benefits comparable to those generally available to other employees. The
agreement does not provide for any severance benefits. Mr. Creamer's current
annual salary is $360,000.
Incentive Agreements with ISG Principals. In January 2003, Headwaters
executed incentive agreements, with an effective date of November 2002, with
three of the former stockholders and officers of ISG: Mr. Creamer, Mr. Everest,
and another current officer of ISG. The agreements, which were approved by the
Compensation Committee, call 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 increase in the average stock price for
Headwaters' Common Stock for any calendar quarter exceeding $20 per share. The
maximum potential payment to Mr. Creamer would be $2,500,000, the maximum
potential payment to Mr. Everest would be $1,000,000, and the maximum potential
payment to the third officer would be $1,500,000. The maximum payments would be
required if there were a change in control prior to October 2004, or if the
officers remain employed through September 2004 and the average stock price for
any calendar quarter reached $25 per share or more.
CORPORATE GOVERNANCE
Headwaters upholds a set of basic values to guide its actions and
believes its corporate governance practices meet the standards defined in
recently enacted legislation.
Independent Directors. A majority of Headwaters' Board members are
independent of Headwaters and its management as defined by the SEC and the
listing standards of the NASD. New directors participate in orientation and
training immediately following their appointment to the Board. The
non-management directors periodically meet in executive session, without
management, as part of the agenda for Board meetings.
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Audit Committee. The Board has adopted an Audit Committee charter that
meets SEC and the NASD listing standards, a copy of which is attached to this
proxy statement. All Audit Committee members meet the applicable tests for
independence from Headwaters' management and are financially literate. Ernst &
Young LLP, Headwaters' independent auditors, reports directly to the Audit
Committee.
Compensation Committee. The Compensation Committee meets the applicable
tests for independence as defined by the SEC and the NASD listing standards.
Incentive compensation plans are reviewed and approved by the Compensation
Committee. Director compensation is determined by the Compensation Committee.
Nominating and Governance Committee. The Board intends to adopt a
Nominating and Governance Committee charter that meets standards of the SEC and
the NASD during January 2003. The members of this committee will meet the
applicable tests for independence from Headwaters' management.
Board Meetings
The Board held a total of ten meetings during fiscal 2002. With the
exception of three directors who each attended nine meetings, all directors
attended all of the meetings.
Committees of the Board
The Board of Directors currently has two committees, an Audit Committee
and a Compensation Committee, both of which are comprised solely of independent
directors as defined in the current NASD listing standards. The Compensation
Committee currently consists of Mr. Weller, as chair, and Mr. Herickhoff. The
Audit Committee currently consists of Mr. Herickhoff, as chair, and Mr. Garn.
Mr. Ronald S. Tanner also served on the Compensation Committee and the Audit
Committee until his seceding from the Board in January 2003. The Audit Committee
held five meetings in fiscal 2002 and the Compensation Committee held three
meetings in fiscal 2002. Headwaters plans to add a Nominating and Governance
Committee in January 2003. In addition, it is expected that the chairmanships
and membership of all of the board committees will be changed in January 2003.
Compensation Committee Report on Executive Compensation
The Compensation Committee reviews and makes recommendations to the
Board of Directors concerning the overall compensation for Headwaters' officers
and other key executives, including the Named Executives. The Compensation
Committee also oversees the granting of stock options and the payment of
incentive bonuses to all executives and employees of Headwaters. Future
compensation polices will be dependent on Headwaters' performance and cash flow
and employee performance.
Headwaters seeks to compensate executives at competitive levels,
considering current compensation surveys and practices for companies in similar
industries and development patterns, the growth of Headwaters, each executive's
individual contribution to meeting Headwaters' goals and objectives, and overall
business conditions, as part of the total benefit package for employees.
Beginning in early fiscal 2000, Headwaters' management and the Board of
Directors initiated a comprehensive review of Headwaters' compensation program
for its executives, management personnel and all other employees. This review
consisted of a formal study by a well-known international human resources
consulting firm of current employee responsibilities and compensation as well as
a study of compensation programs used by other similarly situated public
companies. This compensation review culminated in a detailed report presented to
the Compensation Committee by the consulting firm.
9
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The consulting firm's report recommended several changes in Headwaters'
compensation policies and programs, including changes in base salary levels and
long-term incentives such as stock option grants as well as implementation of a
bonus plan. Following the issuance of the report, the Compensation Committee
made several recommendations to the Board, which the Board subsequently adopted.
It was determined that an incentive bonus program that closely linked bonus
compensation to the creation of stockholder value as measured under the EVA
concept would be in the best interests of Headwaters and its stockholders since
EVA-based plans are purported to be one of the best indicators of actual
stockholder value creation. Accordingly, the Board adopted a formal EVA-based
incentive bonus plan in fiscal 2000. The Board determined that such a plan was
the best way to motivate Headwaters' management and employees to continuously
seek to meet and exceed performance goals.
These recommendations, which affected all executives, management
personnel and other employees of Headwaters, included changes in base salary
levels and long-term incentives such as stock option grants as well as
implementation of an incentive bonus plan. The incentive bonus plan is deemed to
be a significant part of the total compensation package for the Named
Executives.
The current employment agreement for Mr. Benson was approved by the
Compensation Committee in a meeting in October 2002. The Compensation Committee
recommended the fiscal 2002 cash compensation, cash bonus and grant of options
to Mr. Benson based on Mr. Benson's ability to meet Headwaters' objectives.
Section 162(m) of the Code limits Headwaters' tax deduction of certain
compensation in excess of $1 million paid to certain executive officers named in
the proxy unless the compensation is performance-based. Compensation
attributable to stock options under the 1995 Plan and the 2003 Plan (if approved
by stockholders) is treated as performance-based compensation if (1) the options
are granted by the Compensation Committee; (2) the Plans restrict the number of
shares for which options may be awarded to an executive during a specified
period; and (3) the options have an exercise price at least equal the fair
market value of a share of Common Stock on the date of grant. Grants of
restricted stock under the 1995 and 2003 Plans and awards under the 2002 Plan
are not considered performance-based compensation.
While the tax impact of any compensation arrangement is one factor to
be considered, such impact is evaluated in light of the Compensation Committee's
overall compensation philosophy. The Compensation Committee intends to establish
executive officer compensation programs which will maximize Headwaters' tax
deductions, if the Compensation Committee determines that such actions are
consistent with its philosophy and in the best interests of Headwaters and its
stockholders. From time to time, the Compensation Committee may award
compensation which is not fully tax deductible if the Compensation Committee
determines that such award is consistent with its philosophy and in the best
interests of Headwaters and its stockholders.
The Compensation Committee strives to ensure that Headwaters'
compensation plan attracts, retains and rewards both staff and management
personnel while continuing to operate in the best interests of the stockholders.
Compensation Committee
Raymond J. Weller, Chairman
James A. Herickhoff
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the Board of Directors or
Compensation Committee and the Board of Directors or Compensation Committee of
any other entity, nor has any interlocking relationship existed in the past.
Compensation of Directors
Headwaters' directors hold office until the end of their respective
terms or until their successors have been duly elected and qualified.
Headwaters' executive officers are appointed by the Board of Directors and serve
at the discretion of the Board.
Outside directors not serving as Chairman or Vice Chairman are entitled
to annual cash compensation of $32,000, which is paid quarterly. Beginning
January 2002, the Chairman of the Board and the Vice Chairman, unless salaried
employees of Headwaters, are entitled to annual cash compensation in the amount
of $40,000, which is paid quarterly. Also beginning January 2002, any director
who serves as a committee chair receives additional cash compensation of $5,000
annually. The outside directors also receive 12,000 options for each year of
service, vesting annually. Directors receive reimbursement for out-of-pocket
expenses. The cash compensation and options described in this section do not
apply to directors who are salaried employees of Headwaters.
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In December 1998, each of Headwaters' outside directors received 36,000
options for the three-year period following the 1999 annual stockholders'
meeting, subject to vesting on a pro rata basis, at the fiscal 2000, 2001 and
2002 annual stockholders' meetings. The options granted in December 1998 have
exercise prices equal to the closing price of the Common Stock on the grant
date. None of these option grants were granted under the 1995 Stock Option Plan.
In November 2001, the three outside directors who were on the Board at that time
(Messrs. Herickhoff, Tanner, and Weller) each received 36,000 options. Mr. Garn
received an option grant for 36,000 shares in January 2002 when he joined the
board. All of these options to outside directors granted in 2001 and 2002 vest
ratably in December 2002, December 2003 and December 2004, have an exercise
price equal to the closing stock price of Headwaters' Common Stock as of the
grant date and were granted under the 1995 Stock Option Plan. In August 2002,
Mr. Comolli was granted 12,000 options at an exercise price equal to the closing
price of the Common Stock on the grant date. These options vested in December
2002 and were also granted under the 1995 Stock Option Plan.
Audit Committee Report
The Audit Committee currently consists of two directors, each of whom
is independent as defined in the current NASD listing standards. The primary
purposes of the Audit Committee are to provide oversight of Headwaters'
management in the areas of corporate governance including (i) the financial
reporting system, the system of internal controls, and the outside independent
auditing process and audit results, and (ii) legal and regulatory compliance in
areas where control systems must be in place to reduce financial risk to
Headwaters to acceptable levels.
The Audit Committee meets periodically with management to consider the
adequacy of Headwaters' internal controls and the reliability of Headwaters'
financial statements. The Audit Committee also meets privately with the
independent auditors, who have unrestricted access to the Audit Committee. The
Audit Committee recommends to the Board the appointment of the independent
auditors and periodically reviews their performance and independence from
management. The Audit Committee acts pursuant to a written charter that was
adopted by the Board of Directors. A copy of the charter is attached to this
proxy statement.
In performing its functions, the Audit Committee acts only in an
oversight capacity and necessarily relies on the work and assurances of
Headwaters' management, which has the primary responsibility for financial
statements and reports, and of the independent auditors, who, in their report,
express an opinion on the conformity of Headwaters' annual financial statements
with generally accepted accounting principles. It is not the duty of the Audit
Committee to plan or conducts audits or to determine that Headwaters' financial
statements are complete and accurate and in accordance with generally accepted
accounting principles.
Within this framework, we reviewed the audited financial statements and
met with both management and Ernst & Young LLP, Headwaters independent auditors,
to discuss those financial statements. Management has represented to us that the
financial statements were prepared in accordance with accounting principles
generally accepted in the United States. We have received from and discussed
with Ernst & Young LLP the written disclosure and letter required by
Independence Standards Board Standard No. 1. These items relate to that firm's
independence from Headwaters. We also discussed with Ernst & Young LLP the
matters required to be discussed by Statement on Auditing Standards No. 61,
"Communication with Audit Committees."
Based on these reviews and discussions, we recommended to the Board
that the audited financial statements be included in Headwaters' Annual Report
on Form 10-K for the fiscal year ended September 30, 2002.
Audit Committee
James A. Herickhoff, Chairman
E. J. "Jake" Garn
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Stockholder Return Performance Graph
The following graph shows a comparison of the cumulative total
stockholder return, calculated on a dividend reinvestment basis, for September
30, 1997 through September 30, 2002, on Headwaters' Common Stock with (1) the
Nasdaq Composite Index - U.S., and (2) the Standard & Poors Energy - 500 Index.
The comparison assumes $100 was invested on September 30, 1997.
Please note that historic stock price performance shown on the graph is
not necessarily indicative of future price performance. Headwaters has not paid
dividends on its Common Stock.
[GRAPHIC OMITTED]
9/30/97 9/30/98 9/30/99 9/30/00 9/30/01 9/30/02
---------- ---------- ---------- ----------- ---------- -----------
Headwaters $100 $101 $ 27 $ 31 $119 $149
S&P Energy - 500 100 95 113 131 113 98
Nasdaq Composite - US 100 102 166 220 90 71
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 17,
2003 regarding the beneficial ownership of Headwaters' Common Stock, for: (i)
each person (or group of affiliated persons) who, insofar as Headwaters has been
able to ascertain, beneficially owned more than 5% of the outstanding shares of
Common Stock; (ii) each director; (iii) each Named Executive of Headwaters; and
(iv) all directors and executive officers of Headwaters as a group. Headwaters
has relied on information received from each stockholder as to beneficial
ownership, including information contained on Schedules 13D and 13G and Forms 3,
4 and 5. As of January 17, 2003, there were 27,414,764 shares of Common Stock
outstanding. As of that date, there were outstanding options to purchase
3,417,646 shares of Common Stock and outstanding warrants to purchase 92,306
shares of Common Stock.
Name and Address of Amount and Nature of Percent of
Beneficial Owner (1) Beneficial Ownership(2) Class
-------------------- ----------------------- -----
Stockholder:
Citigroup Inc.
399 Park Avenue
New York, NY 10043 1,610,051 (3) 5.9%
Directors:
Kirk A. Benson 1,296,164 (4) 4.6%
Raymond J. Weller 334,274 (5) 1.2%
James A. Herickhoff 78,500 (6) *
E. J. "Jake" Garn 12,000 (7) *
Alfred G. Comolli 242,451 (8) *
L. K. (Theo) Lee 154,162 (9) *
R Steve Creamer 0 0%
R. Sam Christensen 5,500 (10) *
William S. Dickinson 0 0%
Malyn K. Malquist 1,000 (11) *
Executive Officers:
Steven G. Stewart 133,587 (12) *
Harlan M. Hatfield 176,155 (13) *
J. I. Everest, II 1,000 (14) *
All directors and executive officers
as a group (thirteen persons) 2,434,793 (15) 8.5%
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- ------------------
* Less than 1%
(1) The address of each director and officer is c/o Headwaters Incorporated,
10653 South Riverfront Parkway, Suite 300, South Jordan, Utah 84095.
(2) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock reflected as beneficially owned by
them. A person is deemed to be the beneficial owner of securities that can
be acquired by such person within sixty (60) days from January 17, 2003,
and the total outstanding shares used to calculate each beneficial owner's
percentage includes such shares. Beneficial ownership as reported does not
include shares subject to option or conversion that are not exercisable
within 60 days of January 17, 2003.
(3) Consists of 1,610,051 shares owned by Citigroup Inc. and affiliates
thereof.
(4) Consists of 698,748 shares owned by Mr. Benson, warrants for 55,749 shares
exercisable within 60 days of January 17, 2003, and options to purchase
541,667 shares held by Mr. Benson exercisable within 60 days of January 17,
2003.
(5) Consists of 215,524 shares owned by Mr. Weller and options to purchase
118,750 shares held by Mr. Weller exercisable within 60 days of January 17,
2003.
(6) Consists of 8,000 shares owned by Mr. Herickhoff and options to purchase
70,500 shares held by Mr. Herickhoff exercisable within 60 days of January
17, 2003.
(7) Consists of options to purchase 12,000 shares held by Mr. Garn exercisable
within 60 days of January 17, 2003.
(8) Consists of 190,451 shares owned by Mr. Comolli and options to purchase
52,000 shares held by Mr. Comolli exercisable within 60 days of January 17,
2003.
(9) Consists of 117,142 shares owned by Mr. Lee and options to purchase 37,020
shares held by Mr. Lee exercisable within 60 days of January 17, 2003.
(10) Consists of 5,500 shares owned by a partnership of which Mr. Christensen is
a Trustee of the General Partner.
(11) Consists of 1,000 shares owned by Mr. Malquist.
(12) Consists of 6,612 shares owned by Mr. Stewart, 1,000 shares owned by a
trust, for which Mr. Stewart is co-trustee, and options to purchase 125,975
shares held by Mr. Stewart exercisable within 60 days of January 17, 2003.
(13) Consists of 6,570 shares owned by Mr. Hatfield and options to purchase
169,585 shares held by Mr. Hatfield exercisable within 60 days of January
17, 2003.
(14) Consists of 1,000 shares owned by the J. I. Everest, II Children's Trust.
Mr. Everest is the Trustee.
(15) Consists of 1,251,547 shares issued and outstanding, and options and
warrants to purchase 1,183,246 shares exercisable within 60 days of January
17, 2003.
TRANSACTIONS WITH RELATED PARTIES
Employment and Related Agreements. Headwaters has entered into
employment agreements with Messrs. Benson, Cook, Stewart, Everest and Creamer
which provide for significant benefits. In addition, Headwaters has entered into
incentive agreements with Mr. Creamer, Mr. Everest, and another current officer
of ISG. See "Employment Contracts and Termination of Employment and Change in
Control Arrangements." As of September 30, 2002, Headwaters and its subsidiaries
have entered into employment agreements with 12 other officers and employees.
The employment 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 $75,000 to $400,000
annually per person. The annual commitment under all employment agreements
combined was approximately $2,990,000 as of September 30, 2002. The agreements
provide for termination benefits, ranging from at least six months' salary, up
to a maximum period equal to the remaining term of the agreement.
ISG Acquisition. As described in more detail in the notes to the
consolidated financial statements included in Headwaters' Annual Report on Form
10-K, in September 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's shareholders included Messrs. Creamer and
Everest as well as two other current officers of ISG. As a result of this
transaction, all of the ISG shareholders, which included Messrs. Creamer and
Everest and the two other officers of ISG, received the cash and / or stock
proceeds paid by Headwaters to consummate the acquisition.
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In order to obtain the cash necessary to acquire ISG and retire the ISG
debt, Headwaters issued $175,000,000 of new debt including $20,000,000 of
subordinated debt with an approximate five-year term. The subordinated debt was
issued at a 2% discount, with Headwaters receiving net cash proceeds of
$19,600,000. ISG management, including Messrs. Creamer and Everest and the two
other current officers of ISG, participated in one-half, or $10,000,000, of the
subordinated debt. The other half was issued to a corporation. The debt is not
secured, bears interest at an 18% rate, and is repayable in September 2007. It
is senior to all other debt except the $155,000,000 senior secured debt. The
debt agreement allows for optional prepayments. Any prepayments paid to the
corporation are subject to a prepayment charge which ranges from 5% of the
principal prepaid in the first year to 1% of the principal prepaid in the last
year of the five-year term of the debt agreement. Interest is payable quarterly,
beginning October 2002 and is payable in cash at a 12% rate. At Headwaters'
option, interest calculated at an additional 6% rate may be added to the
principal balance in lieu of payment in cash. Headwaters currently intends to
pay in cash the entire amount of interest which accrues.
HTI Acquisition. As described in more detail in the notes to the
consolidated financial statements included in Headwaters' Annual Report on Form
10-K, in August 2001, Headwaters completed the acquisition of 100% of the common
stock of HTI. HTI's shareholders included Messrs. Comolli and Lee. As a result
of this transaction, all of the HTI shareholders, which included Messrs. Comolli
and Lee, received the cash and / or stock proceeds paid by Headwaters to
consummate the acquisition. In accordance with the original HTI acquisition
agreements, additional contingent consideration could be earned by the former
HTI stockholders during calendar 2002 based on the attainment of certain
operating targets and other milestones. In April 2002, Headwaters and the former
HTI stockholders agreed to an amendment of the acquisition agreements and
reached a final settlement of all outstanding contingent payments and Headwaters
paid the former HTI stockholders, including Messrs. Comolli and Lee, additional
cash and stock consideration.
Insurance Benefits. Headwaters purchases certain insurance benefits for
its employees from various companies for which Mr. Weller, a director, acts as a
broker or agent. Gross payments to those insurance companies totaled
approximately $361,000 in fiscal 2000, $381,000 in fiscal 2001 and $532,000 in
fiscal 2002.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
Headwaters' officers and directors, and persons who own more than 10% of a
registered class of Headwaters' equity securities, to file reports of ownership
and changes in ownership with the SEC and Nasdaq. Officers, directors, and
greater than 10% stockholders are required by SEC regulations to furnish
Headwaters with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms furnished to Headwaters between October 1,
2001 and September 30, 2002, on year-end reports furnished to Headwaters after
September 30, 2002, and on representations that no other reports were required,
Headwaters believes that during the 2002 fiscal year all applicable 16(a) filing
requirements were met.
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Nominees for Election as Directors
At the Meeting, the stockholders will elect two Class III directors of
Headwaters to serve until the 2006 annual meeting, or until their successors are
duly elected and qualified. The Board of Directors is divided into three
classes, currently comprised of one Class I director, who has announced his
intention to resign in January 2003, and which class shall be filled with three
new directors in January 2003; three Class II directors, whose terms will expire
at Headwaters' annual meeting in 2005; and two Class III directors, one of whom
has announced his intention to resign in January 2003 and whose position shall
be filled in January 2003, whose terms will expire at the Meeting in March 2003
and who are standing for election at the Meeting.
At the time of the Meeting, the Board will consist of eight members:
Kirk A. Benson, Raymond J. Weller, James A. Herickhoff, E. J. "Jake" Garn, R
Steve Creamer, R. Sam Christensen, William S. Dickinson, and Malyn K. Malquist.
Messrs. Comolli and Lee have announced their intentions to resign in January
2003.
The Board proposes that the two individuals listed below as nominees be
elected as Class III directors of Headwaters. The nominees have consented to
serve if elected to the Board. In the event that one or more of the nominees are
unable to serve as director at the time of the Meeting (which is not expected),
proxies with respect to which no contrary direction is made will be voted "FOR"
such substitute nominee(s) as shall be designated by the Board to fill the
vacancy or vacancies.
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The names of the Class III nominees, together with certain information
about them, is set forth below:
Name Age Position with Headwaters Director Since
---- --- ------------------------ --------------
James A. Herickhoff 60 Vice Chairman and Director 1997
R Steve Creamer 51 Director of Headwaters and Chief 2003
Executive Officer of ISG
James A. Herickhoff has served as a Director of Headwaters since August
1997 and was elected Vice Chairman in April 1999. Mr. Herickhoff is President,
Chief Operating Officer and a principal of Wold Talc Company, which operates one
of the largest talc mines in the United States. From 1987 to 1994 he served as
President of Atlantic Richfield Company's Thunder Basin Coal Company. Mr.
Herickhoff has over 25 years of experience in the coal and mining industries and
extensive experience in strategic positioning of these companies for long-term
growth and competitiveness. Mr. Herickhoff led the growth of the Black Thunder
and Coal Creek coal mines from 19,000,000 to approximately 40,000,000 tons per
year of production. Mr. Herickhoff previously served as President of Mountain
Coal Company, managing all of ARCO's underground mining and preparation plants.
Mr. Herickhoff is the past President of the Wyoming Mining Association and a
former Board member of the Colorado and Utah Mining Associations. Mr. Herickhoff
received a Bachelor degree in 1964 from St. John's University, a Master of
Science degree in 1966 from St. Cloud State University and attended the Kellogg
Executive Management Institute at Northwestern University in 1986. Mr.
Herickhoff's term as a director expires in 2003.
R Steve Creamer has served as a Director of Headwaters since January 2003
and as Chief Executive Officer of ISG and its wholly-owned subsidiary, ISG
Resources, Inc., from 1997 to the present time. Immediately prior to his
employment with ISG, Mr. Creamer was CEO (from 1992 to 1997) and founder of ECDC
Environmental L.C., the largest rail-served industrial waste management facility
in North America. Prior to that, Mr. Creamer served as CEO of Creamer & Noble,
an engineering firm based in St. George, Utah. He earned a B.S. degree in Civil
and Environmental Engineering from Utah State University in 1973. Mr. Creamer is
a Professional Engineer. Mr. Creamer's term as a director expires in 2003.
Directors Not Standing for Election
The names of the directors of Headwaters who are not standing for election
at the Meeting are R. Sam Christensen, William S. Dickinson, and Malyn K.
Malquist, Class I directors whose terms expire in 2004; and Kirk A. Benson,
Raymond J. Weller, and E. J. "Jake" Garn, Class II directors whose terms expire
in 2005. Information about these directors is set forth below.
Class I Directors:
Name Age Position with Headwaters Director Since
---- --- ------------------------ --------------
R. Sam Christensen 54 Director 2003
William S. Dickinson 68 Director 2003
Malyn K. Malquist 50 Director 2003
R. Sam Christensen has served as a Director of Headwaters since January
2003. Since 1996, Mr. Christensen has spent the majority of his time managing
Black Bear Ventures LP, a private investment firm, and evaluating new business
opportunities. Mr. Christensen currently serves as a director for three
privately-held firms in Utah and California. Prior to 1996, Mr. Christensen was
chairman and majority owner of Richmond Holdings, Inc., a privately-held
corporation engaged in developing, designing, manufacturing and selling flexible
packaging materials and static control devices worldwide to the electronics and
pharmaceutical industries. Richmond was sold to a publicly-traded firm in 1996.
Mr. Christensen began his career as an auditor with the firm of Touche Ross &
Co. where he spent nearly ten years. His final assignment, before resigning, was
overseeing and managing their Salt Lake City office and its audit and tax
practice. Mr. Christensen earned a B.S. degree in Accounting from Brigham Young
University in 1972. Mr. Christensen is a Certified Public Accountant. Mr.
Christensen's term as a director expires in 2004.
15
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William S. Dickinson has served as a Director of Headwaters since January
2003. From 1972 to 1994, Mr. Dickinson worked for Arco Products Co. and Arco
Technology and Engineering, most recently as Vice President of Engineering and
Technology (from 1988 to 1994), at which time he retired and has been involved
in various projects as a consultant. In his most recent position with Arco, Mr.
Dickinson was responsible for engineering and process development for the Arco
refineries. In prior years, he was responsible for, among other things, the sale
of all natural gas produced by Arco, the engineering and construction of all new
oil production facilities in Alaska and the lower 48 states, and managed annual
budgets in the range of $100 million to $300 million. Mr. Dickinson graduated
from Yale University in 1956 with a B.S. in Chemical Engineering. Mr.
Dickinson's term as a director expires in 2004.
Malyn K. Malquist has served as a Director of Headwaters since January
2003. Mr. Malquist is Senior Vice President and Chief Financial Officer of
Avista Corp., an energy utility in the Pacific Northwest. Mr. Malquist has held
this position since September 2002. Mr. Malquist has 24 years of experience in
the utility industry, many of which were in financial leadership positions. Mr.
Malquist worked for the Truckee Meadows Water Authority from February 2001 until
September 2002, serving as its General Manager. Mr. Malquist was CEO of Data
Engines, a high tech start-up company from May 2000 through October 2000. Mr.
Malquist was employed by Sierra Pacific Resources from 1994 through April 2000,
initially as its Chief Financial Officer, and later as President, CEO and board
member. Mr. Malquist worked for San Diego Gas and Electric from 1978 through
1994 in a variety of financial positions, including Vice President - Finance and
Treasurer. Mr. Malquist received BA and MBA degrees from Brigham Young
University. Mr. Malquist's term as a director expires in 2004.
Class II Directors:
Name Age Position with Headwaters Director Since
---- --- ------------------------ --------------
Kirk A. Benson 52 Chairman and Chief Executive Officer 1999
Raymond J. Weller 57 Director 1991
E. J. "Jake" Garn 70 Director 2002
Kirk A. Benson has served as a Director of Headwaters since January 1999
and as Chairman and CEO since April 1999. Mr. Benson was Senior Vice President
of Foundation Health Systems, Inc., one of the nation's largest publicly traded
managed healthcare companies. Mr. Benson was with Foundation Health Systems and
its predecessors for approximately ten years, holding various positions
including president and chief operating officer for commercial operations,
general counsel, and senior vice president for development with responsibility
for merger and acquisition activity. He also holds a Master of Laws in Taxation
from the University of Denver, and a Master of Accountancy and Juris Doctorate
from Brigham Young University. Mr. Benson's term as a director expires in 2005.
Raymond J. Weller has served as a Director of Headwaters since July 1991
and served as Chairman of the Board from January 1997 through July 1998. Since
1991, Mr. Weller has been President of Healthcare Benefits of Utah, a Utah based
insurance brokerage firm. From 1985 to 1991, Mr. Weller was an agent with the
insurance brokerage of Galbraith, Benson, and McKay. Mr. Weller's term as a
director expires in 2005.
E. J. "Jake" Garn has served as a Director of Headwaters since January
2002. Mr. Garn is a former United States Senator from the state of Utah. Mr.
Garn currently serves as Managing Director of Summit Ventures, a lobbying and
consulting firm, a position he has held since 2000. From 1993 to 1999, Mr. Garn
served as Vice Chairman of Huntsman Corporation, a large Utah-based
privately-held chemical company. From 1993 until the present, Mr. Garn has
served as a director of Morgan Stanley Funds and at the present time serves as a
director of the following entities: United Space Alliance, Franklin Covey,
NuSkin Asia Pacific, BMW Bank of NA, and Escrow Bank, USA. Mr. Garn had a long
and distinguished career in national politics. Mr. Garn entered politics in 1967
when he was elected to the Salt Lake City (Utah) Commission. He was elected
mayor of Salt Lake City in 1971 and to the U.S. Senate in 1974. He served as
chairman of the Senate Banking, Housing and Urban Affairs Committee and as a
member of the Senate Appropriations Committee. Senator Garn was re-elected to
the Senate in 1980 and again in 1986, retiring in 1992. Mr. Garn's term as a
director expires in 2005.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THE ELECTION OF MESSRS. HERICKHOFF AND CREAMER
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PROPOSAL NO. 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee and the Board have appointed Ernst & Young LLP ("E&Y"),
certified public accountants, as auditors to examine the financial statements of
Headwaters for Fiscal 2003 and to perform other appropriate accounting services
and are requesting ratification of such appointment by the stockholders.
As described in the following paragraphs, Headwaters dismissed Arthur
Andersen LLP ("AA") as its independent accountants on May 10, 2002 and appointed
PricewaterhouseCoopers LLP ("PwC"). On October 14, 2002, Headwaters dismissed
PwC and appointed E&Y.
In September 2002, Headwaters acquired ISG. E&Y has audited ISG since its
inception. 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, prior to E&Y's appointment
as Headwaters' independent auditors. The reports of PwC on the reaudited
financial statements for fiscal 2000 and 2001 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 fiscal
2000 and 2001 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.
Due to events involving Headwaters' former auditors, AA, on May 10, 2002,
Headwaters dismissed AA as its independent accountants. Headwaters' Audit
Committee participated in and approved the decision to change independent
accountants. The reports of AA on the financial statements for the two fiscal
years audited by them (fiscal 2000 and fiscal 2001) 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 those two fiscal years and through May
10, 2002, there were no disagreements with AA 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 AA would
have caused them to make reference thereto in their reports on the financial
statements for such years.
On May 10, 2002, the Audit Committee appointed PwC as Headwaters'
independent accountants. Headwaters did not consult with PwC on any application
of accounting principles or any other matter during the two fiscal years ended
September 30, 2001 or subsequent thereto, except for consultations in the
capacity as Headwaters' independent accountants up to July 19, 2000. There were
no disagreements with accountants on accounting or financial statement
disclosure subsequent to the appointment of AA on July 19, 2000.
Audit and Non-Audit Fees
The following table summarizes the fees paid or payable to Ernst & Young
LLP for services rendered for the fiscal year ended September 30, 2002. Audit
fees include the costs of the audits of Headwaters' subsidiaries, ISG and HTI,
including audit procedures related to the ISG acquisition date balance sheet.
Normally this category would also include the costs of quarterly reviews;
however, Ernst & Young was appointed as Headwaters' independent accountants in
October 2002 and all of the fiscal 2002 quarterly reviews were performed by the
predecessor independent accountants. Audit-related fees consisted primarily of
acquisition due diligence and SEC filings requiring the consents of Headwaters'
independent accountants. Other fees consisted primarily of tax services.
17
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The Audit Committee considered whether the provision of the services other
than the audit services is compatible with maintaining E&Y's independence.
Audit fees $228,788
Financial systems design and implementation fees 0
All other fees:
Audit-related 39,328
Other 6,570
-----------
Total all other fees 45,898
-----------
Total $274,686
===========
In the event that the stockholders do not ratify the appointment of E&Y,
the adverse vote will be considered a directive to the Audit Committee and the
Board to select other auditors for the next fiscal year. A representative of E&Y
is expected to attend the Meeting and will have an opportunity to make a
statement if he or she desires to do so and to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE "FOR" RATIFICATION OF ERNST & YOUNG LLP
AS HEADWATERS' INDEPENDENT AUDITORS
PROPOSAL NO. 3 - APPROVAL OF 2003 STOCK INCENTIVE PLAN
Headwaters' Board of Directors determined that it is in the best interest
of Headwaters' stockholders to adopt the 2003 Stock Incentive Plan (described
below). In January 2003, the Board adopted the 2003 Plan, subject to stockholder
approval. As of the date of this proxy, no awards have been granted under the
2003 Plan.
The following description of the 2003 Plan is a summary only. A copy of the
2003 Plan is attached to this Proxy Statement.
Description of the Headwaters Incorporated 2003 Stock Incentive Plan
General. The 2003 Plan is a critical tool for Headwaters to be able to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentives to employees, directors and
consultants and to promote the success of Headwaters' business. Stock options
(including incentive stock options (ISOs) and non-statutory stock options
(NSOs)), restricted stock and stock appreciation rights (SARs) (collectively
referred to below as "awards") may be granted under the 2003 Plan.
Amount of Shares Available under 2003 Plan. The maximum number of shares
that are available for awards under the 2003 Plan is 1,000,000. The closing
price of a share of Headwaters' Common Stock on Nasdaq on January 17, 2003 was
$15.05.
Administration. The 2003 Plan will be administered by the Compensation
Committee. The Compensation Committee is responsible for making determinations
deemed necessary or advisable to administer the 2003 Plan.
Allocation of Plan Benefits. Headwaters cannot now determine the exact
number of awards to be granted in the future to the Named Executives, all
current executive officers as a group or all other employees (including current
officers who are not executive officers) as a group. See "EXECUTIVE COMPENSATION
AND RELATED INFORMATION -- Option Grants in Fiscal 2002" for the number of stock
options granted to each of the Named Executives during the year. In fiscal 2002,
options to purchase a total of 141,000 shares of Common Stock of Headwaters were
granted to the Named Executives and options to purchase 469,500 shares of Common
Stock of Headwaters were granted to all other employees (including current
officers who are not executive officers) as a group.
Eligibility. Employees, directors and consultants of Headwaters are
eligible for awards under the 2003 Plan. Only employees are eligible for ISOs.
The Compensation Committee selects the individuals who will be granted awards,
the time when awards are granted, the number of shares covered by each award
and, in the case of options and SARs, the exercise price. As of January 2003,
there are six non-employee directors, approximately 840 employees and no
consultants who are eligible for awards under the 2003 Plan.
18
<page>
Stock Options. Each option is evidenced by a stock option agreement between
Headwaters and the grantee, and is subject to the following terms and
conditions:
(a) Exercise Price. The minimum exercise price of an option under the 2003
Plan is 100% of the fair market value of a share of Headwaters Common Stock. The
fair market value is generally determined with reference to the closing sale
price on Nasdaq on the date immediately proceeding the date the option is
granted. Subject to that minimum, the Compensation Committee determines the
exercise price.
(b) Exercise of Option. The Compensation Committee determines when options
become exercisable, and may, in its discretion, accelerate the vesting of any
outstanding option. There are limits on how quickly options granted under the
2003 Plan may vest. Such options may not vest earlier than one year from the
date of grant as to 50% of the shares subject to the option, and as to the
remaining unvested shares subject to the option, not earlier than two years
after the date of grant.
(c) Form of Payment. The permissible forms of payment are specified in each
option agreement. Payment of the exercise price may be made by cash, check,
promissory note, other shares of Headwaters Common Stock (with some
restrictions), cashless exercises (with some restrictions), any other form of
consideration permitted by applicable law, or any combination of these.
Executive officers are prohibited from paying the exercise price with promissory
notes or other payment forms prohibited by the Sarbanes-Oxley Act of 2002.
(d) Term of Option. The Compensation Committee determines the terms of
options subject to certain limits. The term of an ISO cannot be no more than 10
years from the date of grant. In the case of an ISO granted to a 10%
shareholder, the term cannot exceed five years from the date of grant. If a
grantee ceases to provide services to Headwaters for any reason, then the
grantee has a limited period of time to exercise the option (to the extent
vested). In the case of an ISO, the grantee has no more than three months from
the date of termination to exercise the ISO (one year if the grantee terminates
because of death or disability). No option may be exercised after the expiration
of its term.
(e) Annual Limit on Options. The Internal Revenue Code limits Headwaters'
ability to deduct compensation paid to certain executive officers. In order to
preserve the ability to deduct the compensation income associated with awards
granted to such persons, the 2003 Plan provides that no person may be granted
options covering more than 305,000 shares of Common Stock in any fiscal year.
(f) No Repricing of Stock Options. Options cannot be repriced (e.g., by
reducing the exercise price) without first obtaining stockholder approval.
Restricted Stock. Restricted stock is evidenced by a restricted stock
agreement between Headwaters and the grantee, and is subject to the following
terms and conditions:
(a) Vesting of Restricted Stock. The Compensation Committee determines when
restricted stock becomes vested. There are limits on how quickly restricted
stock granted to employees may vest. Such restricted stock may not vest more
quickly than 20% per year over five years from the date of grant.
(b) Form of Payment. The permissible forms of payment are specified in each
restricted stock agreement. Payment of the purchase price may be made by cash,
check, full-recourse promissory note, past services and future services; for
newly issued shares the grantee must pay at least par value of the shares in the
form of cash, cash equivalents or past services. Executive officers are
prohibited from paying the exercise price with promissory notes or other payment
forms prohibited by the Sarbanes-Oxley Act of 2002.
(c) Aggregate Limit on Restricted Stock. The maximum number of shares of
restricted stock that may be granted under the 2003 Plan is 20% of the total
shares available for grant under the 2003 Plan.
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Stock Appreciation Rights (SARs). Each SAR is evidenced by a SAR agreement
between Headwaters and the grantee. The Compensation Committee will specify in
each SAR agreement the number of covered shares (up to a maximum of 200,000 in
one year), the exercise price and the vesting schedule. Upon exercise of a
vested SAR, the grantee may receive shares, cash or a combination of the two.
Both NSOs and ISOs may be granted in combination with SARs, or SARs may be added
to outstanding NSOs at any time after the grant. SARs may also be granted
independently of options. A SAR permits the grantee to elect to receive any
appreciation in the value of the optioned stock directly from Headwaters, in
shares of Common Stock, or cash or a combination of the two, in lieu of
exercising the option. The amount payable upon exercise of a SAR is measured by
the difference between the fair market value of the Common Stock at exercise and
the exercise price under the SAR. Generally, SARs coupled with options may be
exercised at any time after the underlying NSO or ISO vests. Upon exercise of a
SAR coupled with an option, the corresponding portion of the related option must
be surrendered and cannot thereafter be exercised. Conversely, upon exercise of
an option to which a SAR is attached, the SAR may no longer be exercised to the
extent that the corresponding option has been exercised.
Capital Changes. In the event that Headwaters Common Stock changes by
reason of any stock split, reverse stock split, stock dividend, combination,
reclassification or other similar change in capital structure, appropriate
adjustments will be made in the number of shares remaining available for future
grant under the 2003 Plan, the maximum number of options and SARs that may be
granted to an individual in a fiscal year, the number of shares covered by each
option and SAR and the exercise price under each option and SAR.
Liquidation or Dissolution. In the event of a liquidation or dissolution,
any options and SARs that have not been exercised will terminate.
Reorganizations. In the event that Headwaters is party to a merger or other
reorganization, awards under the 2003 Plan will be subject to the agreement of
merger or reorganization. The agreement may provide for continuation of the
awards by the surviving company, the assumption or substitution of the
outstanding awards by the surviving company, full exercisability or vesting and
accelerated expiration of the outstanding awards, or settlement of the full
value of awards in cash or cash equivalents followed by cancellation.
Amendment and Termination of the Plan. The Board of Directors may amend,
alter, suspend or terminate the 2003 Plan. However, Headwaters will obtain
stockholder approval for any amendment to the 2003 Stock Plan to the extent
necessary and desirable to comply with any applicable law. No action by the
Board or stockholders may alter or impair any award previously granted under the
2003 Plan without the written consent of the grantee. Unless terminated earlier,
the 2003 Plan automatically terminates ten years from its date of adoption.
Summary of Certain Income Tax Information
The following is only a brief summary of the effect of federal income
taxation on the recipient of an award and Headwaters under the 2003 Plan. This
summary is not exhaustive and does not discuss the income tax laws of any
municipality, state or country outside of the United States in which a recipient
of an award may reside.
Incentive Stock Options. If an option granted under the 2003 Plan is an
ISO, the grantee will recognize no income upon grant of the ISO and will incur
no tax liability upon exercise unless the grantee is subject to the alternative
minimum tax. Headwaters will not be permitted a deduction for federal income tax
purposes due to an exercise of an ISO regardless of the applicability of the
alternative minimum tax, unless the exercise constitutes a disqualifying
disposition of the ISO. Upon the sale or exchange of the shares at least two
years after grant of the ISO and one year after exercise by the grantee, any
gain (or loss) will be treated as long-term capital gain (or loss). If these
holding periods are not satisfied (i.e., a disqualifying disposition occurs),
the grantee will recognize ordinary income equal to the difference between the
exercise price and the lower of the fair market value of the stock at the date
of the option exercise or the sale price of the stock. Headwaters will be
entitled to a deduction in the same amount as the ordinary income recognized by
the grantee. Any gain (or loss) recognized on a disqualifying disposition of the
shares in excess of the amount treated as ordinary income will be characterized
as capital gain (or loss).
Non-Statutory Stock Options. All options that do not qualify as ISOs are
taxed as non-statutory options (NSOs). A grantee will recognize no income upon
grant of an NSO. However, upon the exercise of an NSO, the grantee will
recognize ordinary income measured by the excess of the fair market value of the
shares over the exercise price. In certain circumstances, where the shares are
subject to a substantial risk of forfeiture when acquired, the date of taxation
may be deferred unless the grantee files an election with the Internal Revenue
Service under Section 83(b) of the Code. The income recognized by a grantee who
is also an employee of Headwaters will be subject to tax withholding by
Headwaters. Upon the sale of such shares by the grantee, any difference between
the sale price and the exercise price, to the extent not recognized as ordinary
income as provided above, will be treated as capital gain (or loss). Headwaters
will be entitled to a tax deduction in the same amount as the ordinary income
recognized by the grantee with respect to shares acquired upon exercise of an
NSO.
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Vote Required; Recommendation of Board of Directors. The approval of
the 2003 Plan requires the affirmative vote of a majority of the shares present
and entitled to vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR"
THE ADOPTION OF THE 2003 PLAN AND THE NUMBER OF SHARES
RESERVED FOR ISSUANCE THEREUNDER
STOCKHOLDER PROPOSALS
Stockholders may submit proposals on matters appropriate for stockholder
action at Headwaters' annual meeting consistent with regulations adopted by the
SEC. For such proposals to be considered for inclusion in the proxy statement
and form of proxy relating to the 2004 annual meeting, they must be received by
Headwaters not later than October 3, 2003 or such later date as Headwaters may
specify in its SEC filings. Such proposals should be addressed to Headwaters at
10653 South Riverfront Parkway, Suite 300, South Jordan, Utah 84095, Attn:
Corporate Secretary.
It is anticipated that proxies solicited in connection with Headwaters'
2004 annual meeting will confer discretionary authority to vote on matters,
among others, of which Headwaters does not receive notice prior to October 3,
2003.
OTHER MATTERS
Management does not intend to present, and has no information as of the
date of preparation of this Proxy Statement that others will present, any
business at the Meeting other than business pertaining to matters required to be
set forth in the Notice of Annual Meeting and Proxy Statement. However, if other
matters requiring the vote of the stockholders properly come before the Meeting,
it is the intention of the person named in the enclosed proxy to vote the
proxies held by him in accordance with his best judgment on such matters.
SOLICITATION OF PROXIES
The accompanying form of proxy is being solicited on behalf of the Board.
The expense of solicitation of proxies for the Meeting will be paid by
Headwaters. In addition to the mailing of the proxy material, such solicitation
may be made in person or by written communication, telephone or mail by
directors, officers, employees or agents of Headwaters or its subsidiaries. In
addition to the foregoing, Headwaters has retained Morrow & Co., a shareholder
services company, to assist in this proxy solicitation. Headwaters will pay
Morrow & Co. approximately $7,500 for its services, plus reimbursement of
out-of-pocket expenses. Also, Headwaters will reimburse banks, brokers and other
persons holding Common Stock for their expenses in forwarding proxy solicitation
materials to beneficial owners of Common Stock.
If you have any questions about giving your proxy or require any
assistance, please contact Sharon Madden, Headwaters' Director of Investor
Relations, at 1-800-316-6214.
YOUR VOTE IS IMPORTANT. YOU ARE URGED TO DATE, SIGN AND PROMPTLY RETURN
YOUR PROXY CARD SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES
AND THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. THE PROMPT RETURN OF YOUR
SIGNED PROXY CARD, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD, WILL AID
HEADWATERS IN AVOIDING THE EXPENSE OF ADDITIONAL PROXY SOLICITATIONS. GIVING
YOUR PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON AT THE MEETING OR YOUR
RIGHT TO RESUBMIT LATER DATED PROXY CARDS.
Headwaters Incorporated
By Order of the Board of Directors,
/s/ Harlan M. Hatfield
----------------------
Harlan M. Hatfield
Secretary
South Jordan, Utah
January 27, 2003
21
HEADWATERS INCORPORATED
PROXY SOLICITED BY THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS - FRIDAY, MARCH 14, 2003
The undersigned stockholder(s) of Headwaters Incorporated, a Delaware
corporation (the "Company"), revoking all previous proxies, hereby appoints
Harlan M. Hatfield as the attorney and proxy of the undersigned, with full power
of substitution, to cast all votes for all shares of Common Stock of Headwaters
which the undersigned would be entitled to cast if personally present at the
Annual Meeting of Stockholders of Headwaters to be held at the University Park
Marriott, 480 Wakara Way, Salt Lake City, Utah 84108 (801-581-1000), on Friday,
March 14, 2003, at 2:00 p.m., Mountain Standard Time, and any and all
adjournments or postponements thereof. Said proxies are authorized and directed
to vote as indicated with respect to the following matters:
(Please date and sign below)
Please mark your vote as this [X]
1. ELECTION OF DIRECTORS:
R Steve Creamer FOR [ ] WITHHOLD [ ]
(If elected, Mr. Creamer's term would expire in 2006) AUTHORITY [ ]
James A. Herickhoff FOR [ ] WITHHOLD [ ]
(If elected, Mr. Herickhoff's term would expire in 2006) AUTHORITY [ ]
2. RATIFY THE SELECTION BY THE BOARD OF FOR [ ] AGAINST [ ]
ERNST & YOUNG LLP AS INDEPENDENT AUDITORS ABSTAIN [ ]
OF HEADWATERS FOR FISCAL 2003
3. APPROVE THE 2003 STOCK INCENTIVE PLAN FOR [ ] AGAINST [ ]
ABSTAIN [ ]
This Proxy is solicited on behalf of the Board of Directors. Unless
otherwise specified, the shares will be voted "FOR" items 1, 2 and 3. This Proxy
also delegates discretionary authority to the proxy to vote with respect to any
other business which may properly come before the Annual Meeting of Stockholders
and any and all adjournments or postponements thereof to the extent allowed by
Rule 14a-4(c) as promulgated by the U.S. Securities and Exchange Commission.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL
MEETING AND PROXY STATEMENT OF HEADWATERS INCORPORATED.
Dated: ________________________________, 2003
_____________________________________________
Name(s) of Stockholder(s)
PLEASE RETURN YOUR COMPLETED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
HEADWATERS INCORPORATED
AUDIT COMMITTEE CHARTER
January 2003
Purpose and Composition
This Charter governs the operations of the Audit Committee. The Audit
Committee shall be comprised of three or more directors as determined by the
Board of Directors and shall meet the qualification requirements of the NASD
listing standards.
The members of the Audit Committee shall be elected by the Board of
Directors annually and shall serve until their successors are duly elected and
qualified. Unless a Chair is elected by the full Board of Directors, the members
of the Audit Committee may designate a Chair by majority vote of the full Audit
Committee membership.
Statement of Policy
The Audit Committee shall provide assistance to the Board of Directors in
overseeing the financial reporting process, disclosure controls and procedures,
the systems of internal accounting and financial controls, the performance and
independence of the external auditors, and the quarterly reviews and annual
independent audit of the Corporation's financial statements.
The external auditor for the Corporation is ultimately accountable to the
Audit Committee and the Board of Directors. The Audit Committee and the Board
shall have the ultimate authority and responsibility to select, evaluate and,
where appropriate, replace the external auditor.
Responsibility and Processes
The primary responsibility of the Audit Committee is to oversee the
Corporation's financial reporting process on behalf of the Board of Directors
and report the results of its activities to the Board of Directors. It is not
the duty of the Audit Committee to plan or conduct audits, to determine that the
Corporation's financial statements are complete and accurate and are in
accordance with generally accepted accounting principles or to assure compliance
with laws. These are the responsibilities of management and the external
auditor.
The following shall be the principal recurring processes of the Audit
Committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the Audit Committee may alter or
supplement them as appropriate.
1. Annually, the Audit Committee shall recommend to the Board of Directors
the selection of the Corporation's external auditor, subject to stockholder
ratification of the selection, if such ratification is required or sought.
2. The Audit Committee shall discuss with the external auditor the overall
scope and plans for their respective audit examinations.
3. The Audit Committee shall ensure that the external auditor submits
annually a formal written statement delineating all relationships between the
external auditor and the Corporation. The Audit Committee is responsible for
engaging in a dialogue with the external auditor with respect to such disclosed
relationships that may impact the objectivity and independence of the external
auditor and recommending that the Board of Directors take appropriate action to
satisfy itself of the external auditor's independence.
4. The Audit Committee shall be notified concerning the engagement of the
external auditor to provide non-audit services, and shall consider whether the
external auditor's performance of any non-audit services is compatible with the
external auditor's independence.
<page>
5. The Audit Committee shall discuss with management and the external
auditor the adequacy and effectiveness of the Corporation's internal controls,
accounting and financial records, and the system for monitoring and managing
business risk and legal compliance. Further, the Audit Committee shall meet
separately with the external auditor, with and without management present, to
discuss the results of their examinations.
6. The Audit Committee shall review and discuss with management and the
external auditor the Corporation's interim financial results to be included in
the Corporation's quarterly reports filed with the Securities and Exchange
Commission, and the matters required to be discussed by Statement on Auditing
Standards No. 61 (Communications with Audit Committees), as it may be modified
or supplemented.
7. The Audit Committee shall review with management and the external
auditor the financial statements to be included in the Corporation's Annual
Report on Form 10-K (or the annual report to shareholders if distributed prior
to the filing of Form 10-K), as well as the auditor's judgment about the
quality, not just acceptability, of the Corporation's accounting principles as
applied in its financial reporting. The review shall also include a discussion
of the reasonableness of judgments and estimates made in the preparation of the
financial statements that may be viewed as critical, as well as the clarity of
financial statement disclosures. In addition, the Audit Committee shall discuss
the results of the annual audit and any other matters required to be
communicated to the Audit Committee by the external auditor under generally
accepted auditing standards, including the matters required to be discussed by
Statement on Auditing Standards No. 61 (Communications with Audit Committees),
as it may be modified or supplemented.
8. Based on its review and discussions of items 3 and 7, the Audit
Committee shall recommend to the Board of Directors whether the financial
statements should be included in the Annual Report on Form 10-K (or the annual
report to shareholders if distributed prior to the filing of Form 10-K).
9. As a whole, or through the Chair, the Audit Committee shall review the
impact on the financial statements of significant events, transactions, or
changes in accounting principles or estimates which potentially affect the
quality of the financial reporting with management and the external auditor
prior to the filing of the Corporation's Reports on Form 10-Q or 10-K, or as
soon as practicable if the communications cannot be made prior to its filing.
10. Management and the external auditor shall discuss with the Audit
Committee significant changes to the Corporation's auditing and accounting
principles, policies, controls, procedures and practices proposed or
contemplated by the external auditor or management.
11. The Audit Committee shall review and reassess this Charter annually and
recommend any appropriate changes to the Board of Directors.
12. The Audit Committee shall review any significant disagreement that is
brought to its attention, after inquiry, among management and the external
auditor in connection with the preparation of the Corporation's financial
statements. The Audit Committee should encourage both management and the
external auditor to communicate openly with the Audit Committee regarding such
disagreements. In addition, the Audit Committee shall review with management and
the external auditor any pending or threatened action by regulators or
government agencies and any employee complaints or published reports that raise
material issues regarding the Corporation's financial statements or accounting
policies. The Audit Committee may request any officer or employee of the
Corporation or the Corporation's outside counsel or external auditor to attend a
meeting of the Audit Committee or to meet with any members of, or consultants
to, the Audit Committee. The Audit Committee shall also have the resources and
authority appropriate to discharge its responsibilities, including the authority
to engage outside auditors for special audits, reviews and other procedures and
to retain special counsel and other experts or consultants.
<page>
Reports
1. The Audit Committee shall prepare or cause the preparation of the report
required by the rules of the Securities and Exchange Commission for inclusion in
the Corporation's annual proxy statement.
2. The Committee shall submit any recommendations for changes to the Audit
Committee Charter to the full Board of Directors for approval.
3. The Audit Committee shall maintain minutes of its meetings and regularly
report its activities to the Board of Directors.
Reliance on Information Provided
In adopting this Audit Committee Charter, the Board of Directors
acknowledges that the Audit Committee members are not employees of the
Corporation and are not providing any expert or special assurance as to the
Corporation's financial statements or any professional certification as to the
external auditor's work or auditing standards. Each member of the Audit
Committee shall be entitled to rely on the integrity of those persons and
organizations within and outside the Corporation that provide information to the
Audit Committee and the accuracy and completeness of the financial and other
information provided to the Audit Committee by such persons or organizations
absent actual knowledge to the contrary.
<page>
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HEADWATERS INCORPORATED
2003 STOCK INCENTIVE PLAN
(Adopted by the Board on January 16, 2003)
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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"..........................................3
(k) "Exercise Price"........................................3
(l) "Fair Market Value".....................................3
(m) "Independent Director"..................................3
(n) "ISO"...................................................3
(o) "Nonstatutory Option" or "NSO"..........................3
(p) "Offeree"...............................................3
(q) "Option"................................................3
(r) "Optionee"..............................................4
(s) "Outside Director"......................................4
(t) "Parent"................................................4
(u) "Participant"...........................................4
(v) "Plan"..................................................4
(w) "Purchase Price"........................................4
(x) "Restricted Share"......................................4
(y) "Restricted Share Agreement"............................4
(z) "SAR"...................................................4
(aa) "SAR Agreement".........................................4
(bb) "Service"...............................................4
(cc) "Share".................................................4
(dd) "Stock".................................................4
(ee) "Stock Option Agreement"................................4
(ff) "Stock Purchase Agreement"..............................4
(gg) "Subsidiary"............................................4
Section 3. ADMINISTRATION...................................................5
(a) Committee Composition...................................5
(b) Committee Procedures....................................5
(c) Committee Responsibilities..............................5
Section 4. ELIGIBILITY......................................................6
(a) General Rule............................................6
(b) Ten-Percent Stockholders................................6
(c) Attribution Rules.......................................6
(d) Outstanding Stock.......................................7
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Section 5. STOCK SUBJECT TO PLAN............................................7
(a) Basic Limitation........................................7
(b) Additional Shares under Plan............................7
(c) Dividend Equivalents....................................7
Section 6. RESTRICTED SHARES................................................7
(a) Restricted Share Agreement..............................7
(b) Limitation on Awards of Restricted Shares...............7
(c) Payment for Awards......................................7
(d) Vesting.................................................8
(e) Voting and Dividend Rights..............................8
Section 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES....................8
(a) Duration of Offers and Nontransferability of Rights.....8
(b) Purchase Price..........................................8
(c) Withholding Taxes.......................................8
(d) Restrictions on Transfer of Shares......................8
Section 8. TERMS AND CONDITIONS OF OPTIONS..................................8
(a) Stock Option Agreement..................................8
(b) No Repricing............................................8
(c) Number of Shares........................................9
(d) Exercise Price..........................................9
(e) Withholding Taxes.......................................9
(f) Exercisability and Term.................................9
(g) Nontransferability......................................9
(h) Exercise of Options Upon Termination of Service.........9
(i) Leaves of Absence......................................10
(j) No Rights as a Stockholder.............................10
(k) Modification, Extension and Renewal of Options.........10
(l) Restrictions on Transfer of Shares.....................10
(m) Buyout Provisions......................................10
Section 9. PAYMENT FOR SHARES..............................................10
(a) General Rule...........................................10
(b) Surrender of Stock.....................................10
(c) Services Rendered......................................11
(d) Cashless Exercise......................................11
(e) Exercise/Pledge........................................11
(f) Promissory Note........................................11
(g) Other Forms of Payment.................................11
(h) Restrictions on Forms of Payment.......................11
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Section 10. STOCK APPRECIATION RIGHTS.......................................11
(a) SAR Agreement..........................................11
(b) Number of Shares.......................................11
(c) Exercise Price.........................................12
(d) Exercisability and Term................................12
(e) Exercise of SARs.......................................12
(f) Special Holding Period.................................12
(g) Special Exercise Window................................12
(h) Modification or Assumption of SARs.....................12
Section 11. ADJUSTMENT OF SHARES............................................12
(a) Adjustments............................................12
(b) Dissolution or Liquidation.............................13
(c) Reorganizations........................................13
(d) Reservation of Rights..................................13
Section 12. DEFERRAL OF AWARDS..............................................14
Section 13. PAYMENT OF DIRECTOR'S FEES IN SECURITIES........................14
(a) Effective Date.........................................14
(b) Elections to Receive NSOs or Restricted Shares.........14
(c) Number and Terms of NSO or, Restricted Shares..........14
Section 14. LEGAL AND REGULATORY REQUIREMENTS...............................14
Section 15. WITHHOLDING TAXES...............................................15
(a) General................................................15
(b) Share Withholding......................................15
Section 16. LIMITATION ON PARACHUTE PAYMENTS................................15
(a) Scope of Limitation....................................15
(b) Basic Rule.............................................15
(c) Reduction of Payments..................................15
(d) Overpayments and Underpayments.........................16
(e) Related Corporations...................................16
Section 17. NO EMPLOYMENT RIGHTS............................................16
Section 18. DURATION AND AMENDMENTS.........................................16
(a) Term of the Plan.......................................16
(b) Right to Amend or Terminate the Plan...................16
(c) Effect of Amendment or Termination.....................17
Section 19. EXECUTION.......................................................17
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HEADWATERS INCORPORATED
2003 STOCK INCENTIVE PLAN
Section 1. ESTABLISHMENT AND PURPOSE.
The Plan was adopted by the Board of Directors effective January 16, 2003,
subject to stockholder approval. 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,
Options and stock appreciation rights.
The Plan shall be governed by, and construed in accordance with, the laws
of the State of Delaware (except their choice-of-law provisions).
Section 2. DEFINITIONS.
(a) "Affiliate" shall mean any entity other than a Subsidiary, if the
Company and/or one of more Subsidiaries own not less than 50% of such entity.
(b) "Award" shall mean any award of an Option, a SAR or a Restricted Share
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 any 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 such election
or nomination; or
(C) Were elected, or nominated for election, to the Board of
Directors with the affirmative votes of at least a majority of the
directors who come within either clause (A) or (B) above; or
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(ii) Any "person" (as defined below) 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 percent (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 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; or
(iii) 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 the ultimate direct or indirect
parent corporation of the continuing or surviving entity or, if there shall
be no such ultimate direct or indirect parent corporation, such continuing
or surviving entity; or
(iv) The sale, transfer or other disposition of all or substantially
all of the Company's assets.
For purposes of Section 2(d)(ii), the term "person" shall have the
same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act
but shall exclude (1) a trustee or other fiduciary holding securities under
an employee benefit plan maintained by the Company or a Parent or
Subsidiary and (2) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of the Stock. Any other provision of this Section 2(d)
notwithstanding, 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, as described in Section 3(a), a committee
designated by the Board of Directors that consists exclusively of two or more
Independent Directors.
(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.
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(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.;
(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) "Independent Director" shall mean an Outside Director who qualifies as
(i) an "outside director" under Treas. Regs. section 1.162-27(e)(3) (or its
successor); and (ii) a "non-employee director" under Rule 16b-3(b)(3) (or its
successor) under the Exchange Act.
(n) "ISO" shall mean an employee incentive stock option described in
Section 422 of the Code.
(o) "Nonstatutory Option" or "NSO" shall mean an employee stock option that
is not an ISO.
(p) "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).
(q) "Option" shall mean an ISO or NSO granted under the Plan and entitling
the holder to purchase Shares.
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(r) "Optionee" shall mean an individual or estate who holds an Option or
SAR.
(s) "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.
(t) "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.
(u) "Participant" shall mean an individual or estate who holds an Award.
(v) "Plan" shall mean this Headwaters Incorporated 2003 Stock Incentive
Plan, as amended from time to time.
(w) "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.
(x) "Restricted Share" shall mean a Share awarded under the Plan.
(y) "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.
(z) "SAR" shall mean a stock appreciation right granted under the Plan.
(aa) "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.
(bb) "Service" shall mean service as an Employee, Consultant or Outside
Director.
(cc) "Share" shall mean one share of Stock, as adjusted in accordance with
Section 11 (if applicable).
(dd) "Stock" shall mean the Common Stock of the Company.
(ee) "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.
(ff) "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.
(gg) "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.
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Section 3. ADMINISTRATION.
(a) Committee Composition. The Plan shall be administered by the Committee.
The Committee shall consist exclusively of two or more Independent Directors of
the Company who shall satisfy:
(i) 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;
(ii) such requirements as the Internal Revenue Service may establish
for outside directors acting under plans intended to qualify for exemption
under section 162(m)(4)(C) of the Code; and
(iii) such independence requirements imposed on members of the
Committee under the rules of the national securities exchange on which the
Stock is listed.
(b) Committee Procedures. The Board of Directors shall designate one of the
members of the Committee as chairperson. 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.
(c) Committee Responsibilities. Subject to the provisions of the Plan, the
Committee shall have full discretionary authority 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 which are not inconsistent with the Plan, 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 which are
not inconsistent with the Plan, including (without limitation) the Exercise
Price, the vesting or duration of the Option (including accelerating the
vesting of the Option), and to specify the provisions of the Stock Option
Agreement relating to such Option;
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(ix) Subject to the limitations under Section 8(b), 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;
(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 shall be eligible for the grant of ISOs.
Only Employees, Consultants and Outside Directors shall be eligible for the
grant of Restricted Shares, NSOs or SARs.
(b) 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 or the grant of an ISO unless such
grant satisfies the requirements of Section 422(c)(6) of the Code.
(c) Attribution Rules. For purposes of Section 4(b) 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 stockholders, partners or beneficiaries.
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(d) Outstanding Stock. For purposes of Section 4(b), "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 and Restricted Shares awarded under the Plan shall not exceed 1,000,000
Shares, plus any additional Shares described in Section 5(b). The limitations of
this Section 5(a) shall be subject to adjustment pursuant to Section 11.
(b) Additional Shares under Plan. If Restricted Shares or Shares issued
upon the exercise of Options are forfeited, then such Shares shall again become
available for Awards under the Plan. If 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 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.
(c) Dividend Equivalents. Any dividend equivalents paid or credited under
the Plan shall not be applied against the number of Restricted Shares, Options
or SARs available for Awards.
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) Limitation on Awards of Restricted Shares. In no event shall the number
of Restricted Shares awarded under the Plan exceed twenty percent (20%) of the
aggregate number of shares available under Section 5(a) (subject to adjustment
in accordance with Section 11).
(c) 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.
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(d) Vesting. Restricted Shares shall vest at a rate that is not faster than
twenty percent (20%) per year (or, in the case of monthly vesting, 1/60th per
month) over five years from the date of grant. A Restricted Share Agreement may
provide for accelerated vesting in the event of a Change in Control or the
Participant's death, disability or retirement, as the Committee may determine.
(e) 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 Section 9(a), Section 9(b) and Section 9(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).
(b) No Repricing. Except as otherwise provided in Section 11, in no event
shall the Committee decrease the Exercise Price of an Option after the date of
grant or cancel outstanding Options and grant replacement Options with a lower
exercise price without first obtaining stockholder approval.
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(c) 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 11. Options granted to an Optionee in a
single fiscal year of the Company shall not cover more than 305,000 Shares
(subject to adjustment in accordance with Section 11).
(d) Exercise Price. Each Stock Option Agreement shall specify the Exercise
Price. The Exercise Price of an Option shall not be less than 100% (110% in the
case of an ISO granted to a 10% stockholder described in Section 4(b)) of the
Fair Market Value of a Share on the date of grant. Subject to the preceding
sentence, 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.
(e) 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.
(f) Exercisability and Term. Each Stock Option Agreement shall specify the
date when all or any installment of the Option is to become exercisable. No
Option shall provide for a right to exercise at rate that is faster than fifty
percent (50%) per year (or, in the case of monthly vesting, 1/24th per month)
over two years from the date of grant. 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(b)). A Stock Option Agreement may provide for accelerated
exercisability in the event of a Change in Control or the Optionee's death,
disability or retirement. 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(f), 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.
(g) Nontransferability. Unless otherwise provided by the Stock Option
Agreement, during an Optionee's lifetime, his or her 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.
(h) 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.
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(i) Leaves of Absence. An Employee's Service shall cease when such Employee
ceases to be actively employed by, or a consultant, director or adviser to, the
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 or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustments shall be made, except as provided in
Section 11.
(k) Modification, Extension and Renewal of Options. Subject to Section 8(b)
and other 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
or her rights or increase his or her 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 Section 9(b) through
Section 9(g) below.
(b) Surrender of Stock. 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
surrendering, or attesting to the ownership of, Shares which have already been
owned by the Optionee or his or her representative. 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 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.
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(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. 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. In no event will payment by promissory note be
available to persons who are considered officers or directors of the Company
under Section 16 of the Exchange Act.
(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.
(h) Restrictions on Forms of Payment. Notwithstanding anything to the
contrary in the Plan or the terms of any Award, a form of payment will not be
available if the Committee determines, in its sole discretion, that such form of
payment could violate any law or regulation.
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 11. SARs granted to any Optionee in a single calendar
year shall in no event pertain to more than 305,000 Shares (subject to
adjustment in accordance with Section 11).
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(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 a Change in Control or the Optionee's
death, disability or retirement 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 Option 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) 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.
(f) 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.
(g) 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(g) 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.
(h) 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 may, without the consent of the
Optionee, alter or impair his or her rights or obligations under such SAR.
Section 11. 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 and Restricted Shares available for
future Awards under Section 5;
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(ii) The limitations set forth in Section 8(c) and Section 10(b);
(iii) The number of Shares covered by each outstanding Option and SAR;
or
(iv) The Exercise Price under each outstanding Option and SAR.
Except as provided in this Section 11, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
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 and SARs 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 11, 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.
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Section 12. 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 credited to a deferred compensation account established
for such Participant by the Committee as an entry on the Company's books; or (b)
have Shares that otherwise would be delivered to such Participant as a result of
the exercise of an Option or SAR 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 12 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 12.
Section 13. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
(a) Effective Date. No provision of this Section 13 shall be effective
unless and until the Board has determined to implement such provision.
(b) Elections to Receive NSOs or Restricted Shares. 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 or Restricted Shares, or a combination
thereof, as determined by the Board. Such NSOs and Restricted Shares shall be
issued under the Plan. An election under this Section 13 shall be filed with the
Company on the prescribed form.
(c) Number and Terms of NSO or, Restricted Shares. The number of NSOs or
Restricted Shares 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 or Restricted Shares
shall also be determined by the Board.
Section 14. 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.
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Section 15. 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; provided, however, the Participant may not surrender Shares
to satisfy withholding or income tax obligations in excess of the minimum
legally required obligations. Such Shares shall be valued at their Fair Market
Value on the date when taxes otherwise would be withheld in cash.
Section 16. LIMITATION ON PARACHUTE PAYMENTS.
(a) Scope of Limitation. This Section 16 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 16. If this Section 16 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 16, 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
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 16, present
value shall be determined in accordance with Section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Section 16 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.
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(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 16, 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 17. 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 18. DURATION AND AMENDMENTS.
(a) Term of the Plan. This Plan, as set forth herein, shall terminate
automatically on the 10th anniversary of date of Plan and may be terminated on
any earlier date pursuant to Section 18(b).
(b) Right to Amend or Terminate the Plan. The Board of Directors may, at
any time and for any reason, amend or terminate the Plan. Rights and obligations
under any Award granted before amendment or termination of the Plan shall not be
materially impaired by such amendment or termination, except with consent of the
person to whom the Award 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.
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(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 19. EXECUTION.
To record the adoption of the Plan by the Board of Directors effective as
of January 16, 2003, the Company has caused its authorized officer to execute
the same.
Headwaters Incorporated
By /s/ Kirk A. Benson
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Kirk A. Benson
Chief Executive Officer