UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27808
HEADWATERS INCORPORATED
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 87-0547337
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11778 South Election Road, Suite 210
Draper, Utah 84020
------------ -----
(Address of principal executive offices) (Zip Code)
(801) 984-9400
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock as of April
20, 2001 was 22,934,073.
HEADWATERS INCORPORATED
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Condensed Consolidated Balance Sheets - As of
September 30, 2000 and March 31, 2001.............. 3
Condensed Consolidated Statements of Operations
- For the three and six months ended March
31, 2000 and 2001.................................. 5
Condensed Consolidated Statement of Changes in
Stockholders' Equity - For the six months
ended March 31, 2001............................... 6
Condensed Consolidated Statements of Cash Flows
- For the six months ended March 31, 2000 and
2001............................................... 7
Notes to Condensed Consolidated Financial Statements. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................. 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................... 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............ 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 18
ITEM 5. OTHER INFORMATION.................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................... 19
SIGNATURES............................................................. 19
Forward Looking Statements
Statements in this Form 10-Q, including those concerning the Registrant's
expectations regarding its business, and certain of the information presented in
this report, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. As such, actual results may
vary materially from such expectations. For a discussion of the factors that
could cause actual results to differ from expectations, please see the caption
entitled "Forward Looking Statements" in Part I, Item 2 hereof. There can be no
assurance that the Registrant's results of operations will not be adversely
affected by such factors. Registrant undertakes no obligation to revise or
publicly release the results of any revision to these forward looking
statements. Readers are cautioned not to place undue reliance on these forward
looking statements, which reflect management's opinion only as of the date
hereof.
2
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
HEADWATERS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
(thousands of dollars) 2000 2001
- ------------------------------------------------------------------------------------------- ---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 983 $ 293
Short-term investments 6,973 5,782
Trade receivables, net 7,298 5,603
Notes receivable 2,530 1,811
Other current assets 387 108
---------------- -----------------
Total current assets 18,171 13,597
---------------- -----------------
Property, plant and equipment, net of accumulated depreciation 552 658
---------------- -----------------
Other assets:
Notes and accrued interest receivable 6,598 8,621
Equity investments, net 3,259 4,388
Deferred income taxes 3,000 3,000
Intangible assets, net of accumulated amortization 1,221 1,136
Other assets 640 721
---------------- -----------------
Total other assets 14,718 17,866
---------------- -----------------
Total assets $33,441 $32,121
================ =================
(continued)
The accompanying notes are an integral part of the
consolidated financial statements.
3
HEADWATERS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
September 30, March 31,
(thousands of dollars and shares) 2000 2001
- -------------------------------------------------------------------------------------------- --------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 698 $ 785
Accrued personnel costs 2,254 1,397
Other accrued liabilities 3,786 3,383
Short-term borrowings 208 1,065
--------------- ----------------
Total current liabilities 6,946 6,630
--------------- ----------------
Long-term liabilities:
Notes payable, non-current 5,055 162
Other long-term liabilities 180 146
Deferred revenue 10,513 7,464
--------------- ----------------
Total long-term liabilities 15,748 7,772
--------------- ----------------
Total liabilities 22,694 14,402
--------------- ----------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.001 par value; authorized 10,000 shares,
issued and outstanding 17 shares at September 30, 2000 and March 31, 2001
(aggregate liquidation preference of $3,776 at March 31, 2001) 1 1
Common stock, $0.001 par value; authorized 50,000 shares, issued and
outstanding 23,341 shares at September 30, 2000 (including 214 shares
held in treasury) and 22,834 shares at March 31, 2001 (including 470
shares held in treasury) 23 23
Capital in excess of par value 82,659 80,289
Accumulated deficit (70,221) (60,239)
Other, primarily treasury stock (1,715) (2,355)
--------------- ----------------
Total stockholders' equity 10,747 17,719
--------------- ----------------
Total liabilities and stockholders' equity $33,441 $32,121
=============== ================
The accompanying notes are an integral part of the
consolidated financial statements.
4
HEADWATERS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, Six Months Ended March 31,
(thousands of dollars, except per-share data) 2000 2001 2000 2001
- -------------------------------------------------------------- ---------------- ---------------- -------------- ------------------
Revenue:
License fees $ 4,798 $5,168 $ 8,833 $11,434
Chemical sales 1,883 4,134 3,236 9,656
Gain on sale of facility -- -- 5,341 --
Gains on non-recurring transactions 1,079 -- 1,079 --
Other 139 452 459 979
---------------- ---------------- -------------- ------------------
Total revenue 7,899 9,754 18,948 22,069
---------------- ---------------- -------------- ------------------
Operating costs and expenses:
Cost of chemical 1,367 2,652 2,228 6,278
Cost of operations 798 857 2,482 1,958
Selling, general and administrative 1,033 1,628 1,895 3,097
Asset write-offs and other non-recurring charges 841 -- 11,862 --
Loss on sale of facilities, net 598 -- 598 --
---------------- ---------------- -------------- ------------------
Total operating costs and expenses 4,637 5,137 19,065 11,333
---------------- ---------------- -------------- ------------------
Operating income (loss) 3,262 4,617 (117) 10,736
---------------- ---------------- -------------- ------------------
Other income (expense):
Interest and investment income 310 119 1,110 341
Interest expense (1,711) (61) (3,766) (146)
Other, net 276 (77) (16) (827)
---------------- ---------------- -------------- ------------------
Total other income (expense), net (1,125) (19) (2,672) (632)
---------------- ---------------- -------------- ------------------
Income (loss) before income taxes and extraordinary item 2,137 4,598 (2,789) 10,104
Income tax benefit (expense) -- (22) 3,000 (122)
---------------- ---------------- -------------- ------------------
Income before extraordinary item 2,137 4,576 211 9,982
Extraordinary loss on early extinguishment of debt (1,823) -- (1,823) --
---------------- ---------------- -------------- ------------------
Net income (loss) $ 314 $4,576 $(1,612) $ 9,982
================ ================ ============== ==================
Basic net income (loss) per common share $.01 $.20 $(.12) $.44
================ ================ ============== ==================
Diluted net income (loss) per common share $.01 $.19 $(.12) $.41
================ ================ ============== ==================
The accompanying notes are an integral part of the
consolidated financial statements.
5
HEADWATERS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended March 31, 2001
(Unaudited)
Other
------------ ------------- ------------
Related
party note
Convertible receivable Deferred
Preferred Stock Common Stock Capital in collater- compensation Common stock
(thousands of ------------------- ------------------- excess Accumulated alized by from stock held in
dollars and shares) Shares Amount Shares Amount of par value deficit common stock options treasury
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
September 30, 2000 17 $1 23,341 $23 $82,659 $(70,221) $(466) $(515) $(734)
Exercise of
stock options 50 -- 75
Write-down of
related party note
receivable to 88
collateral value
Amortization of
deferred compensation
from stock options 23
Purchase of treasury
stock, at cost (1,610)
Treasury stock
transferred to
employee stock
purchase plan 42
Cancellation of
treasury stock (497) -- (1,285) 1,285
Net income 5,406
-------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2000 17 1 22,894 23 81,449 (64,815) (378) (492) (1,017)
Exercise of
stock options 205 -- 308
Write-up of related
party note receivable
to collateral value (629)
Cancellation of related
party note receivable
and transfer of
collateral shares to
treasury stock 1,007 (1,007)
Amortization of
deferred compensation
from stock options 23
Purchase of treasury
stock, at cost (1,358)
Treasury stock
transferred to
employee stock
purchase plan 28
Cancellation of
treasury stock (265) -- (1,468) 1,468
Net income 4,576
-------------------------------------------------------------------------------------------------------------
Balances at
March 31, 2001 17 $1 22,834 $23 $80,289 $(60,239) $ -- $(469) $(1,886)
=============================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
6
HEADWATERS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31,
(thousands of dollars) 2000 2001
- ----------------------------------------------------------------------------------------------- ------------------- -------------
Cash flows from operating activities:
Net income (loss) $(1,612) $ 9,982
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Recognition of deferred revenue (461) (1,462)
Depreciation and amortization 749 129
Deferred income tax benefit (3,000) --
Net gain on sale of facilities and disposition of equipment (4,800) (42)
Equity in losses of investees, write-offs and provisions for
unrealizable investments -- 1,047
Write-down of note receivable and related accrued interest -- 365
Amortization of deferred compensation from stock options 92 46
Interest expense related to amortization of debt discount and debt
issuance costs 2,272 43
Write-down (write-up) of related party note receivable 131 (541)
Extraordinary loss on early extinguishment of debt 1,823 --
Gains on non-recurring transactions (1,079) --
Asset write-offs and other non-recurring charges 10,631 --
Other changes in operating assets and liabilities (6,860) (466)
------------------- -------------
Net cash provided by (used in) operating activities (2,114) 9,101
------------------- -------------
Cash flows from investing activities:
Proceeds from sale of facilities and equipment 18,089 42
Purchase of equipment and facilities held for sale (551) (150)
Net proceeds from sale of short-term investments -- 1,191
Investments in and loans to non-affiliated companies -- (4,201)
Increase in other assets (78) (122)
------------------- -------------
Net cash provided by (used in) investing activities 17,460 (3,240)
------------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of notes payable and warrants and other borrowings 2,980 8,148
Payments on notes payable, including redemption premiums, and other borrowings (14,279) (12,184)
Purchase of common stock for the treasury -- (2,898)
Proceeds from exercise of options and warrants 203 383
Net proceeds from issuance of common stock and warrants 4,666 --
Preferred stock dividends (205) --
------------------- -------------
Net cash used in financing activities (6,635) (6,551)
------------------- -------------
Net increase (decrease) in cash and cash equivalents 8,711 (690)
Cash and cash equivalents, beginning of period 461 983
------------------- -------------
Cash and cash equivalents, end of period $ 9,172 $ 293
=================== =============
Supplemental schedule of non-cash investing and financing activities:
Cancellation of treasury stock $ -- $(2,753)
Cancellation of related party notes receivable and the common stock
collateralizing the notes 6,164 --
Reclassification of redeemable convertible preferred stock to convertible
preferred stock 2,710 --
Common stock issued on conversion of convertible preferred stock and in
payment of dividends 1,634 --
Common stock issued on conversion of convertible debt and related accrued interest 1,116 --
The accompanying notes are an integral part of the
consolidated financial statements.
7
HEADWATERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
1. Nature of Operations and Basis of Presentation
Headwaters Incorporated and its Subsidiaries' primary business is to
commercialize its chemical technologies used to produce alternative
fuel from coal derivatives and to recycle otherwise unusable materials
from other industries into marketable resources. Currently, Headwaters
has licensed its technology to the owners of 28 alternative fuel
facilities which are operating at various levels of production in ten
states. During the fiscal year ended September 30, 2000, Headwaters
began evaluating and pursuing investment alternatives for the cash
generated from operations. Headwaters has invested some of this
available cash in high-grade government backed securities and has made
several equity investments in and loans to unrelated entities.
Headwaters does not currently intend to make any additional equity
investments or loans, but is interested in possible strategic
acquisitions of entities that would be synergistic to Headwaters'
current operations.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for quarterly reports on Form 10-Q.
In the opinion of management, all adjustments considered necessary for
a fair presentation have been included. All adjustments except the
items described in Note 5 consist of normal recurring adjustments. The
results of operations for the three- and six-month periods ended March
31, 2001 are not necessarily indicative of the results to be expected
for the full fiscal 2001 year. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these financial statements
be read in conjunction with the consolidated financial statements and
notes thereto included in Headwaters' Annual Report on Form 10-K for
the year ended September 30, 2000 and in Headwaters' Quarterly Report
on Form 10-Q for the quarter ended December 31, 2000. Certain prior
period amounts have been reclassified to conform with the current
periods' presentation. The reclassifications had no effect on net
income (loss) or total assets.
2. Financing and Equity Transactions
During and subsequent to the quarter ended March 31, 2001, Headwaters
completed several transactions, including the following.
Bank Line of Credit - In January 2001, the terms of Headwaters'
revolving line of credit with a bank were modified. Under the revised
terms, i) the line of credit expiration date was extended from January
2002 to October 2002, ii) the interest rate was reduced from prime plus
1% to prime plus .75%, iii) the maximum amount which can be borrowed,
subject to the "borrowing base," as defined, was increased from
$8,000,000 to $10,000,000, and iv) certain of the operating covenants
and restrictions were changed. Maximum borrowings under the line of
credit during the quarter ended March 31, 2001 were approximately
$446,000. The borrowing base was approximately $6,100,000 at March 31,
2001 and there were no borrowings under the line at March 31, 2001.
Short-term Borrowings with an Investment Company - Headwaters has an
arrangement with an investment company under which Headwaters can
borrow up to 90% of the value of the total portfolio of Headwaters'
short-term investments with the investment company, which investments
collateralize any outstanding borrowings. Maximum borrowings under this
arrangement during the quarter ended March 31, 2001 were approximately
$3,252,000 and approximately $944,000 was outstanding at March 31,
2001. The borrowings were used for short-term working capital needs,
primarily for stock repurchases, rather than liquidating the securities
held as collateral.
Treasury Stock - During the quarter ended March 31, 2001, Headwaters
continued acquiring shares of its common stock in connection with the
stock purchase program announced in May 2000. The program authorizes
Headwaters to purchase stock in the open market or through negotiated
block transactions. During the quarter ended March 31, 2001, Headwaters
purchased approximately 281,000 shares for approximately $1,358,000.
Also during the quarter, approximately 265,000 shares of treasury stock
were cancelled.
8
HEADWATERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
Common Stock Options - During the quarter ended March 31, 2001, options
for the purchase of 205,000 shares of common stock were exercised for
cash proceeds of approximately $308,000. From April 1 through April 20,
2001, options for the purchase of approximately 134,000 shares of
common stock were exercised for cash proceeds of approximately
$244,000. In April 2001, options for the purchase of approximately
244,000 shares were granted to officers and employees.
Related Party Note Receivable Collateralized by Common Stock - In
January 2001, Headwaters accepted from a stockholder as full
satisfaction of a collateral-based note receivable, i) the 150,000
shares of Headwaters stock and options to acquire 25,000 shares of
Headwaters common stock that collateralized the note, both of which
were cancelled, and ii) a new promissory note receivable in the
principal amount of $1,750,000. Prior to this transaction, the original
note receivable was being carried at the value of the underlying
collateral. Headwaters recognized a gain in the March 31, 2001 quarter
of approximately $629,000 representing the increase in value of the
collateral from December 31, 2000 to the date the collateral was
surrendered by the stockholder in payment of the note. The $1,750,000
note receivable bears interest at 6% and both principal and interest
are due no later than December 2003. The new note receivable is
collateralized by certain assets of the former stockholder; however,
Headwaters has recorded an allowance against the full amount of the
note due to substantial uncertainty of both the collectibility of the
note and the value of the collateral.
Convertible Preferred Stock - In April 2001, Headwaters exercised its
right to require the holders of the Series A Convertible Preferred
Stock to convert their preferred shares into common stock within 30
days of the date notice was provided. Such conversion will result in
the issuance of 428,572 shares of common stock (representing a
conversion price of $7.00 per common share) and the payment in cash of
accrued but undeclared dividends of approximately $670,000.
3. Notes Payable and Other Borrowings
Notes payable and other borrowings consist of the following:
September 30, March 31,
(thousands of dollars) 2000 2001
---------------------------------------------------------------------------------------------- -------------- ---------------
Short-term borrowings from an investment company, bearing interest at a
floating rate (7.25% as of March 31, 2001), collateralized by
investments with the investment company with a carrying value of
approximately $5,782,000. $ -- $ 944
Note payable to a bank, bearing interest at prime plus 2%, repaid with
proceeds from a long-term line of credit with this bank obtained in
October 2000 (see Note 2). 3,000 --
Note payable to a corporation bearing interest at 6%, repaid in October
2000 with funds obtained from a long-term bank line of credit obtained
in October 2000 (see Note 2). 1,838 --
Other 425 283
-------------- ---------------
5,263 1,227
Less: current portion (208) (1,065)
-------------- ---------------
Total non-current $5,055 $ 162
============== ===============
The weighted-average interest rate on the above obligations was 9.7% at
September 30, 2000 and 8.7% at March 31, 2001.
9
HEADWATERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
4. Basic and Diluted Earnings per Share
(thousands of dollars and shares, Three Months Ended March 31, Six Months Ended March 31,
except per-share data) 2000 2001 2000 2001
-------------------------------------------------------- ------------- ---------------- --------------- ---------------
Numerator:
Income before extraordinary item $ 2,137 $4,576 $ 211 $9,982
Extraordinary item (1,823) -- (1,823) --
------------- ---------------- --------------- ---------------
Net income (loss) 314 4,576 (1,612) 9,982
Preferred stock dividends (119) (47) (265) (94)
Imputed preferred stock dividends -- -- (58) --
------------- ---------------- --------------- ---------------
Numerator for basic earnings per share -- net income
(loss) attributable to common stockholders 195 4,529 (1,935) 9,888
Effect of dilutive securities - preferred stock dividends 72 47 -- 94
------------- ---------------- --------------- ---------------
Numerator for diluted earnings per share -- net income
(loss) attributable to common stockholders after
assumed conversions $ 267 $4,576 $(1,935) $9,982
============= ================ =============== ===============
Denominator:
Denominator for basic earnings per share -- weighted-
average shares outstanding 18,025 22,458 15,818 22,719
Effect of dilutive securities:
Shares issuable upon exercise of options and warrants 337 1,416 -- 1,057
Shares issuable upon conversion of preferred stock 8,009 443 -- 443
------------- ---------------- --------------- ---------------
Total dilutive potential shares 8,346 1,859 -- 1,500
------------- ---------------- --------------- ---------------
Denominator for diluted earnings per share -- weighted-
average shares outstanding after assumed
exercises and conversions 26,371 24,317 15,818 24,219
============= ================ =============== ===============
Basic net income (loss) per share:
Income (loss) before extraordinary item $.11 $.20 $(.01) $.44
Extraordinary item (.10) -- (.11) --
------------- ---------------- --------------- ---------------
Net income (loss) per common share $.01 $.20 $(.12) $.44
============= ================ =============== ===============
Diluted net income (loss) per share:
Income (loss) before extraordinary item $.08 $.19 $(.01) $.41
Extraordinary item (.07) -- (.11) --
------------- ---------------- --------------- ---------------
Net income (loss) per common share $.01 $.19 $(.12) $.41
============= ================ =============== ===============
During the six months ended March 31, 2000, Headwaters' potentially
dilutive securities consisted of options and warrants for the purchase
of common stock, convertible debt and convertible preferred stock, all
of which were anti-dilutive and were therefore omitted in the
calculation of diluted earnings per share. For all other periods
presented, certain potentially dilutive securities, primarily options
and warrants, were anti-dilutive and were also omitted in the
calculation of diluted earnings per share. The amount of anti-dilutive
securities not considered in the diluted earnings per share calculation
totaled approximately 7,300,000 shares and 1,400,000 shares for the
three months ended March 31, 2000 and 2001, respectively, and
approximately 9,700,000 shares and 2,100,000 shares for the six months
ended March 31, 2000 and 2001, respectively.
10
HEADWATERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
5. Non-recurring Items
In December 1999, Headwaters sold one of the three remaining synthetic
fuel facilities it owned at that time. Headwaters reported a gain on
this transaction of approximately $5,341,000. In the March 2000
quarter, Headwaters sold another synthetic fuel facility and an option
to acquire a licensee facility. Headwaters reported a combined loss on
these transactions of approximately $598,000. Both facilities were
subsequently relocated at which time additional payments were received
and revenue recognized. Also during the quarter ended March 31, 2000,
Headwaters recorded non-recurring gains of approximately $1,079,000
related to the satisfaction of a contingent contract liability and a
gain recognized on a note receivable transaction.
In the December 1999 quarter, Headwaters recorded an impairment charge
of approximately $10,271,000 related to assets located at the Price,
Utah site. This impairment charge consisted of an approximate
$8,082,000 write-down to net realizable value of certain plant and
equipment which remained on the site and became idle when the facility
was sold, plus an approximate $2,189,000 write-off of an intangible
asset which was no longer considered recoverable due to the relocation
of a licensee facility. Headwaters recorded other asset write-offs and
non-recurring charges in the quarter ended December 31, 1999 which,
when added to the impairment charges, totaled approximately
$11,021,000. Of this amount, approximately $10,412,000 did not involve
the use of cash. In the March 2000 quarter, Headwaters recorded
additional non-recurring employee severance and other settlement
charges totaling approximately $841,000, of which $219,000 represented
a non-cash charge.
There were no non-recurring gains or losses recorded during the quarter
or six months ended March 31, 2001.
6. Income Taxes
In the quarter ended March 31, 2001, Headwaters incurred $22,000 of
state income tax expense. In addition, in the quarter ended December
31, 2000, Headwaters reported $100,000 of alternative minimum tax
expense. There was no income tax expense recognized in the quarter
ended March 31, 2000, however Headwaters reported an income tax benefit
of $3,000,000, consisting of the recognition of a portion of its
deferred tax asset, in the quarter ended December 31, 1999. Headwaters
believes it is more likely than not that this portion of the total
deferred tax asset will be realized as a result of income to be
recognized from the amortization in subsequent periods of deferred
revenue currently recorded in the consolidated balance sheet.
As of March 31, 2001, Headwaters has net operating loss carryforwards
of approximately $29,000,000 which can be used to offset future taxable
income. Headwaters has not recognized any portion of the deferred tax
asset related to these net operating loss carryforwards due to various
factors, including its short history of profitability, the significant
variability of licensee production levels, the significant amount of
existing debt and equity investments in high-risk investee companies,
and the current political uncertainty that exists with regard to
Section 29 income tax credits and the potential impact on Headwaters'
future operations and revenues.
7. Commitments and Contingencies
Commitments and contingencies, consisting of legal and contractual
matters, as of March 31, 2001 not disclosed elsewhere, are as follows:
Adtech. In October 1998, Headwaters entered into a technology purchase
agreement with James G. Davidson and Adtech, Inc. The transaction
transferred certain patent and royalty rights to Headwaters related to
an alternative fuel technology invented by Davidson. In September 2000,
Headwaters received a summons and complaint from the United States
District Court for the Western District of Tennessee filed by Adtech,
Inc. against Davidson and Headwaters. In the action certain purported
officers and directors of Adtech allege that the technology purchase
transaction was an unauthorized corporate action and that Davidson and
Headwaters conspired together to effect the transfer. The complaint
asserts related causes of action in fraud, conversion, patent
infringement, conspiracy and unfair competition seeking unspecified
money damages to be proven at trial, accounting, disgorgement,
recission of contracts, punitive damages,
11
HEADWATERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
and other relief. Headwaters denies these allegations and is asking the
court to dismiss the action. Because the litigation is at an early
stage and resolution is uncertain, legal counsel cannot express an
opinion as to the ultimate amount, if any, of Headwaters' liability.
Levy and Klein. In March 1999, Headwaters sold convertible preferred
stock, warrants, and a convertible promissory note to OZ Master Fund,
Ltd. In September 2000, Headwaters received a summons and complaint
from the United States District Court for the Southern District of New
York filed by Mark Levy against OZ Master Fund and related entities
("OZ") and Headwaters. In January 2001, Headwaters received a summons
and complaint from the same court filed by Terry Klein against OZ and
Headwaters making the same claims. The parties in the two cases have
agreed to consolidate. In the actions, purported shareholders of
Headwaters allege that OZ violated section 16(b) of the Securities
Exchange Act of 1934 by converting preferred stock into Headwaters
common stock and then selling the same within a six month period, and
further, that Headwaters' redemption of the preferred stock and the
note constituted a sale of common stock for which OZ is liable under
section 16(b). The complaints seek on behalf of Headwaters from OZ
unspecified money damages to be proven at trial, attorney fees, and
other relief. OZ has moved for an order of dismissal which the court
has not yet ruled upon. Because the litigation is at an early stage and
resolution is uncertain, legal counsel cannot express an opinion as to
the ultimate amount, if any, that might be recovered.
AJG. In December 1996, Headwaters entered into a technology license and
proprietary chemical sale agreement with AJG Financial Services, Inc.
The agreement called for AJG to pay royalties and to purchase
proprietary chemical material from Headwaters. In October 2000,
Headwaters filed a complaint in the Fourth District Court for the State
of Utah against AJG alleging that it has failed to make payments and to
perform other obligations under the agreement. Headwaters asserts
claims including breach of contract, declaratory judgment, unjust
enrichment, and accounting and seeks money damages in the amount of
$750,000 plus other damages to be proven at trial, as well as other
relief. AJG has answered the complaint denying Headwaters' claims and
asserting counter-claims based upon allegations of misrepresentation
and breach. AJG seeks unspecified compensatory damages as well as
punitive damages. Headwaters denies the allegations of AJG's
counter-claims. Because the litigation is at an early stage and
resolution is uncertain, legal counsel cannot express an opinion as to
the ultimate amount of recovery or liability.
Nalco. In October 2000, Headwaters filed a complaint in the United
States District Court for the District of Utah against Nalco Chemical
Company ("Nalco"). Headwaters alleges that Nalco, by its sale and
marketing of materials for use in creating alternative fuel, breached a
non-disclosure agreement, misappropriated trade secrets, and violated
patent rights of Headwaters. Headwaters seeks by its complaint
injunctive relief and damages to be proven at trial. Nalco filed an
answer denying the allegations in the complaint and asserting
counter-claims alleging patent invalidity. Headwaters denies the
counter-claims; however, if Nalco prevails on its counter-claims, the
result could have a material adverse effect on Headwaters' business.
Because the litigation is at an early stage and resolution is
uncertain, legal counsel cannot express an opinion as to the ultimate
amount, if any, that might be recovered by Headwaters.
Headwaters is also involved in other legal proceedings that have arisen
in the normal course of business. Management believes that many of
these other claims are without merit and in all cases intends to
vigorously defend its position. Management does not believe that the
outcome of these activities will have a significant effect upon the
operations or the financial position of Headwaters; however, it is
possible that a change in management's estimates of probable liability
could occur and the change could be significant.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
accompanying unaudited consolidated financial statements and notes thereto.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
The information set forth below compares Headwaters' operating results for the
three months ended March 31, 2001 ("2001") with operating results for the three
months ended March 31, 2000 ("2000").
Revenue. Total revenue for 2001 increased by $1,855,000 to $9,754,000 as
compared to $7,899,000 for 2000. The major components of this revenue are
discussed in the sections below.
License Fees. During 2001, Headwaters recognized license fees totaling
$5,168,000 while $4,798,000 of license fees were recognized during 2000. The
license fees in 2001 consisted of the amortization of one-time non-refundable
initial and prepaid license fees of $1,188,000 and recurring earned license fees
or royalty payments of $3,980,000. License fees in 2000 consisted of the
amortization of one-time non-refundable initial license fees of $231,000 and
recurring license fees or royalty payments of $4,567,000. Initial license fees
were normally received when construction of the related alternative fuel
facility began, when construction was completed, or when certain construction
milestones or other conditions were met. These license fees are generally
recognized on a straight-line basis over the period covered by Headwaters'
license agreements with licensees.
Recurring earned license fees or royalty payments are due quarterly based upon
alternative fuel sold as reported to Headwaters by its licensees. The 2000
earned license fees included significant amounts related to a single licensee
that owns four facilities. This licensee did not report and pay certain prior
period royalty obligations to Headwaters timely, resulting in some "catch-up"
revenue recognition in 2000 for royalties relating to periods other than only
the quarter ended March 31, 2000. This same licensee significantly reduced its
production and sale of alternative fuel in 2001 resulting in a decline in earned
license fees from the licensee of approximately $3,237,000 in 2001 as compared
to 2000. There was an increase of approximately $2,650,000 in earned license
fees from all other licensees in 2001 over 2000. This was due to increased
alternative fuel sales by those licensees. Headwaters expects fluctuations in
future periods in individual licensee alternative fuel sales with corresponding
fluctuations in Headwaters' license fees due to feedstock availability and other
licensee operational issues, marketing issues, the ability of licensees to
utilize the income tax credits earned from the sale of alternative fuel and
other factors, many of which are beyond the direct control of Headwaters.
Headwaters also expects fluctuations in aggregate license fee revenue. However,
at the current time, Headwaters expects its license fee revenue in the fiscal
year ending September 30, 2001 from all licensees to be higher than total
license fees reported for the fiscal year ended September 30, 2000.
Chemical Sales. Headwaters provides chemical reagent to its licensees either at
a fixed price or at Headwaters' cost plus a contracted markup. Headwaters
purchases the chemical materials under a long-term contract with a large
chemical company. Chemical sales during 2001 were $4,134,000 with a
corresponding direct cost of $2,652,000. Chemical sales during 2000 were
$1,883,000 with a corresponding direct cost of $1,367,000. The increase in
chemical sales in 2001 over 2000 was due to increased alternative fuel
production by Headwaters' licensees. Currently, Headwaters expects its chemical
sales revenue from all licensees in the fiscal year ending September 30, 2001 to
be significantly higher than the amounts reported for the fiscal year ended
September 30, 2000. Headwaters expects the gross profit margin for the fiscal
2001 year to be comparable to the profit margin reported in the March 2001
quarter.
Gains on Non-recurring Transactions. In 2000, Headwaters recorded non-recurring
gains of approximately $1,079,000 related to the satisfaction of a contingent
contract liability and a gain recognized on a note receivable transaction. There
were no non-recurring gains recorded in 2001.
Cost of Operations increased by $59,000 to $857,000 in 2001 from $798,000 in
2000, primarily as a result of increased personnel costs.
Selling, General and Administrative Expenses increased $595,000 to $1,628,000
during 2001 from $1,033,000 for 2000. The increase in expenses in 2001 is due to
an increase in payroll and other compensation-related costs of approximately
$294,000 and an increase in professional services expenses of approximately
$340,000, with a net decrease in all other cost categories
13
of approximately $39,000. The increase in professional services expenses is due
primarily to legal costs associated with the current legal actions that
Headwaters is involved in.
Asset Write-offs and Other Non-recurring Charges. In 2000, Headwaters sold a
synthetic fuel facility and an option to acquire a licensee facility. Headwaters
reported a combined loss on these transactions of approximately $598,000. In
2000, Headwaters also recorded non-recurring employee severance and other
settlement charges totaling approximately $841,000. There were no such
non-recurring charges recorded in 2001.
Other Income and Expense. During 2001, Headwaters reported net other expenses of
$19,000 compared to net expenses of $1,125,000 for 2000. This decrease of
$1,106,000 relates primarily to a decrease of $1,650,000 in interest expense and
an increase of $468,000 in the mark-to-market adjustment of the carrying value
of a related party note receivable, offset by an increase of $721,000 in equity
and debt investment-related losses and a decrease of $191,000 in interest
income.
Interest expense decreased in 2001 primarily due to the substantially lower
average levels of outstanding borrowings which existed in 2001 as compared to
2000. There has also been a substantial reduction in the weighted average
effective interest rate on outstanding borrowings between 2000 and 2001.
During 1996, Headwaters sold certain construction companies and received as
consideration a $5,000,000 note receivable. The note was "marked to market" each
quarter based upon the market value of Headwaters' common stock held as
collateral and was reflected in the consolidated balance sheet at the underlying
value of this collateral, $378,000 at December 31, 2000. In January 2001,
Headwaters accepted as full satisfaction of the note receivable the shares of
Headwaters' stock collateralizing the note and a new note receivable which has
been fully reserved. This resulted in recognition of a gain in 2001 of
approximately $629,000 representing the increase in value of the collateral from
December 31, 2000 to the date the collateral was surrendered in payment of the
note. The corresponding adjustment in 2000 resulted in a write-up of $161,000
for a net change in the adjustment of $468,000 in 2001 compared to 2000.
Beginning in June 2000, Headwaters made debt and equity investments in several
less than 50%-owned affiliates. Allowances are provided on a case-by-case basis
when management first determines that the investment is not realizable. Gains on
these same investments cannot be recognized until realized, which normally
occurs at a much later date. During 2001, the provision for allowances and
related write-offs totaled approximately $646,000. In addition, Headwaters
recognized approximately $75,000 related to its equity in losses of investees
accounted for using the equity method.
The decrease in interest income from 2000 to 2001 primarily related to a
decrease in the interest rate, effective in May 2000, on a $6,500,000 note
receivable from a licensee.
Income Taxes. In 2001, Headwaters incurred $22,000 of state income tax expense.
There was no income tax expense recognized in 2000. As of March 31, 2001,
Headwaters has net operating loss carryforwards of approximately $29,000,000
which can be used to offset future taxable income. Headwaters has not recognized
any portion of the deferred tax asset related to these net operating loss
carryforwards due to various factors, including its short history of
profitability, the significant variability of licensee production levels, the
significant amount of existing debt and equity investments in high-risk investee
companies, and the current political uncertainty that exists with regard to
Section 29 income tax credits and the potential impact on Headwaters' future
operations and revenues.
Extraordinary Item. In January 2000, Headwaters redeemed convertible debt which
had been issued beginning in September 1999 through December 1999. The
redemption consideration given included approximately $1,000,000 in redemption
premiums plus 214,000 shares of common stock. The loss recognized as a result of
the redemption consideration paid plus the acceleration of amortization of the
unamortized debt discount and debt issuance costs totaled approximately
$1,823,000. This loss is reflected as an extraordinary item in the 2000
consolidated statement of operations.
Net Income. For 2001, net income of $4,576,000 represents an improvement of
$4,262,000 from net income of $314,000 in 2000. This is primarily due to
increased revenue, decreased expenses, a decrease in interest expense and the
extraordinary item recognized in 2000.
Six Months Ended March 31, 2001 Compared to Six Months Ended March 31, 2000
The information set forth below compares Headwaters' operating results for the
six months ended March 31, 2001 ("2001") with operating results for the six
months ended March 31, 2000 ("2000").
14
Revenue. Total revenue for 2001 increased by $3,121,000 to $22,069,000 as
compared to $18,948,000 for 2000. The major components of this revenue are
discussed in the sections below.
License Fees. During 2001, Headwaters recognized license fees totaling
$11,434,000 while $8,833,000 of license fees were recognized during 2000. The
license fees in 2001 consisted of the amortization of one-time non-refundable
initial and prepaid license fees of $1,463,000 and recurring earned license fees
or royalty payments of $9,971,000. License fees in 2000 consisted of the
amortization of one-time non-refundable initial license fees of $461,000 and
recurring license fees or royalty payments of $8,372,000.
The 2000 earned license fees included significant amounts related to a single
licensee that owns four facilities. This licensee did not report and pay certain
prior period royalty obligations to Headwaters timely, resulting in some
"catch-up" revenue recognition in 2000 for royalties relating to periods other
than the six-month period ended March 31, 2000. This same licensee significantly
reduced its production and sale of alternative fuel in 2001 resulting in a
decline in earned license fees from the licensee of approximately $3,262,000 in
2001 as compared to 2000. There was an increase of approximately $4,861,000 in
earned license fees from all other licensees in 2001 over 2000. This was due to
increased alternative fuel sales by those licensees.
Chemical Sales. Chemical sales during 2001 were $9,656,000 with a corresponding
direct cost of $6,278,000. Chemical sales during 2000 were $3,236,000 with a
corresponding direct cost of $2,228,000. The increase in chemical sales in 2001
over 2000 was due to increased alternative fuel production by Headwaters'
licensees.
Gain on Sale of Facility. In December 1999, Headwaters sold one of the three
remaining synthetic fuel facilities it owned at that time. Headwaters reported a
gain on this transaction of approximately $5,341,000. There were no such gains
in 2001.
Gains on Non-recurring Transactions. In 2000, Headwaters recorded non-recurring
gains of approximately $1,079,000 related to the satisfaction of a contingent
contract liability and a gain recognized on a note receivable transaction. There
were no non-recurring gains recorded in 2001.
Cost of Operations decreased by $524,000 to $1,958,000 in 2001 from $2,482,000
in 2000. During 2001, Headwaters incurred lower operating expenses in connection
with the continued refinement and implementation of the alternative fuel process
associated with licensee-owned facilities. Also, in 2001 there were no operating
costs associated with the three facilities owned by Headwaters which were sold
in December 1999 through April 2000. In 2000, cost of operations included labor
and operating expenses at the owned alternative fuel facilities and the wash
plant located in Utah. There were no such costs in 2001.
Selling, General and Administrative Expenses increased $1,202,000 to $3,097,000
during 2001 from $1,895,000 for 2000. The increase in expenses in 2001 is due to
an increase in payroll and other compensation-related costs of approximately
$570,000 and an increase in professional services expenses of approximately
$722,000, with a net decrease in all other cost categories of approximately
$90,000. The increase in professional services expenses is due primarily to
legal costs associated with the current legal actions that Headwaters is
involved in.
Asset Write-offs and Other Non-recurring Charges. In 2000, Headwaters sold a
synthetic fuel facility and an option to acquire a licensee facility. Headwaters
reported a combined loss on these transactions of approximately $598,000. In
2000, Headwaters recorded an impairment charge of approximately $10,271,000
related to assets located at the Price, Utah site. This impairment charge
consisted of an approximate $8,082,000 write-down to net realizable value of
certain plant and equipment which remained on the site and became idle when the
facility was sold, plus an approximate $2,189,000 write-off of an intangible
asset which was no longer considered recoverable due to the relocation of a
licensee facility. Headwaters recorded other asset write-offs and non-recurring
charges including employee severance and other settlement charges which, when
added to the impairment charges, totaled approximately $11,862,000. There were
no such non-recurring charges recorded in 2001.
Other Income and Expense. During 2001, Headwaters reported net other expenses of
$632,000 compared to net expenses of $2,672,000 for 2000. This decrease of
$2,040,000 relates primarily to a decrease of $3,620,000 in interest expense and
an increase of $673,000 in the mark-to-market adjustment of the carrying value
of a related party note receivable, offset by an increase of $1,413,000 in
equity and debt investment-related losses and a decrease of $769,000 in interest
income.
Interest expense decreased in 2001 primarily due to the substantially lower
average levels of outstanding borrowings which existed in 2001 as compared to
2000. There has also been a substantial reduction in the weighted average
effective interest rate on outstanding borrowings between 2000 and 2001.
15
In January 2001, Headwaters accepted as full satisfaction of the related party
note receivable the shares of Headwaters' stock collateralizing the note and a
new note receivable which has been fully reserved. This resulted in recognition
of a gain in 2001 of approximately $541,000 representing the increase in value
of the collateral from September 30, 2000 to the date the collateral was
surrendered in payment of the note. The corresponding adjustment in 2000
resulted in a write-down of $131,000 for a change in the adjustment of $672,000
in 2001 compared to 2000.
During 2001, the provision for allowances and related write-offs of debt and
equity investments totaled approximately $1,238,000. In addition, Headwaters
recognized approximately $175,000 related to its equity in losses of investees
accounted for using the equity method.
The decrease in interest income from 2000 to 2001 primarily related to a
decrease in interest from the related party note receivable discussed above from
$515,000 in 2000 to $0 in 2001 and a decrease in the interest rate, effective in
May 2000, on a $6,500,000 note receivable from a licensee.
Income Taxes. In 2001, Headwaters incurred $22,000 of state income tax expense
and $100,000 of alternative minimum tax expense. In 2000, Headwaters reported an
income tax benefit of $3,000,000, consisting of the recognition of a portion of
its deferred tax asset. Headwaters believes it is more likely than not that this
portion of the total deferred tax asset will be realized as a result of income
to be recognized from the amortization in subsequent periods of deferred revenue
currently recorded in the consolidated balance sheet.
Extraordinary Item. In January 2000, Headwaters redeemed convertible debt which
had been issued beginning in September 1999 through December 1999. The
redemption consideration given included approximately $1,000,000 in redemption
premiums plus 214,000 shares of common stock. The loss recognized as a result of
the redemption consideration paid plus the acceleration of amortization of the
unamortized debt discount and debt issuance costs totaled approximately
$1,823,000. This loss is reflected as an extraordinary item in the 2000
consolidated statement of operations.
Net Income. For 2001, net income of $9,982,000 represents an improvement of
$11,594,000 from a net loss of $1,612,000 in 2000. This is primarily due to
increased revenue, decreased expenses, a decrease in interest expense and the
extraordinary item recognized in 2000, offset in part by the recognition of
$3,000,000 of income tax benefit in 2000.
Liquidity and Capital Resources
Liquidity. Net cash provided by operating activities during 2001 was $9,101,000
compared to $2,114,000 of cash used during 2000. Most of this change in cash
flow from operating activities is attributable to the 2001 net income of
$9,982,000 as compared to the 2000 net loss of $1,612,000. During 2001,
investing activities consisted primarily of investments in and loans to
non-affiliated companies of approximately $4,201,000 and net proceeds of
approximately $1,191,000 from the sale of short-term investments. During 2001,
financing activities consisted primarily of proceeds from borrowings of
approximately $8,148,000, repayments of borrowings of approximately $12,184,000
and the purchase of treasury stock, net of transfers to Headwaters' Employee
Stock Purchase Plan for approximately $2,898,000.
Capital Resources. In 2001, Headwaters' primary investing activity consisted of
investments in and loans to non-affiliated companies. As of March 31, 2001,
Headwaters owns from 1% to 33% of the voting securities of four non-public
high-risk investee companies. The carrying value of current investments ranges
from $130,000 to $1,933,000 each. Headwaters has no future commitments and does
not currently expect to make any significant additional investments in these
entities. As of March 31, 2001, Headwaters also had notes receivable with a
total net carrying value of approximately $3,836,000, representing loans to
eight private, emerging growth companies. These loans generally bridge the
period between seed funding and the close of first and second rounds of equity
financing. Seven of these notes receivable range from $200,000 to $350,000 each
and have original terms of three to four months, although many of these loans
have been extended for successive three- to four-month periods. Headwaters also
has one additional long-term loan for $2,000,000 to a longer-established private
company. Headwaters does not currently intend to make any additional equity
investments or loans, but could incur losses if the investments are not
recoverable or the loans are not repaid. Headwaters has no current plans to
construct additional synthetic fuel facilities or to incur significant costs to
acquire property, plant and equipment, but is interested in possible strategic
acquisitions of entities that would be synergistic to Headwaters' current
operations. Any future acquisitions could be funded using Headwaters stock, cash
or a combination of stock and cash.
As described in Note 2 to the consolidated financial statements, Headwaters
continued acquiring shares of its common stock during 2001, in connection with
the stock purchase program announced in May 2000. The program authorizes
Headwaters to purchase stock in the open market or through negotiated block
transactions. Purchases under the plan are at the discretion of
16
Headwaters' management. During 2001, Headwaters purchased approximately 895,000
shares for approximately $2,967,000. Headwaters continually evaluates financial
alternatives to the stock repurchase program but currently expects the program
to selectively continue through fiscal 2001 subject to market conditions and
available cash.
Headwaters' working capital decreased from approximately $11,225,000 at
September 30, 2000 to approximately $6,967,000 as of March 31, 2001. The primary
reasons for this change were the use of cash for the repayment of approximately
$4,980,000 of long-term debt, for investments in and loans to non-affiliated
companies and for purchases of treasury stock. Cash from operations funded a
majority of these cash requirements. Headwaters also expects its operations to
produce positive cash flows in future periods. In addition to cash provided by
operating activities, Headwaters has an arrangement with an investment company
under which Headwaters can borrow up to 90% of the value of the total portfolio
of Headwaters' short-term investments with that investment company, which
investments collateralize any outstanding borrowings. Under this arrangement,
maximum borrowings during 2001 were approximately $3,252,000 of which
approximately $944,000 was outstanding as of March 31, 2001.
Headwaters also has borrowing capability under a revolving line of credit with a
bank which expires in October 2002. Borrowings under the line of credit bear
interest at prime plus .75% (8.75% at March 31, 2001) and are limited to the
lesser of $10,000,000 or the "borrowing base," as defined. Maximum borrowings
under the line of credit during 2001 were approximately $4,896,000. The
borrowing base was approximately $6,100,000 at March 31, 2001 and there were no
borrowings under the line at March 31, 2001. Headwaters believes it will have
sufficient cash reserves to meet its obligations during fiscal 2001, and also
believes it has the ability to raise additional debt and equity capital from
other sources if necessary.
Income Taxes. As of March 31, 2001, Headwaters has net operating loss
carryforwards of approximately $29,000,000 which can be used to offset future
taxable income. Headwaters has not recognized any portion of the deferred tax
asset related to these net operating loss carryforwards due to various factors,
including its short history of profitability, the significant variability of
licensee production levels, the significant amount of existing debt and equity
investments in high-risk investee companies, and the current political
uncertainty that exists with regard to Section 29 income tax credits and the
potential impact on Headwaters' future operations and revenues. During the
remainder of fiscal 2001 and in fiscal 2002, Headwaters expects to pay some
level of alternative minimum taxes and a minimal amount of state income taxes in
certain states where net operating loss carryforwards aren't available. However,
because of existing net operating loss carryforwards for federal purposes and in
most states where Headwaters does business, Headwaters does not currently expect
to pay significant amounts of regular income taxes during fiscal 2001 or fiscal
2002.
Forward Looking Statements
Statements in this Management's Discussion and Analysis regarding Headwaters'
expectations as to the operation of facilities utilizing Headwaters'
technologies, the marketing of products, the receipt of licensing fees,
royalties, and product sales revenues, the development, commercialization and
financing of non-alternative fuel technologies and other strategic business
opportunities and acquisitions and other information about Headwaters that is
not purely historical by nature, including those statements regarding
Headwaters' future business plans, the operation of facilities, the availability
of feedstocks, the marketability of the alternative fuel and the financial
viability of the facilities, constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Although
Headwaters believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results will not differ materially from its
expectations. In addition to matters affecting the alternative fuel industry or
the economy generally, factors which could cause actual results to differ from
expectations stated in these forward looking statements include, among others,
the following:
(1) The commercial success of Headwaters' technologies.
(2) Operating issues for licensed facilities including feedstock
availability, moisture content, Btu content, correct application of
chemical reagent, achieving significant chemical change, operability of
equipment, production capacity, product durability, resistance to water
absorption and overall costs of operations.
(3) Marketing issues relating to market acceptance of products manufactured
using Headwaters' technologies, including control of moisture content,
hardness, any special handling requirements and other characteristics
of the alternative fuel product which affect its marketability and its
sales price.
(4) Securing of suitable facility sites, including permits and raw
materials, for relocation and operation of facilities and product
sales.
(5) The market acceptance of products manufactured with Headwaters'
technologies in the face of competition from traditional products.
17
(6) Dependence on licensees to successfully implement Headwaters' chemical
technologies and making license and other payments to Headwaters.
(7) Maintenance of placed-in-service requirements under Section 29 of the
tax code by alternative fuel manufacturing facilities.
(8) Changes in governmental regulations or failure to comply with existing
regulations that may result in operational shutdowns of licensee
facilities.
(9) The continued availability of tax credits to licensees under the tax
code and each licensee's ability to use tax credits.
(10) The commercial feasibility of Headwaters' alternative fuel technologies
upon the expiration of tax credits.
(11) Ability to meet financial commitments under existing contractual
arrangements.
(12) Ability to meet non-financial commitments under existing contractual
arrangements.
(13) Ability to commercialize the non-alternative fuel chemical technologies
which have only been tested in the laboratory and not in full-scale
operations.
(14) Ability to commercialize the technology of others and to implement
non-technology based business plans which are at an early stage of
investigation and investment and which will require significant time,
management, and capital investment.
(15) Success in the face of competition by others producing alternative fuel
and other products.
(16) Sufficiency of intellectual property protections.
(17) Satisfactory resolution of disputes in litigation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "ITEM 3: LEGAL PROCEEDINGS" in Headwaters' Annual Report on Form 10-K for
the year ended September 30, 2000 for descriptions of current legal proceedings.
With respect to all of those matters except NEICO/Earthco and Levy, there have
been no material changes since that report was filed. NEICO, Earthco and
Headwaters have settled their disputes and on November 30, 2000 the District
Court entered an order of dismissal with prejudice as to all parties. With
respect to Levy, an additional claimant has been added to the case, as described
in Note 7 to the consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
Other than the issuance of 5,485 shares of restricted common stock issued upon
exercise of options, there have been no securities issued by Headwaters within
the past fiscal quarter without registration under the Securities Act of 1933,
as amended. Headwaters has five effective registration statements filed on Form
S-3 and three effective registration statements filed on Form S-8. One or more
of these registration statements have registered all of the other securities
issued during the quarter, which consisted solely of the issuance of common
stock upon exercise of options, as described in Note 2 to the consolidated
financial statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of stockholders of Headwaters was held on March 23, 2001 for
the following purposes:
1. To elect two Class I directors of Headwaters to serve until the 2004
annual meeting of stockholders; and
2. To ratify the selection by the board of directors of Arthur Andersen
LLP as independent auditors of Headwaters for the fiscal year ending
September 30, 2001.
A total of 18,052,453 shares were voted on both proposals. The results of voting
on these matters were as follows:
1. To elect Mr. James A. Herickhoff as a Class I director: for -
17,644,553; withheld authority - 407,900.
To elect Mr. John P. Hill, Jr. as a Class I director: for - 15,871,371;
withheld authority - 2,181,082.
2. To ratify the selection of Arthur Andersen LLP as auditors for fiscal
2001: for - 18,002,285; against - 30,030; abstain - 20,138.
18
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
10.13.3 Note Restructure Agreement dated January 26, 2001 among Gerald
M. Larson, Larson Holdings, Inc. and Headwaters
10.13.4 Promissory Note dated January 26, 2001 between Gerald M.
Larson as borrower and Headwaters as lender
10.13.5 Pledge and Security Agreement dated January 26, 2001 between
Larson Holdings, Inc. as pledgor and Headwaters as secured
party
10.13.6 Pledge and Security Agreement dated January 26, 2001 between
Gerald M. Larson as pledgor and Headwaters as secured party
10.71.2 First Amendment to Loan Agreement dated February 1, 2001
between Headwaters and Zions First National Bank
10.71.3 Promissory Note dated February 1, 2001 between Headwaters as
borrower and Zions First National Bank as lender
(b) There were no reports filed on Form 8-K during the quarter
ended March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEADWATERS INCORPORATED
Date: April 26, 2001 By: /s/ Kirk A. Benson
--------------------
Kirk A. Benson, Chief
Executive Officer
and Principal Executive
Officer
Date: April 26, 2001 By: /s/ Steven G. Stewart
---------------------
Steven G. Stewart, Chief
Financial Officer
and Principal Financial
Officer
19