UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
December 27, 2001
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Date of Report (Date of earliest event reported)
HEADWATERS INCORPORATED
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(Exact name of Registrant as specified in its charter)
Delaware 0-27808 87-0547337
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
11778 South Election Road, Suite 210
Draper, UT 84020
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(Address of principal executive offices)
(Zip Code)
(801) 984-9400
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(Registrant's telephone number, including area code)
Not applicable
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(Former name or former address, if changed since last report.)
Item 5. Other Events - Updated List of Risk Factors for Outstanding Effective
Forms S-3 and S-8
Headwaters currently has five outstanding effective Forms S-3 (333-67371,
333-79385, 333-85753, 333-34488, and 333-36872) and three outstanding effective
Forms S-8 (333-39674, 333-39676, and 333-39678). The following list of risk
factors supercedes and replaces the Risk Factors section in the Prospectus of
each of these registration statements.
Risk Factors
Ongoing Financial Viability Depends on Operational Success of Licensees
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We have licensed our technologies to a limited number of licensees. Our
profitability depends on the ability of our licensees to produce and sell
alternative fuel that will generate license fees to us. There are 28 alternative
fuel plants that utilize our patented technologies and from which we expect to
earn license fees. To date, we have earned license fees from the owners of 18
facilities, but most of the ongoing royalties we have earned to date have been
generated by 8 facilities owned by three licensees. If any one of these
licensees does not operate its alternative fuel plants, or operates its plants
at low production levels, our revenues could be materially adversely affected.
To improve operations at each of the plants, the plant owner must produce a
marketable quality of alternative fuel and successfully market the alternative
fuel. In order to do so, our licensees must successfully address all operational
issues including, but not limited to, feedstock availability, cost, moisture
content, Btu content, correct chemical reagent formulation and application,
operability of equipment, product durability, resistance to water absorption,
and overall costs of operations. In some cases, licensees may be forced to
relocate plants and enter into new strategic contracts to address marketing and
operational issues. Licensee plant relocations will delay generation of license
fees for us. It is not certain how much time our licensees will require for the
full resolution of all of these marketing and operational issues.
Our Licensees May Not Qualify for Tax Credits Granted by Congress to Encourage
Production of Alternative Fuels
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Section 29 of the Internal Revenue Code provides a tax credit for the
production and sale of qualified alternative fuel. Our royalties and chemical
sales revenues are ultimately derived from our licensees' ability to manufacture
and sell qualified fuels that generate tax credits for the facility owners. The
IRS has issued at least 14 private letter rulings to licensees of our
technologies covering 19 alternative fuel facilities. These rulings may be
modified or revoked by the IRS if the IRS adopts regulations that are different
from these rulings. Also, a private letter ruling may not apply if the actual
operating practice differs from the information given to the IRS for the ruling.
The IRS from time to time reviews taxpayer use of the Section 29 tax credit,
including whether there should be restrictions on the availability of such
credits. Ultimately, it is within the power of Congress to repeal Section 29.
Therefore, tax credits may not be available in the future, which would
materially adversely impact us.
Based upon the language of Section 29 of the tax code and private
letter rulings issued by the IRS to us and our licensees, we and our licensees
believe the alternative fuel facilities built and completed by June 30, 1998,
are eligible for Section 29 tax credits. However, the ability to claim tax
credits is dependent upon a number of conditions including, but not limited to,
the following:
o The facilities were constructed pursuant to a binding contract
entered into on or before December 31, 1996;
o All steps were taken for the facility to be considered placed
in service on or before June 30, 1998;
o Manufacturing procedures are applied to produce a significant
chemical change and hence a "qualified fuel;"
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o The alternative fuel is sold to an unrelated party; and
o The owner of the facility is in a tax-paying position and can
therefore use the tax credits.
Licensees are subject to audit by the IRS. The IRS may challenge our
licensees on any one of these or other conditions. Also, our licensees may not
be in a financial position to claim the tax credits if they are not profitable.
In addition, the Section 29 credit is subject to phase-out after the unregulated
oil price reaches a certain level, adjusted annually for inflation. The
inability of a licensee to claim tax credits could potentially reduce our income
from the licensee. See our Form 10-K for fiscal year 2001, "ITEM 1. BUSINESS -
Alternative Fuel Tax Credits" for an explanation of the Section 29 tax credits.
We Must Be Able to Develop and Improve Our Alternative Fuel Technologies
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We may not be able to develop or refine our technologies to keep up
with future alternative fuel requirements. As licensees develop and modify their
operations and choices of coal feedstocks, we will need to find new methods,
know-how, chemicals, and other techniques to meet licensee and customer demands,
such as demands for improved efficiencies, lower costs, and improvements in
alternative fuel products, including chemical change and improved physical
characteristics.
We Have Significant Competitors
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Alternative fuels made using our technologies compete with other
alternative fuel products as well as traditional fuels. Competition may come in
the form of the licensing of the competing technologies to process coal
derivatives, the marketing of competitive chemical reagents, the marketing of
end products qualifying as synthetic fuel, and the development of alternative
fuel projects. We also experience competition from traditional coal and fuel
suppliers and natural resource producers, in addition to those companies that
specialize in the recycling and upgrading of industrial waste products. These
companies may have greater financial, management, and other resources than we
have. We may not be able to compete successfully in the future. See our Form
10-K for fiscal year 2001, "ITEM 1. BUSINESS - Competition" for a discussion of
the competition in the alternative fuel industry.
Technological Developments by Third Parties Could Increase Our Competition
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Alternative fuel sources and the recycling of waste products are the
subject of extensive research and development by our competitors. If a
competitive technology is developed that greatly increases the demand for waste
products or reduces the costs of alternative fuels or other resources, the
economic viability of our technologies could be adversely affected.
Sales of Alternative Fuel Production is Uncertain
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Alternative fuel competes with standard coal products. Many industrial
coal users are limited in the amount of alternative fuel product they can
purchase from our licensees because they have committed a substantial portion of
their coal requirements through long-term contracts. Reliance on spot markets
has generally produced different resale prices compared to long-term coal supply
contracts in the utility industry. For these and other possible reasons, our
licensees' customers may not purchase the alternative fuel products made with
our technologies. To date our licensees have secured contracts for the sale of
only a portion of their production. We do not know if our licensees will be able
to secure market contracts for their alternative fuel product when they reach
full production levels.
3
Supply of Sufficient Raw Material for Alternative Fuel Facilities is Not Assured
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Our licensees have not secured all of the raw material needed to
operate all of the facilities for the full term of the tax credit. Some of the
owners of facilities are moving some of the facilities to sites with better
sources of raw materials for operation, causing disruptions in production and
consequent reductions in our revenues.
Alternative Fuel Facilities May Not Be Commercially Viable After the Tax Credits
Expire
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The alternative fuel facilities that qualify for tax credits under
Section 29 of the code receive economic benefits from the tax credits in
addition to the profits, if any, from operations. It is possible that
alternative fuel facilities that are not eligible for tax credits cannot be
built and operated profitably. Under current law, Section 29 expires December
31, 2007, after which tax credits will not apply to the alternative fuel
facilities. If the tax credits are not extended, licensees, in order to remain
competitive and commercially viable after 2007, will have to manage their costs
of production and feedstock and develop the market for alternative fuel with
adequate prices to cover the costs.
Limitation on Protection of Key Intellectual Property
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We rely on rights under patent, trade secret, copyright, and trademark
law, as well as confidentiality agreements and other security measures to
protect our intellectual property. These rights and measures or future rights or
measures may not adequately protect our interests in present and future
intellectual property. Competitors may successfully contest the validity or
scope of our patents or may use concepts and processes that enable them to
circumvent our technologies. See our Form 10-K for fiscal year 2001, "ITEM 1.
BUSINESS - Proprietary Protection" for a discussion of our intellectual property
and its value to us.
Future Acquisitions May Not Be Successful
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In addition to our efforts to develop our technologies in alternative
fuel applications, we continue to investigate possible acquisitions of
complementary businesses aligned to the chemical, mineral, or energy industries
in which we do business. If suitable candidates are not found in these
industries, we may pursue possible acquisition candidates in other growing
industries where promising financial returns exist. There is no assurance that
any future acquisitions will prove to be successful and profitable.
HTI's Technologies May Not Be Commercially Developed and Marketed Profitably
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We acquired Hydrocarbon Technologies, Inc. ("HTI") in August 2001. HTI
is a company focused on developing and commercializing catalysts and catalytic
processes for producing chemicals and converting low-value fossil fuels into
high-value alternative fuels. HTI has some foreign operations. HTI has developed
and patented several potential processes; however, there can be no assurance
that adequate funding will be available to fully develop and successfully
commercialize those processes or that they will be marketed profitably.
HTI's Technologies May Infringe on Others' Intellectual Property Rights
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HTI has developed and patented several potential processes which form
the basis of its business operations. There can be no assurance, however, that
HTI in its normal course of operations will not infringe on patents or other
intellectual property rights held by other parties.
4
We are Involved in Significant Litigation
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We are party to some significant legal proceedings. These proceedings
will require that we incur substantial costs, including attorneys' fees,
managerial time, and other personnel resources and costs. Adverse resolution of
these proceedings could have a materially negative effect on such things as (i)
potential future revenues from a licensee, (ii) our financial liabilities, and
(iii) the strength of some aspects of our intellectual property in the
alternative fuels industry. See our Form 10-K for fiscal year 2001, "ITEM 3.
LEGAL PROCEEDINGS" for a description of the material pending legal proceedings.
Facilities Must Comply With Government Environmental Regulations
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The facilities that use our technologies must satisfy government
environmental, safety, and other regulations. We or the facility owners may be
subject to fines for any violation of regulations due to design flaws,
construction flaws, or operational errors. A violation may prevent a facility
from operating until the violation is cured. We or our licensees may be liable
for environmental damage from facilities not operated within environmental
requirements. In addition, changes in air emissions regulations could affect the
ability of industrial coal users to burn alternative fuel produced by our
licensees.
HTI's operations are also subject to federal, state, and local
environmental regulation. HTI's ordinary course of business involves using its
facilities to perform R&D activities, process and recycle oil and to research
and develop technologies involving waste coal, oil chemicals, and energy
technologies, including liquefaction of coal. As a result, petroleum and other
hazardous materials have been and are present on its property. HTI's
wholly-owned subsidiary Chemsampco's ordinary course of business involves
distillations to purify products, analysis, packaging of chemicals, and the
selling, warehousing, and manufacturing of organic chemicals in small research
volumes. As a result, hazardous materials have been and are present on
Chemsampco's leased property. The possibility exists that regulatory
noncompliance or accidental discharges, in spite of safeguards, could create an
environmental liability. Therefore HTI's and Chemsampco's operations entail risk
of environmental damage and HTI could incur liabilities in the future arising
from the discharge of pollutants into the environment or from waste disposal
practices. See our Form 10-K for fiscal year 2001, "ITEM 1. BUSINESS -
Government Regulation" for a discussion of the principal areas of federal, state
and local regulation to which we are subject.
Operations Liability May Exceed Insurance Coverage
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We are subject to potential operations liabilities, such as injuries to
employees or third parties, which are inherent in the manufacturing of
industrial products. Although we have obtained casualty and property insurance
with the intent of covering these risks, there can be no assurance that our
operations will not expose us to operations liabilities beyond our insurance
coverage.
No Assurance of Future Profits
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Although we were profitable in our 2000 and 2001 fiscal years, there is
no assurance that we will be profitable in the future. We are dependent on the
collection of license fees and other payments from licensees for revenue. There
is no assurance that recurring royalties and other payments from licensees will
continue to be sufficient to meet operating requirements. Potential future
operating cost reductions are limited due to our need to work with licensees in
order to sustain and increase recurring royalties.
5
Our Common Stock Price May Continue to be Volatile
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Our common stock is currently traded on the Nasdaq Stock Market(sm).
The market for our common stock has been volatile. Factors such as announcements
of production or marketing of alternative fuel from the alternative fuel
facilities, technological innovations, new products, competitor announcements,
government regulatory action, litigation, patent or proprietary rights
developments, changes in analyst coverage or ratings, and market conditions in
general could have a significant impact on the future market for our common
stock. You may not be able to sell our common stock at or above your purchase
price.
No Dividends Are Contemplated in the Foreseeable Future
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We have never paid dividends on common stock and do not intend to do so
in the foreseeable future. Our ability to pay dividends without approval of our
line of credit debtholder is also restricted and prohibited by covenant as long
as any debt under our line of credit remains outstanding.
Exercise of Options and Warrants May Dilute Stockholders
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We have issued a significant number of options and warrants which can
be exercised for shares of common stock. As of November 30, 2001, we have
approximately 23,784,000 shares of common stock outstanding (net of shares held
in treasury) and approximately 3,431,000 total additional shares are issuable
upon the exercise of options and warrants. We would receive cash upon the
exercise of options and warrants, but to the extent they are exercised and
common stock is issued, current stockholders' interests in us will be diluted.
Dilution of Stockholders Due to Sales of Common Stock and Sale and Conversion of
Convertible Securities May Affect Our Ability to Raise Additional Capital
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Sales of common stock and the exercise of options and warrants may have
an adverse effect on the trading price of, and market for, our common stock. We
may sell or issue common stock or convertible securities in the future at market
prices or at prices below the current market price, which issuance would cause
dilution to stockholders. If the market value of the common stock decreases
significantly, the offering price per share in any future private placements or
public offerings may decrease, causing dilution of ownership to other
stockholders.
Purpose of this Form 8-K: Headwaters currently has five outstanding effective
Forms S-3 (333-67371, 333-79385, 333-85753, 333-34488, and 333-36872) and three
outstanding effective Forms S-8 (333-39674, 333-39676, and 333-39678). The
preceding list of risk factors supercedes and replaces the Risk Factors section
in the Prospectus of each of these registration statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HEADWATERS INCORPORATED
Registrant
Date: December 27, 2001 /s/ Kirk A. Benson
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Kirk A. Benson
Chief Executive Officer and
Principal Executive Officer
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