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, 2002
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 19, 2002 was 24,749,350.
HEADWATERS INCORPORATED
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets - As of
September 30, 2001 and March 31, 2002...................... 3
Condensed Consolidated Statements of Income - For the
three and six months ended March 31, 2001 and 2002......... 5
Condensed Consolidated Statement of Changes in
Stockholders' Equity - For the six months ended
March 31, 2002.............................................. 6
Condensed Consolidated Statements of Cash Flows - For
the six months ended March 31, 2001 and 2002................ 7
Notes to Condensed Consolidated Financial Statements........ 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................... 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................... 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 17
ITEM 5. OTHER INFORMATION........................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 18
SIGNATURES.................................................................18
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
HEADWATERS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
(thousands of dollars) 2001 2002
- ------------------------------------------------------------------------------------------- ---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 999 $ 5,099
Short-term investments 6,048 13,113
Trade receivables, net 8,887 17,525
Short-term notes and accrued interest receivable 6,857 581
Other current assets 1,257 1,627
---------------- -----------------
Total current assets 24,048 37,945
---------------- -----------------
Property, plant and equipment, net 2,680 2,787
---------------- -----------------
Other assets:
Notes and accrued interest receivable 4,000 5,588
Intangible assets, net 10,752 11,361
Deferred income taxes 13,090 4,036
Other assets 805 3,290
---------------- -----------------
Total other assets 28,647 24,275
---------------- -----------------
Total assets $ 55,375 $ 65,007
================ =================
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) 2001 2002
- -------------------------------------------------------------------------------------------- --------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,203 $ 3,149
Accrued personnel costs 2,777 2,575
Other accrued liabilities 4,987 6,562
Notes payable, current and other short-term borrowings 4,356 90
--------------- ----------------
Total current liabilities 14,323 12,376
--------------- ----------------
Long-term liabilities:
Notes payable, non-current 149 107
Other long-term liabilities 2,906 117
Deferred revenue 6,911 7,180
--------------- ----------------
Total long-term liabilities 9,966 7,404
--------------- ----------------
Total liabilities 24,289 19,780
--------------- ----------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; authorized 50,000 shares, issued and
outstanding 23,807 shares at September 30, 2001 (including 548 shares
held in treasury) and 24,661 shares at March 31, 2002 (including 539
shares held in treasury) 24 25
Capital in excess of par value 83,921 87,853
Accumulated deficit (49,399) (39,213)
Other, primarily treasury stock (3,460) (3,438)
--------------- ----------------
Total stockholders' equity 31,086 45,227
--------------- ----------------
Total liabilities and stockholders' equity $ 55,375 $ 65,007
=============== ================
The accompanying notes are an integral
part of the consolidated financial statements.
4
HEADWATERS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31, Six Months Ended March 31,
--------------------------------- --------------------------------
(thousands of dollars, except per-share data) 2001 2002 2001 2002
- --------------------------------------------------------------- ----------------- --------------- ---------------- ---------------
Revenue:
License fees $ 5,168 $ 6,626 $ 11,434 $ 12,441
Chemical reagent sales 4,134 16,944 9,656 27,287
Service revenue 168 1,660 496 3,199
Other 284 26 483 751
----------------- --------------- ---------------- ---------------
Total revenue 9,754 25,256 22,069 43,678
----------------- --------------- ---------------- ---------------
Operating costs and expenses:
Cost of chemical reagents 2,652 11,640 6,278 18,869
Cost of operations 857 3,336 1,958 5,184
Research and development -- 630 -- 1,198
Selling, general and administrative 1,628 2,215 3,097 3,810
----------------- --------------- ---------------- ---------------
Total operating costs and expenses 5,137 17,821 11,333 29,061
----------------- --------------- ---------------- ---------------
Operating income 4,617 7,435 10,736 14,617
----------------- --------------- ---------------- ---------------
Other income (expense):
Interest and net investment income 119 30 341 2
Interest expense (61) (17) (146) (56)
Other, net (77) 1,351 (827) 2,093
----------------- --------------- ---------------- ---------------
Total other income (expense), net (19) 1,364 (632) 2,039
----------------- --------------- ---------------- ---------------
Income before income taxes 4,598 8,799 10,104 16,656
Income tax provision (22) (3,340) (122) (6,470)
----------------- --------------- ---------------- ---------------
Net income $ 4,576 $ 5,459 $ 9,982 $ 10,186
================= =============== ================ ===============
Basic net income per common share $ .20 $ .23 $ .44 $ .43
================= =============== ================ ===============
Diluted net income per common share $ .19 $ .21 $ .41 $ .40
================= =============== ================ ===============
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, 2002 (Unaudited)
Other
---------------------------
Deferred Common
Common Stock Capital in compensation stock held
------------------------- excess Accumulated related to in
(thousands of dollars and shares) Shares Amount of par value deficit stock options treasury
- ---------------------------------------------------------- ------------- ----------------- ------------- -------------- ----------
Balances as of September 30, 2001 23,807 $24 $83,921 $ (49,399) $ (422) $ (3,038)
Exercise of stock options and warrants 919 1 3,386
Tax benefit from exercise of stock options 1,390
Amortization of deferred compensation related
to stock options 47
Purchase of 75 shares of treasury stock, at cost (1,056)
19 shares of treasury stock transferred to
employee stock purchase plan 111 76
Cancellation of 65 shares of treasury stock (65) (955) 955
Net income 10,186
---------- ---------- -------------- ------------ ---------- ---------
Balances as of March 31, 2002 24,661 $25 $87,853 $ (39,213) $ (375) $ (3,063)
========== ========== ============== ============ ========== =========
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) 2001 2002
- ----------------------------------------------------------------------------------------------- -------------- -------------
Cash flows from operating activities:
Net income $ 9,982 $ 10,186
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes -- 6,504
Recognition of deferred revenue (1,462) (553)
Depreciation and amortization 129 664
Net gain on disposition of property, plant and equipment (42) (1,334)
Losses in equity investments, write-offs and provisions for unrealizable investments 1,047 --
Write-down of note receivable and related accrued interest 365 --
Write-up of related party note receivable (541) --
Other changes in operating assets and liabilities (377) (6,637)
-------------- -------------
Net cash provided by operating activities 9,101 8,830
-------------- -------------
Cash flows from investing activities:
Payments on notes receivable -- 6,842
Net purchases of short-term investments -- (7,065)
Net proceeds from sale of short-term investments 1,191 --
Net proceeds from disposition of property, plant and equipment 42 115
Purchase of property, plant and equipment (150) (317)
Investments in and loans to non-affiliated companies (4,201) --
Net increase in other assets (122) (2,515)
-------------- -------------
Net cash used in investing activities (3,240) (2,940)
-------------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable and other borrowings 8,148 2,056
Payments on notes payable and other borrowings (12,184) (6,364)
Proceeds from exercise of options and warrants 383 3,387
Purchase of common stock for the treasury, net of employee stock purchases (2,898) (869)
-------------- -------------
Net cash used in financing activities (6,551) (1,790)
-------------- -------------
Net increase (decrease) in cash and cash equivalents (690) 4,100
Cash and cash equivalents, beginning of period 983 999
-------------- -------------
Cash and cash equivalents, end of period $ 293 $ 5,099
============== =============
Supplemental schedule of non-cash investing and financing activities:
Income tax benefit from exercise of stock options $ -- $ 1,390
Cancellation of treasury stock (2,753) (955)
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
----------------------------------------------
Operations - Headwaters Incorporated and its subsidiaries' primary business
is commercializing its chemical reagent technologies used to produce
alternative fuel from coal derivatives and to develop and deploy
alternative energy technologies. 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. In August 2001,
Headwaters acquired 100% of Hydrocarbon Technologies, Inc. ("HTI"), a New
Jersey company that has significant intellectual property including
technologies to transform coal and heavy oil into ultra-clean diesel fuel,
recycle waste oil into higher value carbon products, and nano-catalyst
technology. Headwaters is interested in possible strategic acquisitions of
entities that operate in adjacent industries and that would be synergistic
with its current operations.
Basis of Presentation - 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, and except for the
transactions disclosed in Note 2 to the consolidated financial statements,
consist of normal recurring adjustments. During the three- and six-month
periods ended March 31, 2002, a gain was recorded on the sale of a 50%
interest in one of Headwaters' original alternative fuel facilities. This
gain was $1,342,000 and is included in other income in the consolidated
statements of income.
The results of operations for the three- and six-month periods ended March
31, 2002 are not necessarily indicative of the results to be expected for
the full fiscal 2002 year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States 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, 2001 ("Form 10-K") and in Headwaters' Quarterly Report
on Form 10-Q for the quarter ended December 31, 2001.
HTI - As described in more detail in the notes to the consolidated
financial statements in the Form 10-K, HTI's financial statements are
consolidated with Headwaters' financial statements using a one-month lag.
Accordingly, HTI's February 28, 2002 balance sheet has been consolidated
with Headwaters' March 31, 2002 balance sheet, and HTI's results of
operations for the period from date of acquisition (August 28, 2001) to
February 28, 2002 have been consolidated with Headwaters' results for the
six months ended March 31, 2002. The $581,000 short-term note receivable in
the March 31, 2002 balance sheet represents the portion of the intercompany
note receivable due from HTI not eliminated in consolidation.
HTI develops and commercializes catalysts and catalytic processes for
producing chemicals and converting low-value fossil fuels into high-value
alternative fuels. HTI's revenue consists primarily of contract services
for businesses and the US Department of Energy and is included in the
caption "Service revenue" in the consolidated statements of income for the
three- and six-month periods ended March 31, 2002. HTI's costs related to
service revenue are included in cost of operations for the respective
periods. In accounting for long-term contracts, HTI primarily uses the
percentage of completion method of accounting, on the basis of the
relationship between effort expended and total estimated effort for the
contract. If estimates of costs to complete a contract indicate a loss, a
provision is made for the total anticipated loss. Included in cost of
operations for the three- and six-month periods ended March 31, 2002 is
$162,000 and $323,000, respectively, of amortization expense related to the
identifiable intangible assets recorded as part of the HTI acquisition.
2. HTI Transactions Subsequent to Acquisition
------------------------------------------
During the quarter ended March 31, 2002, in connection with the preparation
of Headwaters' and HTI's consolidated income tax returns for the year ended
September 30, 2001, Headwaters finalized its analysis of all of HTI's
differences between book and tax reporting and HTI's net operating loss
carryforwards as of the acquisition date. Based on this analysis,
Headwaters adjusted the HTI purchase price allocation to record additional
deferred tax assets of $510,000 and additional deferred tax liabilities of
$4,240,000, eliminated a $2,714,000 contingent liability and recorded
goodwill of $1,016,000.
8
HEADWATERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
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.
Headwaters agreed to pay to the former HTI stockholders additional
consideration with a value totaling $3,242,000. The consideration will
consist of cash of $419,000 and the issuance of approximately 178,000
shares of Headwaters common stock valued at $2,823,000. This transaction
will result in an increase in goodwill by the total value of the
consideration of $3,242,000. The value of the 178,000 shares of common
stock to be issued to the former HTI stockholders was determined using the
average market price of Headwaters' stock over a three-day period,
consisting of the day the settlement was reached and one day prior to and
one day subsequent to that day.
Included in cost of operations for the three- and six-month periods ended
March 31, 2002 is $500,000 of accrued restructuring costs related to HTI.
These costs are related to a cost reduction plan approved in March 2002 and
implemented from March early April 2002. The plan calls for, among other
cost cutting measures, a personnel reduction from a cross section of HTI's
departments. All of the identified employees, comprising approximately 25%
of HTI's total workforce prior to implementation of the plan, were
terminated effective April 4, 2002. Actual costs incurred to implement the
cost reduction plan through April 19, 2002 total approximately $125,000,
with an estimated $375,000 of costs to be paid during the remainder of
fiscal 2002.
3. Basic and Diluted Earnings per Share
------------------------------------
Three Months Ended March 31, Six Months Ended March 31,
(thousands of dollars and shares, except per-share data) 2001 2002 2001 2002
-------------------------------------------------------------- --------------- -------------- -------------- --------------
Numerator:
Net income $ 4,576 $ 5,459 $ 9,982 $ 10,186
Preferred stock dividends (undeclared) (47) -- (94) --
--------------- -------------- -------------- --------------
Numerator for basic earnings per share -- net income
attributable to common stockholders 4,529 5,459 9,888 10,186
Effect of dilutive securities - preferred stock dividends 47 -- 94 --
--------------- -------------- -------------- --------------
Numerator for diluted earnings per share -- net income
attributable to common stockholders after assumed conversions $ 4,576 $ 5,459 $ 9,982 $ 10,186
=============== ============== ============== ==============
Denominator:
Denominator for basic earnings per share -- weighted-average
shares outstanding 22,458 23,924 22,719 23,758
Effect of dilutive securities:
Shares issuable upon exercise of options and warrants 1,416 1,532 1,057 1,576
Shares issuable upon conversion of preferred stock 443 -- 443 --
--------------- -------------- -------------- --------------
Total dilutive potential shares 1,859 1,532 1,500 1,576
--------------- -------------- -------------- --------------
Denominator for diluted earnings per share --
weighted-average shares outstanding after assumed
exercises and conversions 24,317 25,456 24,219 25,334
=============== ============== ============== ==============
Basic net income per share $ 0.20 $ 0.23 $ 0.44 $ 0.43
=============== ============== ============== ==============
Diluted net income per share $ 0.19 $ 0.21 $ 0.41 $ 0.40
=============== ============== ============== ==============
The amount of anti-dilutive securities not considered in the diluted
earnings per share calculation, consisting only of out-of-the money options
and warrants, totaled approximately 1,450,000 and 110,000 shares for the
three months ended March 31, 2001 and 2002, respectively, and 2,060,000 and
400,000 shares for the six months ended March 31, 2001 and 2002,
respectively.
9
HEADWATERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
4. Borrowing Arrangements
----------------------
Unsecured Bank Line of Credit - Headwaters has an unsecured revolving line
of credit with a bank which currently has an expiration date in October
2002. Borrowings under the unsecured line of credit are limited to a
maximum amount of $10,000,000 and bear interest at prime plus 0.75% (5.5%
at March 31, 2002). Maximum borrowings under the line of credit during the
quarter ended December 31, 2001 were $956,000, but there were no borrowings
outstanding under the line at December 31, 2001 nor at any time during the
quarter ended March 31, 2002.
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 portfolio of Headwaters' short-term investments
with the investment company ($12,000,000 at March 31, 2002). These
investments consist primarily of government-backed securities and
collateralize any outstanding borrowings. Maximum borrowings under this
arrangement during the quarter ended December 31, 2001 were $5,095,000, but
there were no borrowings outstanding at December 31, 2001 nor at any time
during the quarter ended March 31, 2002. Borrowings under this arrangement
and the bank line of credit are used for short-term working capital needs.
Interest on these borrowings totaled $10,000 during the December 2001
quarter.
5. Income Taxes
------------
Headwaters recorded $100,000 of current alternative minimum federal tax
expense in the quarter ended December 31, 2000 and $22,000 of current state
income tax in the quarter ended March 31, 2001, for total income tax
expense of $122,000 for the six months ended March 31, 2001.
Headwaters recorded $3,340,000 and $6,470,000, respectively, of income tax
expense in the quarter and six months ended March 31, 2002. For the March
31, 2002 quarter, total income tax expense consisted of approximately
$3,430,000 of deferred federal and state tax expense and approximately
$310,000 of current state tax expense, offset by approximately $400,000 of
current federal tax credits. For the six months ended March 31, 2002, total
income tax expense consisted of approximately $6,500,000 of deferred
federal and state tax expense and approximately $370,000 of current state
tax expense, offset by approximately $400,000 of current federal tax
credits. As of March 31, 2002, Headwaters had net operating loss ("NOL")
carryforwards for tax purposes of approximately $20,000,000 and does not
anticipate actually paying any substantial amounts of income taxes until
these NOL carryforwards are fully used.
Headwaters' effective tax rate was 38% and 39%, respectively, for the
quarter and six months ended March 31, 2002. The effective tax rate was 40%
for the quarter ended December 31, 2001 and was lower for the quarter ended
March 31, 2002 due primarily to the enactment in March 2002 of the Job
Creation and Worker Assistance Act of 2002. This law allows Headwaters' NOL
carryforwards to offset 100% (instead of only 90%) of the alternative
minimum tax liability for fiscal years 2001 and 2002 only. As a result, a
tax refund receivable was recorded for $200,000 representing the recovery
of alternative minimum taxes expensed and paid in 2001.
6. Commitments and Contingencies
-----------------------------
Commitments and contingencies as of March 31, 2002 not disclosed elsewhere,
consisting of legal and contractual matters, 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. (This technology is
distinct from the technology developed by Headwaters.) 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 alleged that the technology purchase transaction was an
unauthorized corporate action and that Davidson and Headwaters conspired
together to effect the transfer. The complaint asserted related causes of
action and sought unspecified money damages and other relief. In August
2001, the trial court granted Headwaters' motion to dismiss the complaint.
Plaintiffs have appealed the case to the Sixth Circuit Court of Appeals.
Because resolution of the appeal is uncertain, legal counsel cannot express
an opinion as to the ultimate amount, if any, of Headwaters' liability.
10
HEADWATERS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
----------
AGTC. In March 1996, Headwaters entered into an agreement with AGTC and its
associates for certain services related to the identification and selection
of alternative fuel projects. In March 2002, AGTC filed an arbitration
demand claiming that it is owed a commission under the 1996 agreement for
eight percent of the monetized price of the Port Hodder project. Headwaters
asserts that AGTC did not perform under the agreement and that the
agreement was terminated and the disputes were settled in July 1996.
Headwaters has filed an answer in the arbitration, denying AGTC's claims
and has asserted counterclaims against AGTC. Because the arbitration is at
an early stage and resolution is uncertain, legal counsel cannot express an
opinion as to the ultimate amount of recovery or liability.
AJG. In December 1996, Headwaters entered into a technology license and
proprietary chemical reagent sale agreement with AJG Financial Services,
Inc. The agreement called for AJG to pay royalties and to purchase
proprietary chemical reagent material from Headwaters. In October 2000,
Headwaters filed a complaint in the Fourth District Court for the State of
Utah against AJG alleging that it had failed to make payments and to
perform other obligations under the agreement. Headwaters asserts claims
including breach of contract, declaratory judgment, unjust enrichment, and
accounting and seeks money damages in the amount of $750,000 plus other
damages to be proven at trial, as well as other relief. AJG's answer to the
complaint denied Headwaters' claims and asserted counter-claims based upon
allegations of misrepresentation and breach of contract. AJG seeks
unspecified compensatory damages as well as punitive damages. Headwaters
has denied 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.
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 adverse 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.
Headwaters is interested in possible strategic acquisitions of entities
that operate in adjacent industries and that would be synergistic with its
current operations. Any future acquisitions could be funded using
Headwaters' available cash, issuance of common stock, debt, or some
combination thereof. As of March 31, 2002, Headwaters has capitalized
approximately $2,570,000 of costs associated with potential future
acquisitions and related projects that it is currently pursuing. If these
potential acquisitions and related projects are not consummated, the
respective capitalized costs will be expensed.
11
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, 2002 Compared to Three Months Ended March 31, 2001
The information set forth below compares Headwaters' operating results for
the three months ended March 31, 2002 ("2002") with operating results for the
three months ended March 31, 2001 ("2001").
Revenue. Total revenue for 2002 increased by $15,502,000 to $25,256,000 as
compared to $9,754,000 for 2001. The major components of revenue are discussed
below.
License Fees. During 2002, Headwaters recognized license fee revenue
totaling $6,626,000, an increase of $1,458,000 from $5,168,000 of license fee
revenue recognized during 2001. The increase in license fee revenue is due to
increased alternative fuel sales by most of Headwaters' licensees.
Chemical Reagent Sales and Cost of Chemical Reagents. Chemical reagent
sales during 2002 were $16,944,000 with a corresponding direct cost of
$11,640,000. Chemical reagent sales during 2001 were $4,134,000 with a
corresponding direct cost of $2,652,000. The increase in chemical reagent sales
in 2002 over 2001 was due to increased alternative fuel production by
Headwaters' licensees, as well as sales of chemical reagents to new customers.
Headwaters expects its future chemical reagent sales revenue from all licensees
and other customers combined to be higher in fiscal 2002 than the amounts
reported for fiscal 2001 due to anticipated increases in alternative fuel
production by licensees and increases in sales of chemical reagents to new
customers. The gross profit margin decreased in 2002 from 2001 due to increased
sales of a new chemical reagent formula, for certain licensees and new
customers, which has a lower gross margin. Headwaters expects future gross
profit margins to be slightly lower than the margin percentages realized in
fiscal 2001 for the same reason and expects the gross margin for the remainder
of fiscal 2002 to be relatively consistent with the gross margin achieved in
2002.
Service Revenue. Service revenue for 2002 includes $1,030,000 of HTI
revenue and $630,000 of fees for operating two alternative fuel facilities for a
licensee. Since HTI was acquired in August 2001, there was no service revenue
for HTI for 2001. Headwaters operated only one alternative fuel facility in 2001
for which it received $168,000 in fees.
Cost of Operations. These costs increased by $2,479,000 to $3,336,000 in
2002 from $857,000 in 2001. The increase from 2001 to 2002 was primarily
attributable to HTI costs of $2,234,000, along with an increase in personnel
costs of approximately $200,000. Restructuring costs of $500,000 are included in
HTI's costs. These costs are related to a cost reduction plan approved in March
2002 and implemented from March through early April 2002. The plan calls for,
among other cost cutting measures, a reduction in personnel comprising
approximately 25% of HTI's total workforce. Also included in HTI's costs is
$162,000 of amortization expense related to the identifiable intangible assets
recorded as part of the HTI acquisition.
Research and Development. Substantially all of the research and development
costs for 2002 represent the costs of research and development incurred by HTI.
Since HTI was acquired in August 2001, there were no research and development
costs for 2001.
Selling, General and Administrative Expenses. These expenses increased
$587,000 to $2,215,000 in 2002 from $1,628,000 in 2001. The increase was due
primarily to increases of approximately $300,000 in both personnel costs and in
professional services expense. The increase in professional services expense was
due primarily to consulting costs related to strategic planning.
Other Income and Expense. During 2002, Headwaters reported net other income
of $1,364,000 compared to net other expense of $19,000 during 2001. The
difference of $1,383,000 in net other income / expense is primarily attributable
to a gain on sale of an interest in an alternative fuel facility of $1,342,000
in 2002, a decrease in equity and debt investment-related losses of
approximately $720,000, and a decrease in the gain associated with a related
party note receivable of approximately $630,000.
12
In 2002, Headwaters sold a 50% interest in one its original alternative
fuel facilities. The gain on the sale of this interest was $1,342,000. There
were no other material asset sales in either 2002 or 2001. During fiscal 2000
and early fiscal 2001, Headwaters made several equity investments in and loans
to unrelated high-risk entities. In 2001, Headwaters recognized approximately
$720,000 of losses related to those investments. There were no such losses in
2002.
In 1996, Headwaters sold certain construction companies and received as
consideration a note receivable. This related party note was "marked to market"
each period based upon the market value of Headwaters' common stock held as
collateral and was reflected in Headwaters' financial statements at the
underlying value of that collateral. In 2001, Headwaters recorded a "mark to
market" gain of approximately $630,000 on the note receivable. In January 2001,
Headwaters accepted as full satisfaction of the note receivable the shares of
Headwaters' stock collateralizing the note plus a new note receivable which was
fully reserved.
Interest and net investment income decreased from $119,000 in 2001 to
$30,000 in 2002. The $89,000 decrease was primarily due to approximately
$100,000 of interest income in 2001 related to a $6,500,000 note receivable that
was collected in October 2001 and for which there was no interest income in
2002. In 2002, investment income is net of a mark-to-market loss adjustment of
approximately $160,000 related to certain short-term government securities
classified as trading securities.
Income Taxes. As of September 30, 2001, Headwaters determined that it was
more likely than not that it would realize the benefit of its net operating loss
("NOL") carryforwards and recorded a deferred tax asset totaling approximately
$10,470,000. Headwaters then began recording a full tax provision beginning with
the December 2001 quarter.
Headwaters recorded $3,340,000 of income tax expense in 2002, which
consisted of approximately $3,430,000 of deferred federal and state tax expense
and approximately $310,000 of current state tax expense, offset by approximately
$400,000 of current federal tax credits. In 2001, Headwaters utilized its NOL
carryforwards and recorded only $22,000 of current state income tax.
Headwaters' effective tax rate was 38% in 2002. The effective tax rate was
40% for the quarter ended December 31, 2001 and was lower in 2002 due primarily
to the enactment in March 2002 of the Job Creation and Worker Assistance Act of
2002. This law allows Headwaters' NOL carryforwards to offset 100% (instead of
only 90%) of the alternative minimum tax liability for fiscal years 2001 and
2002 only. As a result, a tax refund receivable was recorded for $200,000
representing the recovery of alternative minimum taxes expensed and paid in
fiscal 2001.
Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001
The information set forth below compares Headwaters' operating results for
the six months ended March 31, 2002 ("2002") with operating results for the six
months ended March 31, 2001 ("2001").
Revenue. Total revenue for 2002 increased by $21,609,000 to $43,678,000 as
compared to $22,069,000 for 2001. The major components of revenue are discussed
below.
License Fees. During 2002, Headwaters recognized license fee revenue
totaling $12,441,000, an increase of $1,007,000 from $11,434,000 of license fee
revenue recognized during 2001. The increase in license fee revenue is due to
increased alternative fuel sales by most of Headwaters' licensees.
Chemical Reagent Sales and Cost of Chemical Reagents. Chemical reagent
sales during 2002 were $27,287,000 with a corresponding direct cost of
$18,869,000. Chemical reagent sales during 2001 were $9,656,000 with a
corresponding direct cost of $6,278,000. The increase in chemical reagent sales
in 2002 over 2001 was due to increased alternative fuel production by
Headwaters' licensees, as well as sales of chemical reagents to new customers.
The gross profit margin decreased in 2002 from 2001 due to increased sales of a
new chemical reagent formula, for certain licensees and new customers, which has
a lower gross margin.
Service and Other Revenue. Service revenue for 2002 includes $2,204,000 of
HTI revenue and $995,000 of fees for operating two alternative fuel facilities
for a licensee. Since HTI was acquired in August 2001, there was no service
revenue for HTI for 2001. Headwaters operated only one alternative fuel facility
in 2001 for which it received $496,000 in fees. In 2002, other revenue includes
$500,000 of one-time development services revenue related to work performed for
a licensee.
13
Cost of Operations. These costs increased by $3,226,000 to $5,184,000 in
2002 from $1,958,000 in 2001. The increase from 2001 to 2002 was primarily
attributable to HTI costs of $3,338,000. Restructuring costs of $500,000 are
included in HTI's costs. These costs are related to a cost reduction plan
approved in March 2002 and implemented from March through early April 2002. The
plan calls for, among other cost cutting measures, a reduction in personnel
comprising approximately 25% of HTI's total workforce. Also included in HTI's
costs is $323,000 of amortization expense related to the identifiable intangible
assets recorded as part of the HTI acquisition.
Research and Development. Substantially all of the research and development
costs for 2002 represent the costs of research and development incurred by HTI.
Since HTI was acquired in August 2001, there were no research and development
costs for 2001.
Selling, General and Administrative Expenses. These expenses increased
$713,000 to $3,810,000 in 2002 from $3,097,000 in 2001. The increase was due
primarily to increases of approximately $500,000 in professional services
expense and approximately $200,000 in personnel costs. The increase in
professional services expense was due primarily to consulting costs related to
strategic planning.
Other Income and Expense. During 2002, Headwaters reported net other income
of $2,039,000 compared to net other expense of $632,000 during 2001. The
difference of $2,671,000 in net other income / expense is primarily attributable
to a gain on sale of an interest in an alternative fuel facility of $1,342,000
in 2002, a decrease in equity and debt investment-related losses of
approximately $1,410,000, and an increase in the gain associated with a related
party note receivable of approximately $210,000, all of which was partially
offset by a reduction in interest and net investment income of approximately
$340,000.
In 2002, Headwaters sold a 50% interest in one its original alternative
fuel facilities. The gain on the sale of this interest was $1,342,000. There
were no other material asset sales in either 2002 or 2001. During fiscal 2000
and early fiscal 2001, Headwaters made several equity investments in and loans
to unrelated high-risk entities. In 2001, Headwaters recognized approximately
$1,410,000 of losses related to those investments. There were no such losses in
2002.
In 2001, Headwaters recorded a "mark to market" gain of approximately
$540,000 on its related party note receivable. In January 2001, Headwaters
accepted as full satisfaction of the note receivable the shares of Headwaters'
stock collateralizing the note plus a new note receivable which was fully
reserved. In October 2001, Headwaters collected $750,000 on the fully reserved
note, resulting in a $210,000 increase in the gain recognized on this note in
2002 compared to 2001.
Interest and net investment income decreased from $341,000 in 2001 to
$2,000 in 2002. The $339,000 decrease was primarily due to a decrease of
approximately $180,000 in interest income related to a $6,500,000 note
receivable and a decrease of approximately $190,000 in the return on short-term
investments. The $6,500,000 note receivable was collected in October 2001 and
accordingly, there was very little interest income in 2002. In 2001, Headwaters
realized net investment income of approximately $140,000 while in 2002 a net
investment loss of approximately $50,000 was incurred. The 2002 net investment
loss includes a mark-to-market loss adjustment of approximately $310,000 related
to certain short-term government securities classified as trading securities.
Income Taxes. Headwaters' effective tax rate was 39% in 2002. Headwaters
recorded $6,470,000 of income tax expense in 2002, which consisted of
approximately $6,500,000 of deferred federal and state tax expense and
approximately $370,000 of current state tax expense, offset by approximately
$400,000 of current federal tax credits. In 2001, Headwaters utilized its net
operating loss carryforwards and recorded only $100,000 of current alternative
minimum federal tax expense and $22,000 of current state income tax.
Liquidity and Capital Resources
Net cash provided by operating activities during 2002 was $8,830,000
compared to $9,101,000 during 2001. Most of the cash flow from operating
activities in both periods was attributable to net income. During 2002,
investing activities consisted primarily of net purchases of short-term
investments of $7,065,000, the collection on notes receivable of $6,842,000, and
costs related to potential future acquisitions and related projects totaling
approximately $2,570,000. Financing activities in 2002 consisted primarily of
net repayments of short-term borrowings of $4,308,000 and proceeds from the
exercise of stock options and warrants of $3,387,000.
14
Operating Activities. Headwaters reported net income in 2002 of
$10,186,000. Moreover, most of Headwaters' reported income tax expense of
$6,470,000 represents realization of deferred income taxes which did not require
the use of cash. In 2002, the cash provided from operations was reduced by a
significant increase in trade receivables approximating $8,638,000. This
increase in trade receivables was due to the significant increase in revenues
during 2002. Headwaters has no allowance for doubtful accounts at March 31,
2002.
Investing and Financing Activities. In September 2001, Headwaters sold all
of its remaining high-risk investments in exchange for a $4,000,000
collateral-based note receivable from a limited liability corporation. This note
is due no later than September 2004, is collateralized by the bridge loans and
equity investments sold and is being accounted for on the cost recovery method.
Headwaters also has certain contract rights in excess of the $4,000,000 note
amount relating to the collection of cash by the limited liability corporation.
Headwaters does not currently intend to make any significant additional equity
investments in or loans to any new unrelated high-risk entities, but could incur
additional losses if the $4,000,000 loan is not repaid. During the six months
ended March 31, 2002, Headwaters collected $244,000 on this note. At September
30, 2001, in addition to the $4,000,000 note receivable, Headwaters had
outstanding one other note receivable in the amount of $6,500,000. This note and
the related accrued interest was collected in October 2001.
Headwaters is interested in possible strategic acquisitions of entities
that operate in adjacent industries and that would be synergistic with its
current operations. Any future acquisitions could be funded using Headwaters'
available cash, issuance of common stock, debt, or some combination thereof. As
of March 31, 2002, Headwaters has capitalized approximately $2,570,000 of costs
associated with potential future acquisitions and related projects that it is
currently pursuing. If these potential acquisitions and related projects are not
consummated, the respective capitalized costs will be expensed.
Financing activities in 2002 consisted primarily of net repayments of
short-term borrowings of $4,308,000 and proceeds from the exercise of stock
options and warrants of $3,387,000. Other than operating leases for certain
equipment and real estate, which are not material, Headwaters has no off-balance
sheet transactions, derivatives, or similar instruments and is not a guarantor
of any other entities' debt or other financial obligations.
Working Capital. Headwaters' working capital increased from $9,725,000 at
September 30, 2001, to $25,569,000 at March 31, 2002. The primary reasons for
this increase in working capital were the significant increase in cash and cash
equivalents, short-term investments and trade receivables, all resulting from
increased revenue, profitability and realization of deferred income taxes.
Headwaters expects operations to produce positive cash flows in future periods,
which, combined with current working capital, will be sufficient for Headwaters'
needs for the next 12 months.
Borrowing Arrangements. Headwaters has an unsecured revolving line of
credit with a bank which currently has an expiration date in October 2002.
Borrowings under the unsecured line of credit are limited to a maximum amount of
$10,000,000 and bear interest at prime plus 0.75% (5.5% at March 31, 2002).
Maximum borrowings under the line of credit during the quarter ended December
31, 2001 were $956,000, but there were no borrowings outstanding under the line
at December 31, 2001 nor at any time during the quarter ended March 31, 2002.
Headwaters also has an arrangement with an investment company under which
Headwaters can borrow up to 90% of the value of the portfolio of Headwaters'
short-term investments held with the investment company ($12,000,000 at March
31, 2002). These investments consist primarily of government-backed securities
and collateralize any outstanding borrowings. Maximum borrowings under this
arrangement during the quarter ended December 31, 2001 were $5,095,000, but
there were no borrowings outstanding at December 31, 2001 nor at any time during
the quarter ended March 31, 2002. Borrowings under this arrangement and the bank
line of credit are used for short-term working capital needs.
Income Taxes. As of March 31, 2002, Headwaters had net operating loss
("NOL") carryforwards for tax purposes of approximately $20,000,000 and does not
anticipate actually paying any substantial amounts of income taxes until these
NOL carryforwards are fully used. The NOL carryforwards expire from 2017 to
2021. Headwaters also has approximately $220,000 of tax credit carryforwards
which can be used to offset future tax liabilities. The tax credit carryforwards
expire from 2007 to 2016. The utilization of HTI's acquisition date NOL
carryforwards (totaling approximately $2,400,000) against future taxable income
is subject to an annual limitation of approximately $800,000 due to the change
in ownership of HTI.
During 2002, Headwaters made estimated payments for alternative minimum
taxes and for certain state income taxes in states where NOL carryforwards are
not available. Due to the passage in March 2002 of the Job Creation and Worker
Assistance Act of 2002 (the "Act"), Headwaters has filed for a refund of the
alternative minimum taxes paid in fiscal 2001 and plans to file for refunds
related to the carryback of HTI's 2000 and 2001 losses, which pursuant to the
Act can be carried back for five years instead of the statutory two-year period.
Refunds expected to be received in fiscal 2002 total approximately $400,000.
Because of existing NOL carryforwards for regular federal tax purposes and in
many states where Headwaters does business, the provisions of the Act allowing
Headwaters' NOL carryforwards to offset 100% of the alternative minimum tax
liability for fiscal 2002, and due to anticipated tax benefits from the exercise
of stock options, Headwaters does not currently expect to pay significant
amounts of income taxes until late fiscal 2002 or early fiscal 2003.
15
Acquisition of HTI
Headwaters completed the acquisition of HTI in August 2001. Total
consideration paid at closing, including the direct costs incurred by Headwaters
to consummate the acquisition, was approximately $11,774,000. During the quarter
ended March 31, 2002, in connection with the preparation of Headwaters' and
HTI's consolidated income tax return for the year ended September 30, 2001,
Headwaters finalized its analysis of all of HTI's book / tax temporary
differences and HTI's net operating loss carryforwards as of the acquisition
date. Based on this analysis, Headwaters adjusted the purchase price allocation
to record additional deferred tax assets of $510,000 and additional deferred tax
liabilities of $4,240,000, eliminated a $2,714,000 contingent liability and
recorded goodwill of $1,016,000.
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. Headwaters agreed to pay to the former HTI
stockholders additional consideration with a value totaling $3,242,000. The
consideration will consist of cash of $419,000 and the issuance of approximately
178,000 shares of Headwaters common stock valued at $2,823,000. This transaction
will result in an increase in goodwill by the total value of the consideration
of $3,242,000. The value of the 178,000 shares of common stock to be issued to
the former HTI stockholders was determined using the average market price of
Headwaters' stock over a three-day period, consisting of the day the settlement
was reached and one day prior to and one day subsequent to that day.
As of March 31, 2002, Headwaters had loaned HTI approximately $5,670,000,
of which $581,000 was not eliminated in consolidation.
Other Items
Headwaters has reviewed all recently issued, but not yet adopted,
accounting standards in order to determine their potential effects, if any, on
the future results of operations or financial position of Headwaters. Based on
that review, Headwaters believes that full implementation of SFAS No. 142,
"Accounting for Goodwill and Intangible Assets," will require certain additional
disclosures beginning October 1, 2002; however, Headwaters believes that neither
SFAS No. 142 nor any of the other pronouncements reviewed will have any
significant effects on its current or future financial position or results of
operations.
Forward Looking Statements
Statements in this Quarterly Report on Form 10-Q regarding Headwaters'
expectations as to the operation of facilities utilizing Headwaters' alternative
fuel technologies, the marketing of products, the receipt of licensing fees,
royalties, and product sales revenues, the development, commercialization and
financing of new technologies and other strategic business opportunities and
acquisitions and other information about Headwaters that is not purely
historical by nature, including those statements regarding Headwaters' future
business plans, the operation of facilities, the availability of tax credits,
the availability of 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) 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, overall costs
of operations and other commercial factors surrounding the use of
Headwaters' technologies.
(2) Marketing issues relating to market acceptance and regulatory permitting of
products manufactured using Headwaters' technologies.
(3) Securing of suitable facility sites, including permits and raw materials,
for relocation and operation of facilities and product sales.
16
(4) The market acceptance of products manufactured with Headwaters'
technologies in the face of competition from traditional products.
(5) Dependence on licensees to successfully implement Headwaters' chemical
reagent technologies and to make license and other payments to Headwaters.
(6) Maintenance of placed-in-service and other requirements under Section 29 of
the tax code by alternative fuel manufacturing facilities.
(7) Changes in governmental regulations or failure to comply with existing
regulations that could result in reduction or shutdown of operations of
licensee facilities.
(8) The continued availability of tax credits to licensees under the tax code
and each licensee's ability to use tax credits.
(9) The commercial feasibility of Headwaters' alternative fuel technologies
upon the expiration of tax credits.
(10) Ability to meet financial commitments under existing contractual
arrangements.
(11) Ability to meet non-financial commitments under existing contractual
arrangements.
(12) Ability to commercialize new technologies which have only been tested in
the laboratory and not in full-scale operations.
(13) Ability to commercialize the technology of HTI and to implement new
business plans which are at an early stage of investigation and investment
and which will require significant time, management, and capital
investment.
(14) Success in the face of competition by others producing alternative chemical
reagent products and other competing alternative fuel.
(15) Sufficiency of intellectual property protections.
(16) 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, 2001 for descriptions of current legal
proceedings. Other than the AGTC matter described in Note 6 to the consolidated
financial statements, there have been no material changes with respect to legal
proceedings since that report was filed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
Other than 45,000 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. As of March 31, 2002, Headwaters had 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 shares issued during the quarter.
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 15, 2002
for the following purposes:
1. To elect three Class II directors of Headwaters to serve until the
2005 annual meeting of stockholders, one Class III director to serve
until the 2003 annual meeting, or until their successors are duly
elected and qualified, and also, pursuant to a contractual obligation
connected with the acquisition of Hydrocarbon Technologies, Inc. by
Headwaters, one additional Class I director to serve a contractual
term ending March 31, 2004 and one additional Class III director to
serve a contractual term ending March 31, 2003;
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, 2002; and
3. To approve a new stock incentive plan which was approved by
Headwaters' Board of Directors in November 2001 and which authorizes a
minimum of 2,000,000 shares available for grant thereunder.
17
A total of 22,055,969 shares were voted on proposals no. 1 and 2. A total
of 14,170,149 shares were voted on proposal no. 3. The results of voting on
these matters were as follows:
1. To elect Mr. Kirk A. Benson as a Class II director: for - 19,304,194;
withheld authority - 2,751,775.
To elect Mr. Raymond J. Weller as a Class II director: for -
21,368,870; withheld authority - 687,099.
To elect Mr. E. J. "Jake" Garn as a Class II director: for -
21,484,812; withheld authority - 571,157.
To elect Mr. Ronald S. Tanner as a Class III director: for -
21,456,612; withheld authority - 599,357.
To elect Mr. L. K. (Theo) Lee as an additional Class I director: for -
19,344,302; withheld authority - 2,711,667.
To elect Mr. Alfred G. Comolli as an additional Class III director:
for - 19,280,221; withheld authority - 2,775,748.
2. To ratify the selection of Arthur Andersen LLP as auditors for fiscal
2002: for - 20,313,377; against - 1,421,695; abstain - 320,897.
3. To approve a new stock incentive plan: for - 5,321,342; against -
8,768,910; abstain - 79,897.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
10.72.5 Amendment to Share Exchange Agreement and Agreement and Plan
of Reorganization between Headwaters and Hydrocarbon
Technologies, Inc. dated March 31, 2002
10.74 Asset Purchase Agreement between Headwaters and Red Hawk
Energy, LLC dated December 28, 2001
10.74.1 Amended and Restated Technology License and Reagent Supply
Agreement between Headwaters and Environmental Technologies
Group, LLC dated March 26, 2002
(b) No reports were filed on Form 8-K during the quarter ended
March 31, 2002.
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, 2002 By: /s/ Kirk A. Benson
---------------------------------------
Kirk A. Benson, Chief Executive Officer
and Principal Executive Officer
Date: April 26, 2002 By: /s/ Steven G. Stewart
---------------------------------------
Steven G. Stewart, Chief Financial
Officer and Principal Financial Officer
18