SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement [ ] Confidential, for Use of the Commission
[ ] Definitive Additional Materials Only (as permitted by Rule 14a-6(e)(2))
[ ] Soliciting Material under
ss.240.14a-12
HEADWATERS INCORPORATED
-----------------------------------------------
(Name of Registrant as Specified in Its Charter)
-----------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
HEADWATERS INCORPORATED
10653 South River Front Parkway, Suite 300
South Jordan, Utah 84095
January 21, 2005
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of Headwaters Incorporated, which will be held on Tuesday, March 1, 2005, at
2:00 p.m., Mountain Standard Time, at the Country Inn & Suites, 10499 South
Jordan Gateway, South Jordan, Utah 84095. In addition to the matters to be acted
upon at the meeting, which are described in the attached Notice of Annual
Meeting of Stockholders and Proxy Statement, there will be a report with respect
to the current status of Headwaters' operations and an opportunity for you to
ask questions.
Whether or not you plan to attend the meeting, please complete, date,
sign and return the enclosed proxy card or voting instruction form in the
accompanying envelope as promptly as possible to ensure that your shares are
represented and voted in accordance with your wishes.
The Proxy Statement contains a more extensive discussion of each
proposal and therefore you should read the Proxy Statement carefully. After you
have read the Proxy Statement and the accompanying instructions, you should
execute and return the enclosed form of proxy card or voting instructions with
respect to the proposed matters. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU APPROVE ALL PROPOSALS.
Only stockholders of record at the close of business on January 19,
2005 are entitled to vote at the meeting. You are cordially invited to attend
the meeting in person. However, to assure your representation at the meeting,
please complete, date and sign the enclosed proxy card and return it promptly.
If you choose, you may still vote in person at the meeting even though you
previously submitted a proxy card.
If you have any questions after reading the Proxy Statement and other
materials we have sent, please call Sharon Madden, Headwaters' Director of
Investor Relations, at 1-800-316-6214.
Sincerely,
/s/ Kirk A. Benson
------------------------------------
Kirk A. Benson
Chairman and Chief Executive Officer
THE BOARD ENCOURAGES STOCKHOLDERS TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ACCOMPANYING ENVELOPE. THE
PROXY MAY BE REVOKED AT ANY TIME BEFORE THE SHARES ARE VOTED AT THE MEETING.
STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR SHARES PERSONALLY EVEN THOUGH
THEY HAVE SENT THEIR PROXIES.
HEADWATERS INCORPORATED
10653 South River Front Parkway, Suite 300
South Jordan, Utah 84095
--------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON TUESDAY, MARCH 1, 2005
--------------------
To the Stockholders of Headwaters Incorporated:
The 2005 Annual Meeting of Stockholders (the "Meeting") of Headwaters
Incorporated, a Delaware corporation ("Headwaters"), will be held on Tuesday,
March 1, 2005, starting at 2:00 p.m., Mountain Standard Time, at the Country Inn
& Suites, 10499 South Jordan Gateway, South Jordan, Utah 84095, for the
following purposes:
1. To elect three Class II directors of Headwaters to serve until
the 2008 annual meeting and one Class III director to serve
until the 2006 annual meeting, or until their successors are
duly elected and qualified;
2. To ratify the selection by the Board of Directors of Ernst &
Young LLP as independent auditors of Headwaters for the fiscal
year ending September 30, 2005;
3. To approve an amendment to Headwaters' Certificate of
Incorporation to increase the number of Headwaters' Common
Stock, par value $0.001, authorized for issuance from
50,000,000 to 100,000,000 shares;
4. To approve the Headwaters Short Term Incentive Bonus Plan;
5. To approve the Headwaters Long Term Incentive Compensation
Plan; and
6. To transact such other business as may properly come before
the Meeting and any and all adjournments or postponements
thereof.
The Board has fixed the close of business on Wednesday, January 19,
2005, as the record date for determining the stockholders entitled to notice of,
and to vote at, the Meeting. Only stockholders of record as of the record date
are entitled to notice of, and to vote at, the Meeting and any adjournments or
postponements thereof. A copy of Headwaters' Proxy Statement and a proxy card
accompany this notice. These materials will be first sent to stockholders on or
about January 28, 2005.
Stockholders are cordially invited to attend the Meeting in person.
However, to assure your representation at the Meeting, please complete, date and
sign the enclosed proxy card and return it promptly. If you choose, you may
still vote in person at the Meeting even though you previously submitted a proxy
card.
By Order of the Board of Directors,
/s/ Harlan M. Hatfield
----------------------------
Harlan M. Hatfield
Secretary
South Jordan, Utah
January 21, 2005
Your vote is important.
You are urged to date, sign and promptly return your proxy card so that your
shares may be voted in accordance with your wishes and that the presence of a
quorum may be assured. The prompt return of your signed proxy card, regardless
of the number of shares you hold, will aid Headwaters in avoiding the expense of
additional proxy solicitations. Giving your proxy does not affect your right to
vote in person at the meeting or your right to resubmit later dated proxy cards.
HEADWATERS INCORPORATED
10653 South River Front Parkway, Suite 300
South Jordan, Utah 84095
--------------------
PROXY STATEMENT
Annual Meeting of Stockholders
To Be Held on Tuesday, March 1, 2005
--------------------
GENERAL INFORMATION
This Proxy Statement is being furnished to the stockholders of
Headwaters Incorporated ("Headwaters"), in connection with the solicitation of
proxies on behalf of the Board of Directors of Headwaters (the "Board") for use
at Headwaters' Annual Meeting of Stockholders and any and all adjournments or
continuations thereof (the "Meeting"), to be held Tuesday, March 1, 2005,
starting at 2:00 p.m., Mountain Standard Time, at the Country Inn & Suites,
10499 South Jordan Gateway, South Jordan, Utah 84095, for the purposes set forth
in the accompanying Notice of Annual Meeting of Stockholders (the "Notice").
These materials will be first mailed to stockholders on or about January 28,
2005.
PURPOSE OF ANNUAL MEETING
At the Meeting, stockholders will be asked: (1) to elect three Class II
directors of Headwaters to serve until the 2008 annual meeting and one Class III
director to serve until the 2006 annual meeting, or until their successors are
duly elected and qualified; (2) to ratify the selection by the Board of
Directors of Ernst & Young LLP as independent auditors of Headwaters for the
fiscal year ending September 30, 2005; (3) to approve an amendment to
Headwaters' Certificate of Incorporation to increase the number of Headwaters'
Common Stock, par value $0.001, authorized for issuance from 50,000,000 to
100,000,000 shares; (4) to approve the Headwaters Incorporated Short Term
Incentive Bonus Plan to replace the existing Headwaters Incorporated Incentive
Bonus Plan; (5) to approve the Headwaters Incorporated Long Term Incentive
Compensation Plan; and (6) to transact such other business as may properly come
before the Meeting and any and all adjournments or postponements thereof.
The Board recommends a vote "FOR" each of the proposals. The Board
knows of no other matters that are likely to be brought before the Meeting. If
any other matters properly come before the Meeting, however, the person named in
the enclosed proxy, or his duly appointed substitute acting at the Meeting, will
be authorized to vote or otherwise act thereon in accordance with his judgment
on such matters.
QUORUM, VOTING RIGHTS AND OTHER MATTERS
Headwaters' Common Stock, $.001 par value (the "Common Stock"), will be
entitled to vote at the Meeting. Only stockholders of record at the close of
business on Wednesday, January 19, 2005 (the "Record Date"), will be entitled to
notice of, and to vote at, the Meeting. As of the Record Date, there were
34,020,576 shares of Common Stock outstanding. Holders of Common Stock as of the
Record Date are entitled to one vote for each share held for each of the
proposals.
The presence, in person or by proxy, of the holders of a majority of
the shares of the Common Stock entitled to vote is necessary to constitute a
quorum at the Meeting. Under Delaware law, an abstaining vote and a broker
"non-vote" are counted as present and are, therefore, included for purposes of
determining whether a quorum of shares is present at a Meeting. Broker
"non-votes" are not included in the tabulation of the voting results on the
election of directors or issues requiring approval of a majority of the shares
present or represented by proxy and entitled to vote at the Meeting and,
therefore, do not have an effect on the outcome of Proposals 1, 2, 4, or 5, but
have the same effect as negative votes for Proposal 3. A broker "non-vote"
occurs when a nominee holding shares for a beneficial owner does not vote on a
1
particular proposal because the nominee does not have the discretionary voting
instructions with respect to that item and has not received instructions from
the beneficial owner. Shares held by brokers who do not have discretionary
authority to vote on a particular matter and have not received voting
instructions from their customers are not counted or deemed to be present or
represented for purposes of determining whether stockholders have approved that
matter.
With respect to Proposal 1, a plurality of the votes duly cast is
required for the election of directors (i.e., the nominees receiving the
greatest number of votes will be elected). Abstentions are not counted for
purposes of the election of directors.
With respect to Proposal 3, the affirmative vote of the holders of a
majority of the stockholders' shares outstanding and entitled to vote is
required. With respect to Proposals 2, 4 and 5 and any other matters (other than
the election of directors) on which stockholders of Headwaters are entitled to
vote, the affirmative vote of the holders of a majority of the stockholders'
shares present in person or represented by proxy at the meeting and entitled to
vote, is required. For the purpose of determining whether the stockholders have
approved matters other than the election of directors, abstentions are treated
as shares present or represented and voting, so abstaining has the same effect
as a negative vote.
If stockholders hold their shares through a broker, bank or other
nominee and do not instruct them how to vote, the broker may have authority to
vote the shares. However, the New York Stock Exchange has adopted regulations
that prohibit brokers or other nominees that are NYSE member organizations from
voting in favor of proposals relating to equity compensation plans unless they
receive specific instructions from the beneficial owner of the shares to vote in
that manner. Therefore, for shares held through a broker or other nominee who is
an NYSE member organization, those shares will only be voted in favor of
Proposal 5 if the stockholder has provided specific voting instructions to the
broker or other nominee to vote the shares in favor of that proposal.
All shares of Common Stock represented by properly executed proxies
will, unless such proxies have previously been revoked, be voted in accordance
with the instructions indicated in such proxies. If no such instructions are
indicated, such shares will be voted in favor of (i.e., "FOR") the items listed
in the Notice.
Any stockholder executing a proxy has the power to revoke such proxy at
any time prior to its exercise. A proxy may be revoked prior to exercise by (i)
filing with Headwaters a written revocation of the proxy, (ii) appearing at the
Meeting and casting a vote contrary to that indicated on the proxy, or (iii)
submitting a duly executed proxy bearing a later date.
The cost of preparing, printing, assembling and mailing this Proxy
Statement and other material furnished to stockholders in connection with the
solicitation of proxies will be borne by Headwaters. In addition to the mail
solicitation of proxies, officers, directors, employees and agents of Headwaters
may solicit proxies by written communication, telephone or personal call. Such
persons are to receive no special compensation for any solicitation activities.
Headwaters has retained Morrow & Co., a shareholder services company, to assist
in this proxy solicitation. Headwaters will pay Morrow & Co. approximately
$15,000 for its services, plus reimbursement of out-of-pocket expenses. Also,
Headwaters will reimburse banks, brokers and other persons holding Common Stock
for their expenses in forwarding proxy solicitation materials to beneficial
owners of Common Stock.
2
EXECUTIVE OFFICERS
The following table sets forth (i) the names of the executive officers,
(ii) their ages as of the Record Date and (iii) the capacities in which they
currently serve Headwaters:
Officer
Name Age Position(s) Since
- ---- --- ----------- --------
Kirk A. Benson 54 Chief Executive Officer 1999
and Chairman of the Board
Steven G. Stewart 56 Chief Financial Officer 1998
Harlan M. Hatfield 44 Vice President, General Counsel 1998
and Secretary
Kenneth R. Frailey 51 President, Headwaters Energy Services 1998
Craig R. Hickman 55 President, Headwaters Technology 2002
Innovation Group, Inc.
John N. Lawless, III 44 President, Tapco International 2004
Michael S. Lewis 53 President, Eldorado Stone LLC 2004
William H. Gehrmann, III 48 President, Headwaters Resources, Inc. 2004
Murphy K. Lents 53 President, Headwaters Construction 2004
Materials
- ------------------
See "Proposal No. 1 -- Election of Directors, Nominees for Election as
Directors" for biographical information regarding Mr. Benson.
Steven G. Stewart was appointed Chief Financial Officer of Headwaters
in July 1998 and served as Vice President of Finance and Treasurer from April
1998 through July 1998. From October 1996 through March 1998, Mr. Stewart was a
business assurance partner at PricewaterhouseCoopers LLP (formerly Coopers &
Lybrand LLP), with primary responsibility for public companies operating in the
high technology, mining and extractive industries. From January 1994 through
September 1996, Mr. Stewart was self-employed. Prior to 1994, Mr. Stewart was an
audit partner with Ernst & Young (formerly Arthur Young) and was the Salt Lake
City office Director of High Technology and Entrepreneurial Services. Mr.
Stewart graduated with a B.S. degree in accounting from Brigham Young University
in 1973 and is a Certified Public Accountant.
Harlan M. Hatfield has served as Corporate Counsel since October 1996,
as Vice President and General Counsel since July 1998 and as Secretary since
July 1999. His activities with Headwaters have included the development of
synthetic fuel projects, licensing and strategic business acquisitions. As
General Counsel he oversees the legal staff and outside legal counsel,
litigation, regulatory disputes, contracts and other legal matters. Prior to his
employment with Headwaters, he was in private practice at the Seattle law firm
of Oles, Morrison and Rinker for more than nine years where he was a partner.
Mr. Hatfield obtained a B.A. degree in Public Policy from Brigham Young
University in 1984 and a Juris Doctorate from the University of Minnesota in
1987.
Kenneth R. Frailey joined Headwaters in August 1998 as Vice President
of Operations, after having been employed by Kennecott Corporation and General
Electric for a total of 20 years. In February 2003, Mr. Frailey was appointed
President of Headwaters Energy Services. At Headwaters, Mr. Frailey's
responsibilities include all aspects of the Headwaters Energy Services synthetic
fuels business, including, synthetic fuels operations, licensee relations,
proprietary reagent sales and marketing, technology development, and
intellectual property protection and management. Mr. Frailey has experience and
expertise in mining, electrical power generation and energy fuels covering a
wide variety of managerial assignments in a plant operating environment,
business development and engineering. Mr. Frailey has leadership experience in
plant technological improvements, plant optimization and profitability of
existing operations as well as bringing start-up projects to full capacity. Mr.
Frailey received his B.S. degree in Electrical Engineering from the University
of Utah.
Craig R. Hickman joined Headwaters in June 2002 and was appointed
President of HTI in April 2003. Mr. Hickman is the founder, and was formerly the
Chairman, of Management Perspectives Group, a strategic management consulting
firm. He has consulted for corporations and organizations worldwide, lectured
abroad for the U.S. State Department, served as a member of the Board of
Directors of a large automotive parts distributor and was Editor-in-Chief of a
regional business magazine. After receiving his MBA from the Harvard Business
School, he joined the management consulting division of Ernst & Ernst where he
worked on several strategic planning, organizational design and merger and
acquisition consulting engagements. He has previously worked with Dart
3
Industries and Arthur Young & Company, now Ernst & Young. He is the author or
co-author of twelve books on business management, including The Strategy Game,
An Innovator's Tale, and Mind of a Manager, Soul of a Leader.
John N. Lawless, III currently serves as President of Tapco. Mr.
Lawless was the President and Chief Executive Officer of Tapco when Headwaters
acquired Tapco in September 2004. At Tapco, Mr. Lawless's responsibilities
include all aspects of Tapco's business including sales, marketing, operations,
finance and strategic planning. Mr. Lawless joined Tapco in 1989 and served as
Vice President, Marketing and Operations, and Executive Vice President, before
being appointed President in 1998. Prior to 1989, Mr. Lawless was employed by
Comerica Bank in Detroit as a Commercial Lender. Mr. Lawless received his B.S.
degree in Economics from Kalamazoo College and his MBA from the University of
Notre Dame.
Michael S. Lewis currently serves as President of Eldorado Stone. Mr.
Lewis was the President and Chief Executive Officer of Eldorado Stone when
Headwaters acquired Eldorado in June 2004. Prior to forming Eldorado Stone in
2000, Mr. Lewis was co-founder and President of StoneCraft Industries for ten
years. Under Mr. Lewis' direction, StoneCraft grew to become the largest
Eldorado Stone franchisee. Prior to 1991, Mr. Lewis was an executive for eight
years with Stretch Forming Corporation, a manufacturer of aftermarket automotive
sunroofs and custom curved metal products. Mr. Lewis worked with Rossignol Ski
Company from 1972-1983.
William H. Gehrmann, III was appointed President of Headwaters
Resources, Inc. in October 2004. Mr. Gehrmann has been with Headwaters Resources
and its predecessors for 19 years and was appointed Senior. Vice President,
Operations in 2004 and was Senior. Vice President, Southern Region for the
previous five years. During his time with Headwaters Resources Mr. Gehrmann has
been responsible for the development of new products utilizing coal combustion
products, the construction and operation of hazardous and non-hazardous waste
landfills, and the design and operation of material handling systems. Mr.
Gehrmann has worked in the coal combustion product industry since 1985 where he
has received a patent, authored numerous technical papers, and developed new
products utilizing CCPs. He is a registered professional engineer. Mr. Gehrmann
graduated from the University of Texas at Austin with a degree in Architectural
Engineering, with specializations in structural engineering and construction
management.
Murphy K. Lents was appointed as President of Headwaters Construction
Materials in July 2004. In 1997 Mr. Lents co-founded and was President of
Southwest Concrete Products, L.P., which grew to become a large concrete
products company in Texas. Southwest Concrete Products was acquired by
Headwaters in July 2004. Prior to 1997 Mr. Lents co-founded and was President of
Independent Gas Company, a retail propane distributor in Texas for four years,
worked as a CFO of a Houston real estate developer for six years, was an
executive with Beacon Management, a venture capitalist firm for two years, and
was employed in banking for five years with J.P. Morgan and Company. Mr. Lents
received his B.S. degree from Rice University in English and Spanish Literature
and his MBA from the Wharton School of Business.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
The following sets forth the compensation of Headwaters' Chief
Executive Officer and each of the other four most highly compensated executive
officers (collectively "Named Executives") as of September 30, 2004, whose total
annual salary and bonus exceeded $100,000 in fiscal 2004. Unless otherwise
noted, the amounts shown represent what was earned in the respective fiscal
years.
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
----------------------------------- ------------------------ ----------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Salary Bonus Compensation Awards Options Payouts Compensation
Position Year ($) ($) ($) ($) (#)(1) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------------------
Kirk A. Benson............ 2004 400,000 2,025,686 1,621 - 75,000 - 15,692 (2)
Chief Executive 2003 416,924 1,004,883 1,810 - 175,000 - 163,891
Officer 2002 316,583 912,914 1,815 - 61,000 - 15,363
4
Steven G. Stewart.......... 2004 265,000 752,556 1,183 116,500(7) 40,654 - 15,135 (3)
Chief Financial 2003 272,135 347,147 1,299 - 15,000 - 69,152
Officer 2002 181,000 237,202 1,815 - 25,000 - 15,363
Harlan M. Hatfield......... 2004 174,923 492,183 890 76,937(7) 25,338 - 48,507 (4)
Vice President and 2003 176,327 203,918 959 - 15,000 - 3,833
General Counsel 2002 169,000 191,519 1,815 - 25,000 - 15,363
Kenneth R. Frailey(8) ...... 2004 177,346 615,328 898 79,126(7) 39,133 - 25,763 (5)
President, Headwaters
Energy Services
Craig R. Hickman(8) ....... 2004 173,750 222,212 887 76,937(7) 35,338 - 3,702 (6)
President, Headwaters
Technology Innovation
Group, Inc.
- -----------------
(1) All option grants shown above for 2002 were granted under the 2002
Stock Incentive Plan. All option grants shown above for 2003 and 2004
were granted under the 2003 Stock Incentive Plan.
(2) All other compensation for Mr. Benson consists of the following: For
2004, (i) $8,000 of matching 401(k) contributions, and (ii) $7,692 of
payments in lieu of paid time off. For 2003, (i) $59,583 of retroactive
pay for the period from May 1, 2002 through October 1, 2002 which was
paid in 2003, (ii) $99,231 of paid time off related to 2002, which was
also paid in 2003, and (iii) $5,077 of matching 401(k) contributions.
For 2002, $15,363 of matching 401(k) contributions.
(3) All other compensation for Mr. Stewart consists of the following: For
2004, (i) $8,000 of matching 401(k) contributions, and (ii) $7,135 of
payments in lieu of paid time off. For 2003, (i) $64,466 of paid time
off related to 2002, which was paid in 2003, and (ii) $4,686 of
matching 401(k) contributions. For 2002, $15,363 of matching 401(k)
contributions.
(4) All other compensation for Mr. Hatfield consists of the following: For
2004, (i) $39,880 of payments in lieu of paid time off, and (ii) $8,627
of matching 401(k) contributions. For 2003, $3,833 of matching 401(k)
contributions. For 2002, $15,363 of matching 401(k) contributions.
(5) All other compensation for Mr. Frailey consists of (i) $14,279 of
payments in lieu of paid time off, and (ii) $11,484 of matching 401(k)
contributions.
(6) All other compensation for Mr. Hickman consists of payments in lieu of
paid time off.
(7) The restricted stock awards vest over a five-year period. Using the
closing Common Stock price as of September 30, 2004 of $30.86, the
value of the restricted stock awards as of September 30, 2004 would be
as follows: Mr. Stewart - $151,121 (4,897 shares); Mr. Hatfield -
$99,801 (3,234 shares); Mr. Frailey - $102,640 (3,326 shares); and Mr.
Hickman - $99,801 (3,234 shares).
(8) Messrs. Frailey and Hickman became executive officers in 2004.
Option Grants in Fiscal 2004
The following table sets forth certain information concerning options
to purchase Common Stock granted during fiscal 2004 to the Named Executives.
5
OPTION GRANTS IN FISCAL 2004
- -------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Granted
Underlying to Employees in
Options 2004 Exercise Expiration Grant Date
Name Granted (#)(1) (2) Price ($/Sh) (3) Date Value ($) (4)
- -------------------------------------------------------------------------------------------------------------------
Kirk A. Benson ............ 75,000 6.5% $23.79 April 2014 787,713
Steven G. Stewart ......... 25,654 2.2% $23.79 April 2014 269,440
15,000 1.3% $28.31 September 2014 180,527
Harlan M. Hatfield ........ 10,338 0.9% $23.79 April 2014 108,578
15,000 1.3% $28.31 September 2014 180,527
Kenneth R. Frailey......... 14,133 1.2% $23.79 April 2014 148,436
25,000 2.2% $28.31 September 2014 300,879
Craig R. Hickman........... 10,338 0.9% $23.79 April 2014 108,578
25,000 2.2% $28.31 September 2014 300,879
- ----------------
(1) All of the options granted in fiscal 2004 vest ratably over five years,
beginning on March 31, 2005 through March 31, 2009.
(2) The percentages reflected in the table above were computed based on the
total number of options granted or issued in fiscal 2004, or 1,162,156.
(3) The exercise prices shown above equal the fair market values on the
dates of grant, which fair market values are determined by the closing
price of the Common Stock as reported by the Nasdaq Stock Market.
(4) The fair value of each stock option grant was determined using the
Black-Scholes option pricing model and the following assumptions:
expected stock price volatility of 40%, risk-free interest rates
ranging from 3.3% to 4.2%, weighted average expected option life of
three years, and no dividend yield. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility.
Because Headwaters' stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value, in
management's opinion, the existing models do not necessarily provide a
reliable measure of the fair value of stock options.
Aggregated Option Exercises in Fiscal 2004 and Fiscal Year-End Option Values
The following table summarizes for the Named Executives the number of
stock options exercised during fiscal 2004, the aggregate dollar value realized
upon exercise, the total number of unexercised options held at September 30,
2004 and the aggregate dollar value of in-the-money unexercised options held at
September 30, 2004. Value realized upon exercise is the difference between the
fair market value of the underlying stock on the exercise date (based upon the
average of the high and low prices of Common Stock as reported by the Nasdaq
Stock Market) and the exercise price of the option. Options are in-the-money if
the fair market value of the underlying securities exceeds the exercise price of
the option. The value of unexercised, in-the-money options at September 30, 2004
is the aggregate amount of the difference between their exercise price and
$30.86 per share, the fair market value of the underlying stock on September 30,
2004, based on the closing price of the Common Stock on that date.
6
The underlying options have not been and may never be exercised. The actual
gains, if any, on exercise will depend on the value of the Common Stock on the
actual date of exercise. There can be no assurance that these values will be
realized.
AGGREGATED OPTION EXERCISES IN FISCAL 2004 AND FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
Shares
Acquired on Number of Securities Value of Unexercised
Exercise Underlying Unexercised In-the-Money Options at
(#) Value Options at 9/30/04 (#) 9/30/04 ($) Exercisable /
Name Realized ($) Exercisable / Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
Kirk A. Benson ........ 25,000 471,688 707,334 / 178,666 17,408,964 / 2,160,216
Steven G. Stewart...... 51,253 1,262,038 96,667 / 58,987 1,811,356 / 502,068
Harlan M. Hatfield .... - - 216,667 / 43,671 4,755,024 / 393,784
Kenneth R. Frailey..... 50,000 1,115,875 90,000 / 59,133 2,028,032 / 464,138
Craig R. Hickman ...... - - 40,000 / 65,338 660,132 / 606,607
- ------------------
Stock Option Plans
1995 Stock Option Plan. Until April 2002, Headwaters had only one stock
option plan, the 1995 Stock Option Plan (the "1995 Plan"), under which 2,400,000
shares of Common Stock are reserved for ultimate issuance. A committee of
Headwaters' Board of Directors, or in its absence, the Board (the "Committee")
administers and interprets the 1995 Plan. This Committee is authorized to grant
options under the terms of the 1995 Plan to eligible employees and consultants
and to grant options and other awards outside the 1995 Plan to eligible
employees, officers, directors, and consultants of Headwaters. The 1995 Plan
provides for the granting of both incentive stock options ("ISOs") and
nonstatutory stock options ("NSOs"). Terms of options granted under the 1995
Plan, including vesting requirements, are determined by the Committee. Options
granted under the 1995 Plan vest over periods ranging from 0 to ten years,
expire no more than ten years from the date of grant and are not transferable
other than by will or by the laws of descent and distribution. ISO grants must
meet the requirements of the Internal Revenue Code and the 1995 Plan and may be
made only to employees of Headwaters.
2002 Stock Incentive Plan. In April 2002, the Board of Directors
approved the 2002 Stock Incentive Plan (the "2002 Plan"). The 2002 Plan is
intended to be a "broad-based" plan for purposes of the Nasdaq National Market
listing standards. The number of shares reserved under the 2002 Plan is
currently 850,000. Non-statutory stock options, restricted stock, stock
appreciation rights (SARs) and stock units may be granted under the 2002 Plan.
ISOs may not be granted under the 2002 Plan. Employees, directors and
consultants of Headwaters are eligible for awards under the 2002 Plan, which
expires ten years after adoption unless terminated earlier by the Board. The
administration of the 2002 Plan is generally consistent with the administration
of the 1995 Plan.
2003 Stock Incentive Plan. In January 2003, the Board of Directors
approved the 2003 Stock Incentive Plan (the "2003 Plan"). The 2003 Plan was
approved by Headwaters' stockholders at the 2003 annual meeting. In January
2004, the Board of Directors approved Amendment No. 1 to the 2003 Plan,
increasing the number of shares available for award grants under the 2003 Plan
to 2,500,000. Amendment No. 1 to the 2003 Plan was approved by Headwaters'
stockholders at the 2004 annual meeting. ISOs, NSOs, restricted stock, SARs and
stock units may be granted under the 2003 Plan. Employees, directors and
consultants of Headwaters are eligible for awards under the 2003 Plan, which
expires ten years after adoption unless terminated earlier by the Board. The
administration of the 2003 Plan is generally consistent with the administration
of the 1995 and 2002 Plans.
Other Options. In addition to options granted under the 1995 Plan, the
2002 Plan and the 2003 Plan (the "Option Plans"), Headwaters has periodically
granted options for the purchase of Common Stock to employees, officers,
directors and consultants outside those plans that were not qualified as ISOs
for tax purposes. There were 307,000 such option grants during fiscal 2004, all
of which were granted to employees of one of the companies acquired by
Headwaters in 2004.
7
Summary Information about Equity Compensation Plans. The following
table provides information as of September 30, 2004 about Headwaters' Common
Stock that may be issued upon the exercise of options, warrants and rights
granted to employees, consultants or members of the Board of Directors under all
of Headwaters' existing equity compensation plans and individual arrangements.
As described above, Headwaters has three primary stock option plans under which
options have been granted. Headwaters has also issued several options outside of
any plan. The 1995 Plan and the 2003 Plan were approved by stockholders; the
2002 Plan has not been approved by stockholders. The amounts included in the
caption "not approved by stockholders" in the table below represent amounts
applicable under (i) the 2002 Plan plus (ii) all stock options granted outside
of any stock option plan.
(in thousands)
- -------------------------------------------------------------------------------------------------------------------
Shares remaining available
Shares to be issued Weighted-average for future issuance under
upon exercise of exercise price of existing equity compensation
Plan Category outstanding options outstanding options plans
- -------------------------------------------------------------------------------------------------------------------
Plans approved by stockholders 2,559 $14.96 1,048
Plans not approved by
stockholders 1,239 16.70 115 (1)
---------------------------------------------------------------------------------
Total 3,798 $15.53 1,163
=================================================================================
- ------------------
(1) Under the 2002 Plan, all of these shares may be issued as restricted
stock or upon the exercise or settlement of stock appreciation rights
and stock units.
2000 Employee Stock Purchase Plan
The Board approved the 2000 Employee Stock Purchase Plan ("ESPP") in
May 2000 to provide eligible employees with an opportunity to increase their
proprietary interest in the success of Headwaters by purchasing Common Stock in
Headwaters on favorable terms and to pay for such purchases through payroll
deductions. The Board has subsequently amended the ESPP, most recently in July
2004. The Board believes that this plan is mutually beneficial to employees and
Headwaters and its stockholders because such a plan enhances the interest of
employees in the continued success of Headwaters and further aligns the
interests of employees and stockholders. In addition, the Board is of the
opinion that employee stock purchase plans provide an aid in recruiting
qualified and talented employees. For these reasons, the Board authorized the
adoption of the ESPP. The ESPP was approved by stockholders in September 2000 at
a Special Meeting of Stockholders.
Substantially all employees of Headwaters are eligible to participate
in the ESPP after three months of employment. Non-employee directors are not
eligible. A total of 500,000 shares of stock are reserved for issuance under the
ESPP, of which approximately 208,000 shares have been issued through January 19,
2005. Under the ESPP, employees purchase shares of Common Stock directly from
Headwaters, which shares are made available from treasury shares repurchased on
the open market. The ESPP is intended to comply with Section 423 of the Internal
Revenue Code, but is not subject to the requirements of ERISA. Employees
purchase stock through payroll deductions of 1% to 10% of cash compensation,
subject to certain limitations. The stock is purchased in a series of quarterly
offerings. The cost per share to the employee is 85% of the lesser of the fair
market value at the beginning of the offering period or the end of the offering
period.
Participation in the ESPP is voluntary and each eligible employee will
make his or her own election whether and to what extent to participate in the
ESPP. It is therefore not possible to determine the benefits or amounts that
will be received in the future by individual employees or groups of employees,
including the Named Executives.
Incentive Bonus Plan
The Incentive Bonus Plan ("Bonus Plan"), approved annually by the
Compensation Committee of the Board of Directors ("Compensation Committee"),
which is comprised only of independent directors, provides for annual cash
bonuses to be paid if Headwaters accomplishes certain financial goals and if
employees meet individual goals. A participant's cash bonus is based on
Headwaters' accomplishing specified financial performance targets established by
the Compensation Committee, the employee's base pay, and individual performance
during the year. Headwaters' financial goals are based upon an economic value
added concept ("EVA"), which purports to more closely align with a company's
share price than other measurements of performance. EVA is a concept that is
founded on the assumption that "free cash flow" is the primary driver of
corporate value over time. This concept and EVA-based compensation plans began
in the early 1970s and are still used today by what Headwaters believes to be
some of the most successful companies in the U.S.
8
Under the terms of the Bonus Plan, annual cash awards can be earned by
participants who are employed at the end of the fiscal year, provided
Headwaters' and the participant's individual goals are met or exceeded.
Participants in the Bonus Plan include only officers and certain management
level personnel. The amount of the cash awards is dependent on several factors,
the most important of which is the EVA multiplier, or a factor determined by how
much Headwaters' performance meets or exceeds a financial threshold ("EVA
target") established by the Compensation Committee for each fiscal year. No
awards are earned if the minimum EVA target is not achieved. EVA profit, which
varies from traditional accrual accounting earnings, is determined each fiscal
year and is then compared to the EVA target, which determines the EVA
multiplier. EVA profit is defined as net income, plus interest expense, plus or
minus economic adjustments, minus the cost of capital.
A portion of annual cash awards "earned" by certain management
personnel are banked, meaning that the full amount of the awards are not
actually earned and paid unless the EVA target is achieved in each of the two
succeeding fiscal years. This banking mechanism helps motivate management and
employees to achieve long-term sustainable stockholder value and discourages
short-term performance at the expense of long-term stockholder value creation.
The bonus amounts for 2002 in the Summary Compensation Table represent the cash
awards paid to the Named Executives for fiscal 2002, and include 50% of the
banked amounts from fiscal 2000 and fiscal 2001, which were earned in 2002. The
bonus amounts for 2003 in the Summary Compensation Table represent the cash
awards paid to the Named Executives for fiscal 2003, and include 50% of the
banked amounts from fiscal 2001 and fiscal 2002, which were earned in 2003. The
bonus amounts for 2004 in the Summary Compensation Table represent the cash
awards paid to the Named Executives for fiscal 2004, and include 50% of the
banked amounts from fiscal 2002 and fiscal 2003, which were earned in 2004.
If the stockholders approve the Short Term Incentive Bonus Plan as
proposed herein, the Bonus Plan will be replaced by the new Short Term Incentive
Bonus Plan. Currently, the bonus payments under the Bonus Plan to the Chief
Executive Officer and the four other highest compensated officers of Headwaters
are not exempt from the $1,000,000 tax deduction limit under Section 162(m) of
the Internal Revenue Code. The proposed Short Term Incentive Bonus Plan has been
designed to qualify for the exemption from the $1,000,000 tax deduction limit
under Section 162(m), provided that the stockholders approve that plan.
In addition to the Bonus Plan described in the preceding paragraphs,
Headwaters also has a General Employee Bonus Plan which covers substantially all
employees not otherwise eligible to participate in any other performance-based
compensation arrangement (including the Bonus Plan and sales commission
arrangements). This Plan is also administered by the Compensation Committee. In
addition to this Plan and the Bonus Plan, certain of the subsidiaries acquired
by Headwaters in 2004 have or had bonus programs in place, all of which have
been or will be discontinued in the near future. The total bonus amounts for
2002, 2003 and 2004 for all officers and employees under all bonus plans of
Headwaters or its acquired subsidiaries, and including discretionary bonus
payments approved by the Compensation Committee, was $2,784,749, $5,005,737, and
$14,051,890, respectively.
Deferred Compensation Plan
In November 2004, Headwaters' Board of Directors approved a
Nonqualified Deferred Compensation Plan ("NDCP") for certain designated officers
and employees, which has an effective date of January 1, 2005. The NDCP is a
deferred compensation plan that is not qualified under Section 401(a) of the
Internal Revenue Code that is limited to a select group of management employees
and highly compensated employees of Headwaters and its subsidiaries. All of the
Named Executives are eligible to participate in the NDCP. Participants in the
NDCP can annually elect to defer up to 50% of base salary and up to 100% of
bonus payments into the Plan. Participant deferrals are matched by Headwaters at
a rate of 50% of the first six percent of salary or bonus deferred less any
match made through the Headwaters 401(k) Savings and Investment Plan. Matching
contributions are fully vested after three years of service. Participants direct
the investment of deferred compensation and the company match, selecting from a
series of investment options that are similar to the Headwaters 401(k) Plan. The
NDCP is funded through a "rabbi trust" and trust-owned life insurance on all
Plan participants. The Plan is intended to meet all applicable regulatory
requirements, including the recently-enacted Section 409A of the Internal
Revenue Code.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Kirk A. Benson. In October 2002, Headwaters and Mr. Benson entered into
an employment agreement covering Mr. Benson's "at will" employment. The
agreement calls for payment of a gross annual salary of not less than $400,000
for the 12-month period ending April 2003, $450,000 for the 12-month period
ending April 2004, and $500,000 for the 12-month period ending April 2005. The
9
employment agreement further provides for participation in Headwaters' incentive
bonus plan, the grant of stock options, the payment of severance pay, and other
standard benefits such as vacation, participation in Headwaters' employee
benefit plans and reimbursement for necessary and reasonable business expenses.
With regard to option grants, the agreement provides for the grant of
options in February 2003, April 2003 and April 2004. The February and April 2003
option grants were combined into an option grant in July 2003 for 175,000 shares
with vesting over a three-year period beginning on the one-year anniversary of
the grant date. The April 2004 option grant was for 75,000 shares, with vesting
over a five-year period. All options will have a minimum exercise price equal to
the fair market value of a share of Headwaters Common Stock on the grant date,
and an expiration date 10 years from date of grant, with full vesting upon
disability or death. If Headwaters terminates Mr. Benson's employment without
cause or if Mr. Benson resigns all of his positions with Headwaters for good
reason, as defined (including any change in control of Headwaters), he is
entitled to termination benefits equal to 300% of his annual base salary in
effect when employment terminates. In event of termination or upon a change in
control, all of Mr. Benson's options shall immediately become fully vested and
exercisable.
Steven G. Stewart. Effective May 1998, Headwaters and Mr. Stewart
entered into an employment agreement covering a continuous three-year period,
unless terminated by Headwaters for cause or disability, or by Mr. Stewart for
good cause or without good reason provided 90 days prior written notice is
given. The employment agreement further provides for participation in
Headwaters' incentive bonus plan, if any, as in effect from time to time, and
the grant of stock options. In addition, Mr. Stewart receives other benefits
comparable to those generally available to Headwaters employees. If his
employment is terminated by Headwaters without cause or is terminated by Mr.
Stewart for good reason, he is entitled to termination benefits equal to 200% of
his then annual base salary and all outstanding options vest immediately. Mr.
Stewart's current annual salary is $291,500.
CORPORATE GOVERNANCE
Headwaters upholds a set of basic values to guide its actions and
believes its corporate governance practices meet the standards defined in
recently enacted legislation and other regulations.
Independent Directors. A majority of Headwaters' Board members are
independent of Headwaters and its management as defined by the SEC and the
listing standards of the Nasdaq National Market. New directors participate in
orientation and training immediately following their appointment to the Board.
The non-management directors periodically meet in executive session, without
management, as part of the agenda for Board meetings. Mr. James A. Herickhoff,
an independent director and Vice Chairman of the Board, chairs all non-executive
meetings of directors.
Audit Committee. The Board has adopted an Audit Committee charter that
meets SEC and the Nasdaq National Market listing standards, a copy of which was
attached to the proxy statement filed with the SEC on January 28, 2003, for the
2003 annual meeting of stockholders. The Board has determined that each of Mr.
R. Sam Christensen, Mr. Malyn K. Malquist and Mr. Blake O. Fisher is an "audit
committee financial expert" for purposes of the SEC's rules and all of the Audit
Committee members are independent directors as defined by the Nasdaq National
Market listing standards. Ernst & Young LLP, Headwaters' independent auditors,
reports directly to the Audit Committee.
Compensation Committee. The Board adopted a Compensation Committee
charter in November 2004, a copy of which is attached to this proxy statement as
Appendix C. The Compensation Committee meets the applicable tests for
independence as defined by the SEC and the current Nasdaq National Market
listing standards. Incentive compensation plans are reviewed and approved by the
Compensation Committee. Director compensation is recommended to the Board by the
Compensation Committee.
Nominating and Governance Committee. The Nominating and Corporate
Governance Committee was formed in January 2003. A copy of the committee's
charter was attached to the proxy statement filed with the SEC on January 28,
2004, for the 2004 annual meeting of stockholders. All Nominating and Corporate
Governance Committee members are independent directors as defined by the Nasdaq
National Market listing standards. The Nominating and Governance Committee
provides assistance to the Board in overseeing corporate governance, evaluates
and selects director nominees of Headwaters to be considered for election at the
annual meeting of stockholders and takes such other actions within the scope of
its charter as the committee deems necessary or appropriate.
Code of Ethics. Headwaters has adopted a Code of Ethics that applies to
all of Headwaters' employees, executive officers and Board members. A copy of
the Code of Ethics is included as an exhibit to Headwaters' Annual Report on
10
Form 10-K filed with the SEC for the fiscal year ended September 30, 2003. We
will provide a copy of our Code of Ethics free of charge upon request. You may
also view our Code of Ethics online at
http://www.hdwtrs.com/corporate/ethics.asp.
Board Meetings and Committees
The Board held a total of ten meetings during fiscal 2004. All
directors attended all of the meetings, except that Mr. Garn attended seven
meetings and two other directors attended nine meetings. Headwaters encourages
but does not require Board member attendance at the Headwaters' annual meeting.
The Board currently has three committees, an Audit Committee, a
Compensation Committee and a Nominating and Corporate Governance Committee, each
of which are comprised solely of independent directors as defined in the current
Nasdaq National Market listing standards. The Audit Committee currently consists
of Mr. R. Sam Christensen, as chair, and Mr. E.J. "Jake" Garn, Mr. Blake O.
Fisher, and Mr. Malyn K. Malquist. The Compensation Committee currently consists
of Mr. James A. Herickhoff, as chair, and Mr. Fisher, Mr. Raymond J. Weller, and
Mr. Malquist. The Nominating and Corporate Governance Committee currently
consists of Mr. William S. Dickinson, as chair, and Mr. Weller, Mr. Garn, and
Mr. Herickhoff. The Audit Committee held five meetings in fiscal 2004, the
Compensation Committee held five meetings in fiscal 2004, and the Nominating and
Corporate Governance Committee held two meetings in fiscal 2004.
Headwaters' policy is that any stockholder communications to the Board
should be sent to the attention of the Board, specific Board member or committee
in care of Headwaters' corporate Secretary at the following address: 10653 South
River Front Parkway, Suite 300, South Jordan, Utah 84095. Headwaters is
considering the adoption of a process by which stockholders may communicate more
directly with the Board. The Nominating and Corporate Governance Committee will
evaluate the establishment of procedures by which stockholders can send
communications to the Board or to the non-management directors as a group.
Headwaters will post those procedures on its website upon their adoption.
Compensation Committee Report on Executive Compensation
The Board adopted a Compensation Committee charter in November 2004, a
copy of which is attached to this proxy statement as Appendix C. The
Compensation Committee reviews and makes recommendations to the Board of
Directors concerning the overall compensation for Headwaters' officers and other
key executives, including the Named Executives. The Compensation Committee also
oversees the granting of stock options and the payment of incentive bonuses to
all executives and employees of Headwaters. Future compensation polices will be
dependent on Headwaters' performance and cash flow and employee performance.
Headwaters seeks to compensate executives at competitive levels,
considering current compensation surveys and practices for companies in similar
industries and development patterns, the growth of Headwaters, each executive's
individual contribution to meeting Headwaters' goals and objectives, and overall
business conditions, as part of the total benefit package for employees.
Headwaters' compensation practices include long-term incentives such as
stock option grants as well as a bonus plan. It has been determined that an
incentive bonus program that closely links bonus compensation to the creation of
stockholder value as measured under the EVA concept is in the best interests of
Headwaters and its stockholders since EVA-based plans are purported to be one of
the best indicators of actual stockholder value creation. Accordingly, the Board
adopted a formal EVA-based incentive bonus plan in fiscal 2000. The Board
determined that such a plan was the best way to motivate Headwaters' management
and employees to continuously seek to meet and exceed performance goals. The
incentive bonus plan is deemed to be a significant part of the total
compensation package for the Named Executives.
The current employment agreement for Mr. Benson was approved by the
Compensation Committee in a meeting in October 2002. The Compensation Committee
recommended the fiscal 2004 cash compensation, cash bonus and grant of options
to Mr. Benson based on Mr. Benson's ability to meet Headwaters' objectives.
Section 162(m) of the Code limits Headwaters' tax deduction of certain
compensation in excess of $1 million paid to certain executive officers named in
the proxy unless the compensation is performance-based. Compensation
attributable to stock options under the 1995 Plan and the 2003 Plan is treated
11
as performance-based compensation if (1) the options are granted by the
Compensation Committee; (2) the Plans restrict the number of shares for which
options may be awarded to an executive during a specified period; and (3) the
options have an exercise price at least equal to the fair market value of a
share of Common Stock on the date of grant. Grants of restricted stock under the
1995 and 2003 Plans and awards under the 2002 Plan are not considered
performance-based compensation.
While the tax impact of any compensation arrangement is one factor to
be considered, such impact is evaluated in light of the Compensation Committee's
overall compensation philosophy. The Compensation Committee intends to establish
executive officer compensation programs which will maximize Headwaters' tax
deductions, if the Compensation Committee determines that such actions are
consistent with its philosophy and in the best interests of Headwaters and its
stockholders. From time to time, the Compensation Committee may award
compensation that is not fully tax deductible if the Compensation Committee
determines that such award is consistent with its philosophy and in the best
interests of Headwaters and its stockholders.
The Compensation Committee strives to ensure that Headwaters'
compensation plan attracts, retains and rewards both staff and management
personnel while continuing to operate in the best interests of Headwaters and
its stockholders.
Compensation Committee
James A. Herickhoff, Chairman
Blake O. Fisher
Raymond J. Weller
Malyn K. Malquist
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the Board of Directors or
Compensation Committee and the Board of Directors or Compensation Committee of
any other entity, nor has any interlocking relationship existed in the past.
Compensation of Directors
Headwaters' directors hold office until the end of their respective
terms or until their successors have been duly elected and qualified.
Headwaters' executive officers are appointed by the Board of Directors and serve
at the discretion of the Board.
Outside directors are entitled to base annual cash compensation of
$50,000, which is paid quarterly. The following additional annual compensation
is paid quarterly: Vice Chair of the Board, $15,000; chair of the Audit
Committee, $15,000; and all other committee chairs, $10,000. The outside
directors also receive options for the purchase of Common Stock which vest at
the rate of 12,000 shares each year. Directors receive reimbursement for
out-of-pocket expenses. The cash compensation and options described in this
section do not apply to directors who are salaried employees of Headwaters.
In December 1998, each of Headwaters' outside directors received 36,000
options for the three-year period following the 1999 annual stockholders'
meeting, subject to vesting on a pro rata basis, at the fiscal 2000, 2001 and
2002 annual stockholders' meetings. The options granted in December 1998 have
exercise prices equal to the closing price of the Common Stock on the grant
date. None of these option grants were granted under the 1995 Stock Option Plan.
In November 2001, the three outside directors who were on the Board at that time
(Messrs. Herickhoff, Tanner, and Weller) each received 36,000 options. Mr. Garn
received an option grant for 36,000 shares in January 2002 when he joined the
Board. All of these options to outside directors granted in 2001 and 2002 vest
ratably in December 2002, December 2003 and December 2004, have an exercise
price equal to the closing stock price of Headwaters' Common Stock as of the
grant date and were granted under the 1995 Stock Option Plan. In August 2002,
Mr. Comolli was granted 12,000 options at an exercise price equal to the closing
price of the Common Stock on the grant date. These options vested in December
2002 and were also granted under the 1995 Stock Option Plan. In January 2003,
the three new outside directors (Messrs. Christensen, Dickinson, and Malquist)
were each granted 12,000 options at an exercise price equal to the closing price
of the Common Stock on the grant date and which vested in December 2003. These
options were granted under the 1995 Stock Option Plan, in the cases of Messrs.
Christensen and Dickinson, and under the 2002 Stock Incentive Plan, in the case
of Mr. Malquist. In March of 2003, these same three new directors were each
12
granted 24,000 options under the 2003 Stock Incentive Plan at an exercise price
equal to the closing price of the Common Stock on the grant date, vesting
ratably in December 2004 and December 2005. In November 2004, Messrs.
Herickhoff, Garn, Weller, and Fisher each received 36,000 options at an exercise
price equal to the closing price of the Common Stock on the grant date, vesting
ratably in December 2005, 2006, and 2007.
Audit Committee Report
The Audit Committee currently consists of four directors, each of whom
is an independent director as defined by the Nasdaq National Market listing
standards. The Board has determined that each of Messrs. Christensen, Malquist
and Fisher is an "audit committee financial expert" for purposes of the SEC's
rules. The primary purposes of the Audit Committee are to provide oversight of
Headwaters' management in the areas of corporate governance including (i) the
financial reporting system, the system of internal controls, and the outside
independent auditing process and audit results, and (ii) legal and regulatory
compliance in areas where control systems must be in place to reduce financial
risk to Headwaters to acceptable levels.
The Audit Committee meets periodically with management to consider the
adequacy of Headwaters' internal controls and the reliability of Headwaters'
financial statements. The Audit Committee also meets privately with the
independent auditors, who have unrestricted access to the Audit Committee. The
Audit Committee recommends to the Board the appointment of the independent
auditors and periodically reviews their performance and independence from
management. The Audit Committee acts pursuant to a written charter that was
adopted by the Board of Directors, a copy of which was attached to the proxy
statement filed with the SEC on January 28, 2003 for the 2003 annual meeting of
stockholders.
In performing its functions, the Audit Committee acts only in an
oversight capacity and necessarily relies on the work and assurances of
Headwaters' management, which has the primary responsibility for financial
statements and reports, and of the independent auditors, who, in their report,
express an opinion on the conformity of Headwaters' annual financial statements
with U.S. generally accepted accounting principles. It is not the duty of the
Audit Committee to plan or conduct audits or to determine that Headwaters'
financial statements are complete and accurate and in accordance with U.S.
generally accepted accounting principles.
Within this framework, the Audit Committee reviewed the audited
financial statements and met with both management and Ernst & Young LLP,
Headwaters independent auditors, to discuss those financial statements.
Management has represented to us that the financial statements were prepared in
accordance with accounting principles generally accepted in the United States.
The Audit Committee has received from and discussed with Ernst & Young LLP the
written disclosure and letter required by Independence Standards Board Standard
No. 1. These items relate to that firm's independence from Headwaters. The Audit
Committee also discussed with Ernst & Young LLP the matters required to be
discussed by Statement on Auditing Standards No. 61, "Communication with Audit
Committees."
Based on these reviews and discussions, the Audit Committee recommended
to the Board that the audited financial statements be included in Headwaters'
Annual Report on Form 10-K for the fiscal year ended September 30, 2004.
Audit Committee
R. Sam Christensen, Chairman
E. J. "Jake" Garn
Blake O. Fisher
Malyn K. Malquist
Nominating and Corporate Governance Committee Report
The Nominating and Corporate Governance Committee currently consists of
four directors, each of whom is independent as defined in the current Nasdaq
National Market listing standards. The Nominating and Governance Committee
provides assistance to the Board in overseeing corporate governance, evaluates
and selects director nominees of the company to be considered for election at
the annual meeting of stockholders and takes such other actions within the scope
of its charter as the committee deems necessary or appropriate. A copy of the
committee's charter was attached to the proxy statement filed with the SEC on
January 28, 2004, for the 2004 annual meeting of stockholders.
13
The Nominating and Corporate Governance Committee has responsibility
for identifying and evaluating new nominees to the Board. In evaluating director
nominees, the Nominating and Corporate Governance Committee will, as described
in the committee's charter, consider various criteria, including relevant
industry experience, general business experience, relevant financial experience,
and compliance with independence and other qualifications necessary to comply
with any applicable tax and securities laws and the rules and regulations of the
Nasdaq Stock Market. In addition, directors must have time available to devote
to Board activities and to enhance their knowledge of Headwaters' industry.
Headwaters therefore seeks to attract and retain highly qualified directors who
have sufficient time to devote to their substantial responsibilities and duties
to Headwaters and its stockholders. The Nominating and Corporate Governance
committee is considering the adoption of a more formal process for identifying
or evaluating new nominees to the Board. To date, Headwaters has not engaged
third parties to identify or evaluate or assist in identifying potential
director nominees, although Headwaters may do so in the future.
To date, Headwaters has not received any recommendations from
stockholders requesting the Board or any of its committees to consider a nominee
for inclusion among the Board's slate of nominees in Headwaters' proxy statement
for its annual meeting. Accordingly, the Nominating and Corporate Governance
Committee has not at this time adopted a formal policy by which Headwaters'
stockholders may recommend director nominees, however the committee will
consider nominees recommended by stockholders. A stockholder wishing to submit
such a recommendation should send a letter to the corporate Secretary at
Headwaters' principal executive offices in accordance with the provisions of
Headwaters' Bylaws and the provisions set forth herein under the heading
"Stockholder Proposals." The mailing envelope must contain a clear notation
indicating that the enclosed letter is a "Director Nominee Recommendation." The
letter must identify the author as a stockholder and provide a brief summary of
the nominee's qualifications, including such information about the nominee as
would have been required to be included in a proxy statement filed pursuant to
the rules of the SEC had such nominee been nominated by the Board, as well as
contact information for both the nominee and the stockholder. Nominees should at
a minimum have relevant business and financial experience and must be able to
read and understand fundamental financial statements. Headwaters anticipates
that nominees recommended by stockholders will be evaluated in the same manner
as nominees recommended by anyone else, although, the Nominating and Corporate
Governance Committee may prefer nominees who are personally known to the
existing directors and whose reputations are highly regarded. The Nominating and
Corporate Governance Committee will consider all relevant qualifications as well
as the needs of Headwaters in terms of compliance with Nasdaq National Market
listing standards and SEC rules.
All of the nominees for directors being voted upon at the Meeting are
directors standing for reelection.
Nominating and Corporate Governance Committee
William S. Dickinson, Chairman
E. J. "Jake" Garn
James A. Herickhoff
Raymond J. Weller
Stockholder Return Performance Graph
The following graph shows a comparison of the cumulative total
stockholder return, calculated on a dividend reinvestment basis, for September
30, 1999 through September 30, 2004, on Headwaters' Common Stock with (1) the
Nasdaq Composite Index - U.S., (2) the Standard & Poors - 500 Energy Sector
Index, and (3) the Standard & Poors - 500 Building Products Index. The
comparison assumes $100 was invested on September 30, 1999.
Please note that historic stock price performance shown on the graph is
not necessarily indicative of future price performance. Headwaters has not paid
dividends on its Common Stock.
[GRAPH OMITTED]
9/30/99 9/30/00 9/30/01 9/30/02 9/30/03 9/30/04
----------- ---------- ---------- ----------- ---------- -----------
Headwaters $100 $115 $440 $553 $645 $1,234
S&P - 500 Energy Sector Index $100 $115 $100 $87 $101 $146
S&P - 500 Building Products Index $100 $59 $62 $63 $81 $116
Nasdaq Composite Index - U.S. $100 $103 $45 $37 $48 $50
14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 19,
2005 regarding the beneficial ownership of Headwaters' Common Stock, for: (i)
each person (or group of affiliated persons) who, insofar as Headwaters has been
able to ascertain, beneficially owned more than 5% of the outstanding shares of
Common Stock; (ii) each director; (iii) each Named Executive of Headwaters; and
(iv) all directors and executive officers of Headwaters as a group. Headwaters
has relied on information received from each stockholder as to beneficial
ownership, including information contained on Schedules 13D and 13G and Forms 3,
4 and 5. As of January 19, 2005, there were 34,020,576 shares of Common Stock
outstanding. As of that date, there were outstanding options to purchase
3,724,189 shares of Common Stock.
Name and Address of Amount and Nature of Percent
Beneficial Owner (1) Beneficial Ownership(2) of Class
-------------------- ----------------------- --------
Directors:
----------
Kirk A. Benson 1,466,831(3) 4.2%
Raymond J. Weller 318,274(4) *
James A. Herickhoff 102,500(5) *
E. J. "Jake" Garn 36,000(6) *
R. Sam Christensen 29,500(7) *
William S. Dickinson 25,700(8) *
Malyn K. Malquist 28,500(9) *
Blake O. Fisher, Jr. 0 0%
Executive Officers:
-------------------
Steven G. Stewart 63,688(10) *
Harlan M. Hatfield 148,591(11) *
Kenneth R. Frailey 95,162(12) *
Craig R. Hickman 43,234(13) *
All directors and executive officers
as a group (sixteen persons) 2,365,903(14) 6.7%
* Less than 1%
(1) The address of each director and officer is c/o Headwaters
Incorporated, 10653 South River Front Parkway, Suite 300, South Jordan,
Utah 84095.
(2) The persons named in this table have sole voting and investment power
with respect to all shares of Common Stock reflected as beneficially
owned by them. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within sixty (60) days
from January 19, 2005, and the total outstanding shares used to
calculate each beneficial owner's percentage includes such shares.
Beneficial ownership as reported does not include shares subject to
option or conversion that are not exercisable within 60 days of January
19, 2005.
(3) Consists of 834,497 shares owned by Mr. Benson and options to purchase
632,334 shares held by Mr. Benson exercisable within 60 days of January
19, 2005.
(4) Consists of 215,524 shares owned by Mr. Weller and options to purchase
102,750 shares held by Mr. Weller exercisable within 60 days of January
19, 2005.
(5) Consists of 8,000 shares owned by Mr. Herickhoff and options to
purchase 94,500 shares held by Mr. Herickhoff exercisable within 60
days of January 19, 2005.
(6) Consists of options to purchase 36,000 shares held by Mr. Garn
exercisable within 60 days of January 19, 2005.
(7) Consists of 5,500 shares owned by a partnership of which Mr.
Christensen is a Trustee of the General Partner and options to purchase
24,000 shares held by Mr. Christensen exercisable within 60 days of
January 19, 2005.
(8) Consists of 1,700 shares owned by Mr. Dickinson and options to purchase
24,000 shares held by Mr. Dickinson exercisable within 60 days of
January 19, 2005.
(9) Consists of 4,500 shares owned by Mr. Malquist and options to purchase
24,000 shares held by Mr. Malquist exercisable within 60 days of
January 19, 2005.
(10) Consists of 17,021 shares owned by Mr. Stewart and options to purchase
46,667 shares held by Mr. Stewart exercisable within 60 days of January
19, 2005.
(11) Consists of 12,382 shares owned by Mr. Hatfield and options to purchase
136,209 shares held by Mr. Hatfield exercisable within 60 days of
January 19, 2005.
(12) Consists of 5,162 shares owned by Mr. Frailey and options to purchase
90,000 shares held by Mr. Frailey exercisable within 60 days of January
19, 2005.
(13) Consists of 3,234 shares owned by Mr. Hickman and options to purchase
40,000 shares held by Mr. Hickman exercisable within 60 days of January
19, 2005.
15
(14) Consists of 1,115,443 shares issued and outstanding and options to
purchase 1,250,460 shares exercisable within 60 days of January 19,
2005.
TRANSACTIONS WITH RELATED PARTIES
Employment and Related Agreements. As of September 30, 2004, Headwaters
had employment agreements with Messrs. Benson and Stewart which provide for
significant benefits. See "Employment Contracts and Termination of Employment
and Change in Control Arrangements." As of September 30, 2004, Headwaters and
its subsidiaries have also entered into employment agreements with 23 other
officers and employees. The employment agreements have original terms ranging
from two to five years and are generally renewable by Headwaters, usually for
one-year terms. They provide for annual salaries currently ranging from
approximately $67,000 to $500,000 annually per person. The annual commitment
under all employment agreements combined was approximately $3,715,000 as of
September 30, 2004. Generally, the agreements provide for termination benefits,
ranging from six months' salary, up to a maximum period equal to the remaining
term of the agreement.
Subordinated Debt. As described in more detail in the notes to the
consolidated financial statements included in Headwaters' Annual Report on Form
10-K, in September 2002, in order to obtain the cash necessary to acquire ISG
and retire the ISG debt, Headwaters issued new debt, including $20,000,000 of
subordinated debt with an approximate five-year term. The subordinated debt was
issued at a 2% discount, with Headwaters receiving net cash proceeds of
$19,600,000. ISG management, including officers of ISG, participated in
one-half, or $10,000,000, of the subordinated debt. The other half was issued to
a corporation. The debt was not secured, bore interest at an 18% rate, and was
repayable in September 2007. The debt agreement allowed for optional
prepayments. Any prepayments paid to the corporation were subject to a
prepayment charge which ranged from 5% of the principal prepaid in the first
year to 1% of the principal prepaid in the last year of the five-year term of
the debt agreement. Interest was payable quarterly, beginning October 2002.
During fiscal year 2003, Headwaters made interest payments to Messrs. Creamer,
Everest, Deju and the other current officer of ISG management under the
subordinated debt agreement in the total amount of $1,410,000. In addition, in
December 2003 Headwaters fully prepaid the subordinated debt. The prepayment to
Messrs. Creamer, Everest, Deju and the other officer of ISG totaled $10,000,000,
plus $440,000 of accrued interest.
Incentive Agreements with ISG Principals. In January 2003, Headwaters
executed incentive agreements with Messrs. Creamer, Everest and Deju, former
stockholders and officers of ISG, all of whom were officers of either Headwaters
or ISG following the ISG acquisition. The agreements called for contingent
payments totaling up to $5,000,000 in the event of (i) a change in control, as
defined, or (ii) continuing employment through September 2004 and an average
stock price for Headwaters' Common Stock for any calendar quarter exceeding $20
per share. The maximum payments would have been required if there had been a
change in control prior to October 2004, or if the officers remained employed
through September 2004 and the average stock price for any calendar quarter
reached $25 per share or more. During 2004, Messrs. Creamer and Everest resigned
their positions and Headwaters recorded an expense for $1,500,000 related to the
obligation to Mr. Deju.
Insurance Benefits. Headwaters purchases certain insurance benefits for
its employees from various insurance companies where Wansutter Employee Benefits
LLC acts as broker. Mr. Weller, a director, is a principal of Wansutter Employee
Benefits LLC. Gross payments to those insurance companies where Wansutter
Employee Benefits LLC acted as broker totaled approximately $532,000 in fiscal
2002, $510,000 in fiscal 2003 and $1,215,000 in fiscal 2004.
Other. Eldorado Stone, a subsidiary of Headwaters, purchases product
from an entity located in Mexico in which Michael S. Lewis, an officer of
Eldorado has a minority ownership interest. Costs incurred for materials
purchased from this entity were approximately $2,712,000 in 2004.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
Headwaters' officers and directors, and persons who own more than 10% of a
registered class of Headwaters' equity securities, to file reports of ownership
and changes in ownership with the SEC and Nasdaq. Officers, directors, and
greater than 10% stockholders are required by SEC regulations to furnish
Headwaters with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms furnished to Headwaters between October 1,
2003 and September 30, 2004, on year-end reports furnished to Headwaters after
September 30, 2004, and on representations that no other reports were required,
Headwaters believes that during the 2004 fiscal year all applicable 16(a) filing
requirements were met, except that John N. Lawless, III and E.J. "Jake" Garn
each filed one Form 4 after the due date for such Form 4.
16
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Nominees for Election as Directors
At the Meeting, the stockholders will elect three Class II directors of
Headwaters to serve until the 2008 annual meeting and one Class III director to
serve until the 2006 annual meeting, or until their successors are duly elected
and qualified. The Board of Directors is divided into three classes, currently
comprised of three Class II directors whose terms will expire at the Meeting in
March 2005 and who are standing for election at the Meeting; two Class III
directors, whose terms will expire at Headwaters' annual meeting in 2006; and
three Class I director, whose terms will expire at Headwaters' annual meeting in
2007.
At the time of the Meeting, the Board will consist of eight members:
Kirk A. Benson, Raymond J. Weller, James A. Herickhoff, Blake O. Fisher, Jr., E.
J. "Jake" Garn, R. Sam Christensen, William S. Dickinson, Malyn K. Malquist.
The Board proposes that the three individuals listed below as Class II
nominees (each a current Class II director) be elected as Class II directors of
Headwaters, and that the one individual listed below as a Class III nominee (a
current Class III director) be elected as a Class III director of Headwaters.
The nominees have consented to serve if elected to the Board. In the event that
one or more of the nominees is unable to serve as director at the time of the
Meeting (which is not expected), proxies with respect to which no contrary
direction is made will be voted "FOR" such substitute nominee(s) as shall be
designated by the Board to fill the vacancy or vacancies.
The names of the Class II nominees, together with certain information
about them, is set forth below:
Name Age Position with Headwaters Director Since
- ---- --- ------------------------ --------------
Kirk A. Benson 54 Chairman and Chief Executive Officer 1999
Raymond J. Weller 59 Director 1991
E. J. "Jake" Garn 72 Director 2002
The name of the Class III nominee, together with certain information
about him, is set forth below:
Name Age Position with Headwaters Director Since
- ---- --- ------------------------ --------------
Blake O. Fisher, Jr. 60 Director 2004
Kirk A. Benson has served as a Director of Headwaters since January
1999 and as Chairman and CEO since April 1999. Mr. Benson was Senior Vice
President of Foundation Health Systems, Inc., one of the nation's largest
publicly traded managed healthcare companies. Mr. Benson was with Foundation
Health Systems and its predecessors for approximately ten years, holding various
positions including president and chief operating officer for commercial
operations, general counsel, and senior vice president for development with
responsibility for merger and acquisition activity. He also holds a Master of
Laws in Taxation from the University of Denver, and a Master of Accountancy and
Juris Doctorate from Brigham Young University.
Raymond J. Weller has served as a Director of Headwaters since July
1991 and served as Chairman of the Board from January 1997 through July 1998.
Since 1991, Mr. Weller has been President of Wansutter Employee Benefits LLC, a
Utah-based insurance brokerage firm. From 1985 to 1991, Mr. Weller was an agent
with the insurance brokerage of Galbraith, Benson, and McKay.
E. J. "Jake" Garn has served as a Director of Headwaters since January
2002. Mr. Garn is a former United States Senator from the state of Utah. Mr.
Garn currently serves as Managing Director of Summit Ventures, a lobbying and
consulting firm, a position he has held since 2000. From 1993 to 1999, Mr. Garn
served as Vice Chairman of Huntsman Corporation, a large Utah-based
privately-held chemical company. From 1993 until the present, Mr. Garn has
served as a director of Morgan Stanley Funds and at the present time serves as a
director of the following entities: United Space Alliance, Franklin Covey,
NuSkin Asia Pacific, BMW Bank of NA and Escrow Bank, USA. Mr. Garn had a long
and distinguished career in national politics. Mr. Garn entered politics in 1967
when he was elected to the Salt Lake City (Utah) Commission. He was elected
mayor of Salt Lake City in 1971 and to the United States Senate in 1974. He
served as chairman of the Senate Banking, Housing and Urban Affairs Committee
and as a member of the Senate Appropriations Committee. Senator Garn was
re-elected to the Senate in 1980 and again in 1986, retiring in 1992.
17
Blake O. Fisher, Jr. has served as a Director of Headwaters since
November 2004. Mr. Fisher is currently involved in management and financial
consulting to the telecommunications and utility industries. He is a consultant
on financial issues to the USDA on Rural Utilities Service's broadband program.
From May 2004 until December 2004 he served as chief financial officer for Fiber
Utilities of Iowa, an entity that provides operation and construction services
to municipal utilities. In May of 2002, Mr. Fisher retired from McLeod USA, a
telecommunications provider. From February 1996 to May 2002, he held senior
management positions with McLeod USA, initially as Chief Financial Officer, then
President of the company's Western region and as Chief Development Officer. From
1991 until February of 1996 Mr. Fisher was Chief Financial Officer of IES
Industries, an energy holding company. Prior to that Mr. Fisher spent 23 years
in several management positions with Consumer Power Company, headquartered in
Michigan. Mr. Fisher received B.S. and M.S. degrees in Industrial Engineering
from the University of Michigan.
Directors Not Standing for Election
The names of the directors of Headwaters who are not standing for
election at the Meeting are R. Sam Christensen, William S. Dickinson, and Malyn
K. Malquist, Class I directors whose terms expire in 2007, and James A.
Herickhoff., a Class III director whose term expires in 2006. Information about
these directors is set forth below.
Class I Directors:
Name Age Position with Headwaters Director Since
- ---- --- ------------------------ --------------
R. Sam Christensen 56 Director 2003
William S. Dickinson 70 Director 2003
Malyn K. Malquist 52 Director 2003
R. Sam Christensen has served as a Director of Headwaters since January
2003. Since 1996, Mr. Christensen has spent the majority of his time managing
Black Bear Ventures LP, a private investment firm, and evaluating new business
opportunities. Mr. Christensen currently serves as a Director for two
privately-held firms in California. Prior to 1996, Mr. Christensen was Chairman
and majority owner of Richmond Holdings, Inc., a privately-held corporation
engaged in developing, designing, manufacturing and selling flexible packaging
materials and static control devices worldwide to the electronics and
pharmaceutical industries. Richmond Holdings, Inc. was subsequently sold to a
publicly-traded firm in 1996. Mr. Christensen began his career as an auditor
with the firm of Touche Ross & Co. where, he spent nearly ten years. His final
assignment, before resigning, was managing their Salt Lake City office and its
audit and tax practice. Mr. Christensen earned a B.S. degree in Accounting from
Brigham Young University in 1972. Mr. Christensen is a Certified Public
Accountant.
William S. Dickinson has served as a Director of Headwaters since
January 2003. From 1972 to 1994, Mr. Dickinson worked for Arco Products Co. and
Arco Technology and Engineering, most recently as Vice President of Engineering
and Technology (from 1988 to 1994), at which time he retired and has been
involved in various projects as a consultant. In his most recent position with
Arco, Mr. Dickinson was responsible for engineering and process development for
the Arco refineries. In prior years, he was responsible for, among other things,
the sale of all natural gas produced by Arco, the engineering and construction
of all new oil production facilities in Alaska and the lower 48 states, and
managed annual budgets in the range of $100 million to $300 million. Mr.
Dickinson graduated from Yale University in 1956 with a B.S. in Chemical
Engineering.
Malyn K. Malquist has served as a Director of Headwaters since January
2003. Mr. Malquist is Senior Vice President and Chief Financial Officer of
Avista Corp., an energy utility in the Pacific Northwest. Mr. Malquist has held
this position since September 2002. Mr. Malquist has 24 years of experience in
the utility industry, many of which were in financial leadership positions. Mr.
Malquist worked for the Truckee Meadows Water Authority from February 2001 until
September 2002, serving as its General Manager. Mr. Malquist was CEO of Data
Engines, a high tech start-up company from May 2000 through October 2000. Mr.
Malquist was employed by Sierra Pacific Resources from 1994 through April 2000,
initially as its Chief Financial Officer, and later as President, CEO and board
member. Mr. Malquist worked for San Diego Gas and Electric from 1978 through
1994 in a variety of financial positions, including Vice President-Finance and
Treasurer. Mr. Malquist received BA and MBA degrees from Brigham Young
University.
18
Class III Directors:
Name Age Position with Headwaters Director Since
- ---- --- ------------------------ --------------
James A. Herickhoff 62 Vice Chairman and Director 1997
James A. Herickhoff has served as a Director of Headwaters since August
1997 and was elected Vice Chairman in April 1999. Since January 2000, Mr.
Herickhoff has been President, Chief Operating Officer and a principal of Wold
Talc Company, which operates one of the largest talc mines in the United States.
From 1987 to 1994, he served as President of Atlantic Richfield Company's
(ARCO's) Thunder Basin Coal Company. Mr. Herickhoff has over 30 years of
experience in the coal and mining industries and extensive experience in
strategic positioning of these companies for long-term growth and
competitiveness. Mr. Herickhoff led the growth of the Black Thunder and Coal
Creek coal mines from 19 million to approximately 40 million tons per year of
production. Mr. Herickhoff previously served as President of Mountain Coal
Company, managing all of ARCO's underground mining and preparation plants. Mr.
Herickhoff is the past President of the Wyoming Mining Association and a former
Board member of the Colorado and Utah Mining Associations. Mr. Herickhoff
received a Bachelor degree in 1964 from St. John's University, a Master of
Science degree in 1966 from St. Cloud State University and attended the Kellogg
Executive Management Institute at Northwestern University in 1986.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THE ELECTION OF MESSRS. BENSON, WELLER, GARN AND FISHER
PROPOSAL NO. 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee and the Board have appointed Ernst & Young LLP
("E&Y"), certified public accountants, as auditors to examine the financial
statements of Headwaters for fiscal 2005 and to perform other appropriate
accounting services and are requesting ratification of such appointment by the
stockholders.
As described in more detail in the following paragraphs, on October 14,
2002, Headwaters dismissed PricewaterhouseCoopers LLP ("PwC") and appointed
Ernst & Young LLP ("E&Y").
On September 19, 2002, Headwaters acquired 100% of the common stock of
ISG. E&Y audited ISG since its inception. ISG's revenues comprised approximately
65% of the consolidated revenues of the combined entity and ISG operated in 35
states and Canada. In addition, approximately 85% of Headwaters' employees came
from the ISG acquisition. On October 14, 2002, Headwaters decided to retain E&Y
as its independent auditors for the new combined company and accordingly
dismissed PwC. Headwaters' Audit Committee participated in and approved the
decision to change independent auditors.
Headwaters did not consult with E&Y on any application of accounting
principles or any other matter during the two fiscal years ended September 30,
2001 or subsequent thereto.
The reports of PwC on the financial statements for the fiscal years
audited by them contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principle.
In connection with its audits for the two most recent fiscal years and
through October 14, 2002, there were no disagreements with PwC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
PwC would have caused them to make reference thereto in their reports on the
financial statements for such years.
During the two most recent fiscal years and through October 14, 2002,
there were no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).
Headwaters requested that PwC furnish it with a letter addressed to the
Securities and Exchange Commission stating whether or not it agrees with the
above statements. A copy of such letter is filed as Exhibit 16.1 to Headwaters'
Report on Form 10-K for the fiscal year ended September 30, 2004.
19
Audit and Non-Audit Fees
The following table summarizes the fees paid or payable to Ernst &
Young LLP for services rendered for the fiscal years ended September 30, 2003
and September 30, 2004. Audit fees include the costs of the audit of Headwaters
and its subsidiaries including the costs of quarterly reviews, SEC filings
requiring the consents of Headwaters' independent auditor, and comfort letters
provided to underwriters. Audit-related fees consisted primarily of due
diligence procedures for a proposed acquisition. Tax fees consisted primarily of
the costs of federal and state income tax filings for Headwaters and its
subsidiaries, a state and local tax planning study, consultations on the tax
treatment of certain acquisition-related transaction costs and consultations
regarding legal entity structures and related potential asset transfers. All
other fees was for an annual subscription to Ernst & Young's online accounting
research library.
The Audit Committee pre-approves the annual audit fee, tax return
services, and non-routine SEC filing reviews, as well as the fees for all large
projects that are expected to cost more than $50,000. The Audit Committee is
informed of and approves all services provided. In addition, it has pre-approved
$100,000 for items that relate to routine accounting consultations related to
items such as new accounting pronouncements, routine SEC filings requiring
consents, and routine tax consultations. Upon performance of such services, the
Audit Committee is informed of and approves the matters to which such
consultations relate. Upon approval by the Audit Committee, the amount is added
back to the pre-approved $100,000.
The Audit Committee approved 100% of the audit fees, the audit-related
fees, the tax fees, and all other fees for 2003 and 2004.
Fiscal Year Fiscal Year
2003 2004
--------------- ---------------
Audit fees $325,924 $1,100,325
Audit-related fees 10,000 74,305
Tax Fees 254,782 964,281
All other fees 0 1,599
--------------- ---------------
Total $590,706 $2,140,510
=============== ===============
In the event that the stockholders do not ratify the appointment of
E&Y, the adverse vote will be considered a directive to the Audit Committee and
the Board to select other auditors for the next fiscal year. A representative of
E&Y is expected to attend the Meeting and will have an opportunity to make a
statement if he or she desires to do so and to respond to appropriate questions.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE "FOR" RATIFICATION OF ERNST & YOUNG LLP
AS HEADWATERS' INDEPENDENT AUDITORS
PROPOSAL NO. 3 - PROPOSED AMENDMENT TO CERTIFICATE OF
INCORPORATION TO INCREASE AUTHORIZED SHARES
General
Currently, our Restated Certificate of Incorporation authorizes the
issuance of 50,000,000 shares of our Common Stock. On January 7, 2005, our Board
of Directors adopted a proposal to amend our Restated Certificate of
Incorporation to increase the number of shares of Common Stock we are authorized
to issue from 50,000,000 to 100,000,000, subject to stockholder approval of the
amendment.
20
Our Board of Directors has declared the proposed amendment to be
advisable and in the best interest of Headwaters and its stockholders, and has
submitted the proposed amendment to be voted on by the stockholders at the
annual meeting. On January 19, 2005, of the 50,000,000 authorized shares of
Common Stock, there were 34,020,576 shares of Common Stock outstanding.
Additionally, 3,724,189 shares of Common Stock were reserved for issuance upon
the exercise of stock options. In addition, the indenture for our 2-7/8%
Convertible Senior Subordinated Notes due 2016 requires Headwaters to have
Common Stock available when the notes are presented for conversion. The
aggregate number of shares which may potentially be issued upon conversion of
the notes is 5,750,000; however, at present the notes are not convertible. Based
upon these issued and reserved shares of Common Stock, we currently have
approximately 12,250,000 shares of Common Stock remaining available for other
purposes.
In addition, we currently have 10,000,000 authorized but unissued
shares of preferred stock available for issuance under our Restated Certificate
of Incorporation. The proposed amendment does not increase the number of shares
of preferred stock that we are authorized to issue. There are currently no
shares of any series of our preferred stock outstanding and there are no
immediate plans, arrangements, commitments or understandings with respect to the
issuance of any shares of our preferred stock.
Form of Amendment
We propose to amend our Restated Certificate of Incorporation so that
Article V, Section A of our Restated Certificate of Incorporation will read in
its entirety as follows:
A. The capital stock authorized, the par value thereof, and
the characteristics of such stock shall be as follows:
Number of Shares Par Value Class of
Authorized Per Share Stock
---------------- --------- --------
100,000,000 $0.001 Common
10,000,000 $0.001 Preferred
Purpose of Amendment
Our Board of Directors is recommending this increase in authorized
shares of Common Stock primarily to give Headwaters appropriate flexibility to
issue shares for future corporate needs. The shares may be issued by the Board
in its discretion, subject to any further stockholder action required in the
case of any particular issuance by applicable law, regulatory agency, or under
the rules of the Nasdaq National Market or any stock exchange on which
Headwaters' Common Stock may then be listed. Although there is no present
agreement to issue any shares, the newly authorized shares of Common Stock would
be issuable for any proper corporate purpose, including future acquisitions,
capital raising transactions of equity or convertible debt securities, stock
splits, stock dividends, or issuance under current or future employee stock
plans. Our Board believes that these additional shares will provide us with
needed flexibility to issue shares in the future to take advantage of market
conditions or favorable opportunities, without the potential expense or delay
incident to obtaining stockholder approval for a particular issuance. There are
no immediate plans, arrangements, commitments or understandings with respect to
issuance of any of the additional shares of Common Stock which would be
authorized by the proposed amendment.
Rights of Additional Authorized Shares
The additional authorized shares of Common Stock, if and when issued,
would be part of the existing class of Common Stock and would have the same
rights and privileges as the shares of Common Stock presently outstanding. In
addition, our stockholders do not have preemptive rights with respect to our
Common Stock. Accordingly, should the Board of Directors elect to issue
additional shares of our Common Stock, existing stockholders would not have any
preferential rights to purchase the shares.
Potential Adverse Effects of Amendment
Future issuance of Common Stock or securities convertible into our
Common Stock could have a dilutive effect on the earnings per share, book value
per share, voting power and percentage interest of holdings of current
stockholders. In addition, the availability of additional shares of our Common
Stock for issuance could, under certain circumstances, discourage or make more
difficult efforts to obtain control of Headwaters. The Board is not aware of any
21
attempt, or contemplated attempt, to acquire control of Headwaters. This
proposal is not being presented with the intent that it be used to prevent or
discourage any acquisition attempt but nothing would prevent the Board from
taking any appropriate actions not inconsistent with its fiduciary duties.
Effectiveness of Amendment
If the proposed amendment is adopted, it will become effective upon the
filing of a certificate of amendment to our Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware.
Vote Required; Recommendation of Board of Directors. The amendment to the
Certificate of Incorporation requires the affirmative vote of a majority of the
shares outstanding and entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED SHARES
PROPOSAL NO. 4 - APPROVAL OF THE HEADWATERS INCORPORATED SHORT
TERM INCENTIVE BONUS PLAN
On January 3, 2005, the Board adopted, subject to stockholder approval,
the Headwaters Incorporated Short Term Incentive Bonus Plan (the "SIBP"), a
performance-based incentive bonus plan under which employees of Headwaters who
are designated by the Compensation Committee ("Participants") are eligible to
receive bonus payments. The SIBP is being submitted to Headwaters' stockholders
for approval so that bonuses payable by Headwaters to its senior executives
under the SIBP will be fully deductible for federal income tax purposes. If
approved by the stockholders of Headwaters, the SIBP will take effective October
1, 2005, and will replace Headwaters' existing Incentive Bonus Plan under which
bonuses payable to Headwaters' senior executives under that plan in excess of
$1,000,000 (including other compensation from Headwaters or its subsidiaries)
would not be fully deductible for federal income tax purposes.
Description of the SIBP
General. The purpose of the SIBP is to promote the short-term success
of Headwaters by providing financial incentive for employees of Headwaters and
its subsidiaries to strive for more effective operation of the business of
Headwaters and its subsidiaries through ongoing development and use of their
knowledge, skill, ingenuity, resourcefulness and industry. The SIBP provides
that annual awards may be made to employees who are responsible for successful
operation and management of Headwaters and its subsidiaries. The SIBP is
intended to supplement the base compensation and long-term incentive plans
provided to the employees of Headwaters.
Effective Date. Subject to the approval of stockholders of Headwaters,
Headwaters seeks to qualify the SIBP for federal income tax purposes for the
fiscal year commencing October 1, 2005.
Administration. The SIBP will be administered by the Compensation
Committee which is appointed by the Board and which consists of at least two
members of the Board who qualify as "outside directors" under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
and interpretations promulgated thereunder. The Compensation Committee will have
the sole discretion and authority to administer and interpret the SIBP.
Participation. Key employees of Headwaters selected to participate in
the SIBP by the Compensation Committee and are employed on the last day of a
performance year are eligible to participate in the SIBP; however, Participants
in the SIBP are selected based on their roles and responsibilities in Headwaters
and participation is subject to the decision of the Compensation Committee. In
the fiscal year ending September 30, 2004, approximately 115 employees of the
Company participated in the Incentive Bonus Plan, which the SIBP will replace.
The number of Participants in the SIBP for the fiscal year commencing October 1,
2005, has yet to be determined.
Bonus Determinations. The performance criteria and bonus formula for
the SIBP are substantially similar to the ones in the existing Incentive Bonus
Plan of Headwaters. Under the SIBP, a Participant will be eligible to receive a
bonus payment under the SIBP if Headwaters accomplishes certain financial goals
and if the Participant meets individual goals. A Participant's bonus will be
based on Headwaters' success in accomplishing specified financial performance
22
targets established by the Compensation Committee, the employee's base pay, and
individual performance during the year. No bonuses may be awarded to a
Participant if Headwaters' overall performance is below a certain threshold
level or if a Participant's individual performance is unsatisfactory. Under the
SIBP, Headwaters' financial performance will be measured using an economic value
added formula, which is defined as Headwaters' net operating profit after taxes,
less the average cost of capital employed by Headwaters during the fiscal year.
Under the SIBP, the Compensation Committee has the discretion to adjust the net
operating profit before taxes during a performance year to include or exclude:
(i) extraordinary, unusual and/or non-recurring items of gain or loss, (ii)
gains or losses on the disposition of a business, (iii) changes in tax or
accounting regulations or laws, or (iv) the effect of a merger or acquisition,
as identified in the Company's quarterly and annual earnings releases. A
multiplier, or factor, is determined by measuring how much Headwaters' financial
performance exceeds a financial threshold established by the Compensation
Committee for the fiscal year. The multiplier shall be multiplied against a
pre-determined percentage of the Participant's base compensation with the
product adjusted based upon the Participant's individual performance during the
fiscal year in order to calculate the potential bonus payable to the
Participant. The Compensation Committee has the authority to reduce (but not
increase) the actual bonus to be paid to a Participant. Any potential bonus
payments which are not paid to a Participant are not reallocated to other
Participants in the SIBP.
Maximum Bonus. The actual amount of future bonus payments under the
SIBP is not presently determinable. However, the SIBP provides that the maximum
bonus for any Participant shall not exceed $3,000,000 with respect to any fiscal
year of Headwaters.
Payment of Bonus. Under the SIBP, payment of a bonus award will occur
as soon as practicable after the date on which the award is approved by the
Compensation Committee. The Compensation Committee will have the discretion to
require that a portion of the bonus award be banked, meaning that the full
amount of the award will not be paid unless the performance target for
Headwaters is achieved in each of the two succeeding fiscal years. This banking
mechanism helps motivate management and employees to create long-term
sustainable stockholder value and discourages short-term performance at the
expense of long-term stockholder value creation.
Plan Payments. Because future awards and payments under the SIBP will
be subject to the Committee's discretion, it is not possible to determine the
payments that will be received under the SIBP by executive officers and other
employees in the fiscal year beginning October 1, 2005. The table below shows
the benefits that were awarded under the Incentive Bonus Plan, which the SIBP
will replace, in 2004 to: all of the executive officers as a group; and all
other employees of Headwaters. The benefits that were awarded under the
Incentive Bonus Plan in 2004 to each of the executive officers named in the
Summary Compensation Table on page 4 are disclosed in the Summary Compensation
Table. Non-employee directors are not eligible for awards under the Incentive
Bonus Plan and will not be eligible for awards under the SIBP.
Dollar Value
------------
All current executive officers as a group $4,316,745
All other employees as a group (not including $5,404,087
executive officers
Section 162(m) and Certification of Bonuses. The SIBP is designed to
permit annual bonuses paid thereunder to Participants to be deductible by
Headwaters without limit under Section 162(m) of the Code. Section 162(m) places
a limit of $1,000,000 on the amount of compensation that may be deducted by
Headwaters in any taxable year with respect to each "Covered Employee" within
the meaning of Section 162(m). The term includes the Chief Executive Officer and
the four other highest compensated officers of Headwaters whose compensation are
disclosed in the Summary Compensation Table. Certain performance-based
compensation is not subject to the $1,000,000 deduction limit. The SIBP is
designed to provide this type of performance-based compensation to Covered
Employees. Bonuses paid to Participants under the SIBP will be based upon bonus
formulas that are tied to the objective performance criteria in the economic
value added formula described above in Bonus Determinations. Bonus formulas
based on the objective performance criteria for Participants who are Covered
Employees will be adopted for each performance period or year, by the
Compensation Committee not later than the latest time permitted by Section
162(m) of the Code (generally, for performance periods of one year or more, not
later than 90 days after the commencement of the performance period, and before
one-fourth of the performance period has expired). No bonuses will be paid to
Participants unless and until the Compensation Committee makes a certification
in writing with respect to the attainment of the objective performance criterion
as required by Section 162(m) of the Code. Although the Compensation Committee
may in its sole discretion, reduce a bonus payable to a Participant, the
Compensation Committee will have no discretion to increase the amount of a
23
Participant's bonus under the SIBP or waive the vesting requirements for such
bonus. The SIBP and its performance criteria are subject to stockholder approval
before any bonuses will be paid thereunder.
Reasons for Adoption of the SIBP. The Board believes the SIBP will
provide an incentive for superior work and will motivate Participants toward
even higher achievement and business results. The Board also believes the SIBP
will further tie the Participant's goals and interests to those of Headwaters
and its stockholders, and will enable the Company to attract and retain highly
qualified senior executives. Payment of bonuses under the SIBP will also be
eligible to be deducted by Headwaters under the Code without regard to the
restrictions of Section 162(m) thereof.
Further Information Regarding the SIBP. The foregoing is only a summary
of the SIBP and is qualified in its entirety by reference to its full text, a
copy of which is attached hereto as Exhibit A and is incorporated herein by
reference. Stockholders are urged to read the SIBP in its entirety before
casting their votes.
Vote Required; Recommendation of Board of Directors. The approval of the
Headwaters Short Term Incentive Bonus Plan requires the affirmative vote of a
majority of the shares present and entitled to vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR"
THE APPROVAL OF THE HEADWATERS INCORPORATED SHORT TERM INCENTIVE BONUS PLAN
PROPOSAL NO. 5 - APPROVAL OF THE HEADWATERS INCORPORATED LONG
TERM INCENTIVE COMPENSATION PLAN
On January 3, 2005, the Board of Directors adopted, subject to
stockholder approval, the Headwaters Incorporated Long Term Incentive
Compensation Plan (the "LTIP"), under which employees of Headwaters selected to
participate in the LTIP by the Compensation Committee ("Participants") will be
eligible to receive long-term incentive-based compensation.
Description of the LTIP
Purpose of the LTIP. The purpose of the LTIP is to promote the success
of Headwaters Incorporated and its subsidiaries by providing financial incentive
for employees to strive for long-term creation of stockholder value. The LTIP
provides long-term incentives to employees of Headwaters and its subsidiaries
who are able to contribute towards the creation of or have created stockholder
value by providing them stock options and other stock and cash incentives. Key
strategic objectives in our compensation program are to closely align
management's interests with the long-term interests of our stockholders, and to
encourage employees to behave like owners of the business by rewarding them when
stockholder value is created. We believe that by allowing Headwaters to continue
to offer its employees long-term performance-based compensation through the
LTIP, Headwaters will continue to be able to attract, motivate and retain
experienced and highly qualified employees who will contribute to Headwaters'
financial success.
Term of the Plan. The LTIP becomes effective upon stockholder approval,
and provides that no further awards under the LTIP may be made on or after March
1, 2015, the tenth anniversary of the approval of the LTIP. No awards will be
granted thereunder until stockholder approval is obtained for the LTIP.
Authorized Shares. The total number of shares of Common Stock available
for delivery pursuant to awards under the LTIP over its entire term is 1,500,000
(subject to the adjustment provisions discussed below), which represents
approximately 4.4% of Headwaters' common shares currently outstanding.
Administration. The LTIP will be administered by the Compensation
Committee which is appointed by the Board and which consists of at least two
members of the Board who qualify as "outside directors" under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
and interpretations promulgated thereunder. The Compensation Committee will have
the sole discretion and authority to administer and interpret the LTIP.
Participation. All employees of Headwaters and its subsidiaries are
eligible to participate in the LTIP. Participants in the LTIP are selected based
24
on their roles and responsibilities in the performance of Headwaters and is
subject to the approval of the Compensation Committee. The number of
Participants in the LTIP has yet to be determined.
Types of Awards. The LTIP authorizes the grant of several types of
awards, including incentive stock options ("ISOs"), non-qualified stock options
("NSOs"), stock appreciation rights ("SARs"), restricted stock and restricted
stock unit awards, performance stock and performance unit awards, unrestricted
stock awards, cash awards and other performance awards.
Vesting of LTIP Awards. The Compensation Committee has the discretion
to establish minimum vesting requirements that must be followed for awards under
the LTIP and may accelerate the vesting of the LTIP awards in the event of a
Change in Control of Headwaters (as defined in the LTIP). Subject to the
provisions of the LTIP permitting or providing for adjustments to the Awards
(and Common Stock subject to the Awards) under the LTIP under certain
circumstances (including but not limited to a merger or other change in control
of Headwaters), all stock and cash bonus Awards under the Plan, other than EVA
Awards, shall be subject to a minimum service vesting requirement over a period
of at least three years, with vesting in each of the first two years of the
vesting period for such Awards not to exceed one-third of the total Award,
provided, however, that the Compensation Committee shall have the discretion to
provide for faster vesting in the event of the Disability, death or retirement
(as defined by the Compensation Committee) of a Participant.
Annual Limit on Total Grants of Restricted Stock, Restricted Stock
Units and Performance Stock. The Restricted Stock, Restricted Stock Units and
Performance Shares granted under the LTIP in any one calendar year shall not
relate to more than 300,000 shares of Common Stock in the aggregate, provided,
that any portion of such 300,000 share limit not reserved for grants of
Restricted Stock, Restricted Stock Units or Performance Shares made in any
calendar year beginning in 2005, shall be added to the 300,000 share limit for
subsequent calendar years.
Maximum Award. No Participant may receive in any calendar year: (i)
stock options relating to more than 500,000 shares; (ii) restricted stock or
restricted stock units that are subject to the attainment of performance goals
(as described below) relating to more than 500,000 shares; (iii) SARs relating
to more that 500,000 shares; or (iv) performance shares relating to more than
500,000 shares. The maximum cash payment that may be made to a single
Participant under a single Performance Unit, EVA Award or other cash award in
any calendar year shall not exceed $20,000,000.
Stock Options
ISOs and NSOs. ISOs and NSOs are both stock options allowing the
recipient to purchase a fixed number of shares of our Common Stock for a fixed
price. Under the LTIP, the exercise price of any option must be not less than
the fair market value, as defined in the LTIP, of our Common Stock on the grant
date. The LTIP permits the Compensation Committee to include various terms in
the options in order to enhance the linkage between stockholder and management
interests. The LTIP provides that the term of any option granted may not exceed
ten years and that each option may be exercised for such period as may be
specified by our Compensation Committee in the grant of the option, subject to
the minimum vesting requirements described above.
Fair Market Value. For purposes of the LTIP, the fair market value of
our common stock will mean the closing sale price of our common stock at four
o'clock p.m. (Eastern Time), on the principal United States national stock
exchange on which the common stock of the Company is traded, as determined by
the Committee, or, if the common stock shall not have been traded on such date,
the closing sale price on such stock exchange on the first day prior thereto on
which the common stock was so traded, or, if the common stock is not traded on a
United States national stock exchange, such other amount as may be determined by
the Compensation Committee by any fair and reasonable means. The fair market
value determined by the Committee in good faith shall be final, binding and
conclusive on all parties.
Stock Appreciation Rights. SARs constitute the right to receive stock
or cash, or a combination of stock and cash, equal in value to the difference
between the exercise price of the SAR and the market price of Headwaters' Common
Stock on the exercise date. The exercise price of a SAR must be no less than the
fair market value of our Common Stock on the grant date. SARs may be granted
alone or in tandem with options. SARs granted in tandem with options must have
an exercise price equal to the exercise price per share of the related options.
The exercise of all or a portion of a SAR granted with a related option results
in the forfeiture of all or a corresponding portion of the related option, and
vice versa.
25
No Discounted Stock Options. The LTIP prohibits the grant of a stock
option with an exercise price less than the fair market value of our stock on
the date of grant.
No Repricing. The LTIP prohibits the cancellation of any outstanding
stock option for the purpose of reissuing the option to the Participant at a
lower exercise price or any reduction in the option price of an outstanding
option.
Transferability of Options. The LTIP does not permit the transfer of
stock options under the LTIP.
Restricted Stock and Restricted Stock Units
Restricted stock consists of shares which are transferred or sold by
Headwaters to a Participant, but are subject to substantial risk of forfeiture
and to restrictions on their sale or other transfer by the Participant.
Restricted stock units are the right to receive shares at a future date in
accordance with the terms of such grant upon the attainment of certain
conditions specified by the Compensation Committee which include substantial
risk of forfeiture and restrictions on their sale or other transfer by the
Participant. The Compensation Committee determines the eligible Participants to
whom, and the time or times at which, grants of restricted stock or restricted
stock units will be made, the number of shares or units to be granted, the price
to be paid, if any, the time or times within which the shares covered by such
grants will be subject to forfeiture, the time or times at which the
restrictions will terminate, and all other terms and conditions of the grants.
Restrictions or conditions could include, but are not limited to, the attainment
of performance goals (as described below), continuous service with Headwaters,
the passage of time or other restrictions or conditions. Generally, the
restricted stock and restricted stock units that are currently outstanding vest
over five years after the date of grant.
Performance Based Awards
Performance Stock. A Participant who is granted performance stock has
the right to receive shares or cash or a combination of shares and cash equal to
the fair market value of such shares at a future date in accordance with the
terms of such grant and upon the attainment of performance goals specified by
the Compensation Committee. The award of performance stock to a Participant will
not create any rights in such Participant as a stockholder of Headwaters until
the issuance of Common Stock with respect to an award.
Performance Units. A Participant who is granted performance units has
the right to receive a payment in cash upon the attainment of performance goals
specified by the Compensation Committee. The Compensation Committee may
substitute actual shares of Common Stock for the cash payment otherwise required
to be made pursuant to a performance unit award.
Qualified Performance Based Awards. Section 162(m) of the Code
generally places a $1,000,000 annual limit on a company's tax deduction for
compensation paid to a "covered employee." A "covered employee" is an employee
who is, on the last day of the company's taxable year in which the deduction
would otherwise be claimed, the company's chief executive officer or one of the
other four highest paid officers named in its Summary of Compensation Table.
This limit does not apply to compensation that satisfies the applicable
requirements for a performance-based compensation exception, one of which is
that stockholders approve the material terms of the performance-based
compensation. The LTIP incorporates the requirements for the performance-based
compensation exception applicable to options and SARs, so that all such awards
should qualify for the exception. In addition, our Compensation Committee may
grant other awards designed to qualify for this exception. These awards are
referred to as qualified performance-based awards.
These qualified performance-based awards must be made subject to the
achievement of objective performance goals relating to one or more business
criteria within the meaning of Section 162(m) of the Code, including, but not
limited to: cash flow; cost; ratio of debt to debt plus equity; profit before
tax; economic profit; earnings before interest and taxes; earnings before
interest, taxes, depreciation and amortization; earnings per share; operating
earnings; economic value added; ratio of operating earnings to capital spending;
free cash flow; net profit; net sales; sales growth; price of (and changes in
the price of) Headwaters Common Stock; return on net assets, equity or
stockholders' equity; market share; or total return to stockholders.
The Compensation Committee may also elect to apply performance business
criteria based on a long-term economic value added formula which takes into
account the following business criteria in the bonus calculation: net operating
profit after taxes, as adjusted to eliminate the effect of non-economic elements
of generally accepted accounting principles, ("NOPAT"), less the weighted
average cost of capital employed during the year ("Employed Capital"). The
26
Committee shall have the discretion to adjust NOPAT to include or exclude: (i)
extraordinary, unusual and/or non-recurring items of gain or loss, (ii) gains or
losses on the disposition of a business, (iii) changes in tax or accounting
regulations or laws, or (iv) the effect of a merger or acquisition, as
identified in the Company's quarterly and annual earnings releases.
In all other respects, the Performance Criteria to be applied under the
LTIP shall be calculated in accordance with the Company's financial statements,
generally accepted accounting principles, or under a methodology established by
the Committee prior to the issuance of an Award which is consistently applied
and identified in the audited financial statements, including footnotes, or the
Management Discussion and Analysis section of the Company's annual report. Any
performance criteria may be used to measure the performance of Headwaters as a
whole or any business unit of Headwaters and may be measured relative to a peer
group or index. The achievement of these goals may be determined without regard
to the effect of specified unusual events, such as extraordinary, unusual or
non-recurring items of gain or loss, gains or losses on the disposition of a
business, changes in tax or accounting regulations or laws, or the effect of a
merger or acquisition, as determined by the Compensation Committee in connection
with the establishment of the goals. The Compensation Committee may impose other
conditions, such as continued employment, for qualified performance-based awards
to be earned, vested or payable. The Compensation Committee also has the
authority to reduce but not increase the payouts on performance based awards or
limit (but not waive) the actual performance-based vesting of such awards in its
sole discretion.
Other Awards
Stock Awards. The Compensation Committee may award shares of Common
Stock to Participants without payment therefore, as additional compensation for
service to Headwaters or a subsidiary. Stock awards may be subject to other
terms and conditions, which may very from time to time and among employees, as
the Compensation Committee determines to be appropriate.
Cash Awards. In addition to the various types of equity-based awards
described above, the LTIP permits our Compensation Committee to grant cash
awards, subject to such terms and conditions, if any, as it determines, such as
requiring continued employment or continued service or performance conditions.
General Plan Provisions
Adjustment Provisions. If there is any change in the Common Stock by
reason of any stock split, stock dividend, spin-off, split-up, spin-out,
recapitalization, merger, consolidation, reorganization, combination, or
exchange of shares, the total number of shares available for Awards, the maximum
number of shares which may be subject to an award in any calendar year and the
number of shares subject to outstanding Awards, and the price of each of the
foregoing, as applicable, will be equitably adjusted by the Compensation
Committee in its discretion. In the event of any merger, consolidation, or
reorganization of Headwaters with or into another corporation which results in
Headwaters' outstanding Common Stock being converted into or exchanged for
different securities, cash, or other property, there shall be substituted on an
equitable basis as determined by the Compensation Committee, for each share of
Common Stock subject to an Award, the number and kind of shares of stock, other
securities, cash, or other property to which holders of Common Stock of
Headwaters are entitled pursuant to the transaction.
Substitution and Assumption of Awards Without affecting the number of
shares reserved or available under the LTIP, either the Board or the
Compensation Committee may authorize the issuance of Awards in connection with
the assumption of, or substitution for, outstanding benefits previously granted
to individuals who become employees of Headwaters or any subsidiary as the
result of any merger, consolidation, acquisition of property or stock, or
reorganization other than a Change in Control, upon such terms and conditions as
it deems appropriate.
Share Counting Rules. If a Stock Option granted under the LTIP expires
or is terminated, surrendered or canceled without having been fully exercised or
if Restricted Stock, Restricted Stock Units, Performance Shares or SARs granted
under the LTIP are forfeited or terminated without the issuance of all of the
shares subject thereto, the shares covered by such awards will again be
available for use under the LTIP. Shares covered by an award granted under the
LTIP would not be counted as used unless and until they are actually issued and
delivered to a Participant. Any shares of Common Stock covered by a SAR shall be
counted as used only to the extent shares are actually issued to the Participant
upon exercise of the SAR. The number of shares which are transferred to
Headwaters by a Participant to pay the exercise or purchase price of an award
will not be subtracted from the number of shares issued with respect to such
27
award for the purpose of counting shares used. Shares withheld to pay
withholding taxes in connection with the exercise or payment of an award will
not be counted as used. Shares covered by an award granted under the LTIP that
is settled in cash will not be counted as used
Change of Control. The LTIP provides that in the event of a "Change in
Control" then, except as otherwise provided in an award agreement under the
LTIP:
o The Compensation Committee, in its sole discretion, may (but
shall not be required to) make all outstanding Stock Options
and SARs fully vested and exercisable, all restrictions on
Restricted Stock and Restricted Stock Units terminated, all
performance goals deemed achieved at target levels and all
other terms and conditions met, and deliver all Performance
Stock, and pay out all Performance Units and Restricted Stock
Units.
o The Compensation Committee shall in its sole discretion
determine the status of achievement of a particular target
goals under the LTIP and shall specify an adjusted basic award
based upon its determination of achievement of the performance
goals under the Awards as of the Change in Control ("Change in
Control Award"). A Change in Control Award shall be modified
as follows and shall be paid 30 days after the consummation of
the Change in Control. In the event of a Change in Control,
all EVA awards or cash awards shall be paid on a pro-rated
basis (as determined by the Committee) based on the portion of
the Performance Goals achieved under the EVA Awards or cash
Awards as of the date of the Change in Control, subject to the
discretion of the Committee to reduce the EVA awards Any
deferred award payments outstanding upon a Change in Control
shall be paid 30 days after the Change in Control.
For purposes of the LTIP, a "Change in Control" is defined as:
o The acquisition by any person of beneficial ownership of 50%
or more of either the outstanding shares of Common Stock or
combined voting power of Headwaters, provided that a change of
control shall not be deemed to have occurred as a result of
any acquisition from Headwaters, any acquisition by
Headwaters, a subsidiary or a Company-sponsored or maintained
employee benefit plan;
o The consummation by Headwaters of a merger, consolidation or
any other corporate reorganization if persons who were not
stockholders of Headwaters immediately prior to such merger,
consolidation or other reorganization own immediately after
such merger, consolidation or other reorganization 50% or more
of the voting power of the outstanding securities of each of
(A) the continuing or surviving entity and (B) any direct or
indirect parent corporation of such continuing or surviving
entity; or
o The sale, transfer, or other disposition of all or
substantially all of Headwaters' assets.
Amendment and Termination of the LTIP. Each of the Compensation
Committee and the Board of Directors has the right and power to amend the LTIP,
provided, however, that the Compensation Committee and the Board of Directors
may not amend the LTIP in a manner that would impair or adversely affect the
rights of the holder of an award without the holder's consent. No amendment of
the LTIP shall be made without stockholder approval to the extent stockholder
approval is expressly required under applicable rules and regulations of the
Securities and Exchange Commission, the applicable rules of a stock exchange on
which the securities of the Company are traded as may be established pursuant to
its rule-making authority of such stock exchange, and the rules and regulations
of the Internal Revenue Service for plans intended to qualify for the
performance-based exemption under Section 162(m) of the Code.
Plan Benefits
A new benefits table is not provided because no awards have been made
under the LTIP and all future benefits under the LTIP are subject to the
Compensation Committee's discretion.
Summary of Certain Federal Income Tax Information
The following is only a brief summary of the effect of federal income
taxation on the recipient of an award and Headwaters under the LTIP. This
summary is not exhaustive and does not discuss the income tax laws of any
municipality, state or country outside of the United States in which a recipient
of an award may reside.
Incentive Stock Options. If an option granted under the LTIP is an ISO,
the grantee will recognize no income upon grant of the ISO and will incur no tax
liability upon exercise unless the grantee is subject to the alternative minimum
28
tax. Headwaters will not be permitted a deduction for federal income tax
purposes due to an exercise of an ISO regardless of the applicability of the
alternative minimum tax, unless the exercise constitutes a disqualifying
disposition of the ISO. Upon the sale or exchange of the shares at least two
years after grant of the ISO and one year after exercise by the grantee, any
gain (or loss) will be treated as long-term capital gain (or loss). If these
holding periods are not satisfied (i.e., a disqualifying disposition occurs),
the grantee will recognize ordinary income equal to the difference between the
exercise price and the lower of the fair market value of the stock at the date
of the option exercise or the sale price of the stock. Headwaters will be
entitled to a deduction in the same amount as the ordinary income recognized by
the grantee. Any gain (or loss) recognized on a disqualifying disposition of the
shares in excess of the amount treated as ordinary income will be characterized
as capital gain (or loss).
Non-Statutory Stock Options. All options that do not qualify as ISOs
are taxed as non-statutory options ("NSOs"). A grantee will recognize no income
upon grant of an NSO. However, upon the exercise of an NSO, the grantee will
recognize ordinary income measured by the excess of the fair market value of the
shares over the exercise price. In certain circumstances, where the shares are
subject to a substantial risk of forfeiture when acquired, the date of taxation
may be deferred unless the grantee files an election with the Internal Revenue
Service under Section 83(b) of the Code. The income recognized by a grantee who
is also an employee of Headwaters will be subject to tax withholding by
Headwaters. Upon the sale of such shares by the grantee, any difference between
the sale price and the exercise price, to the extent not recognized as ordinary
income as provided above, will be treated as capital gain (or loss). Headwaters
will be entitled to a tax deduction in the same amount as the ordinary income
recognized by the grantee with respect to shares acquired upon exercise of an
NSO.
Restricted Stock Awards. A recipient generally does not recognize
taxable income on the grant of restricted stock, but does recognize ordinary
income on the vesting date, or the date the recipient's interest in the stock is
freely transferable or is no longer subject to a substantial risk of forfeiture,
in an amount equal to the fair market value of the shares on that date. Any
dividends paid on the restricted stock before the vesting date are also taxable
as compensation income upon receipt. However, a recipient may elect to recognize
income upon the grant of restricted stock, rather than when the recipient's
interest is freely transferable and no longer subject to a substantial risk of
forfeiture, equal to the fair market value of the shares on the date of the
award. If the recipient makes this election, dividends paid with respect to the
restricted shares that are paid currently (rather than held subject to
forfeiture) will not be treated as compensation, but rather as dividend income,
and the recipient will not recognize additional income when the restrictions
applicable to the restricted stock lapse. The recipient will not be entitled to
any deduction if, after making this election, he or she forfeits any of the
restricted stock. If restricted stock is forfeited after this election is made,
the recipient will not be entitled to a refund of the ordinary income tax paid
on the restricted stock. The recipient may, however, be entitled to receive a
capital loss deduction upon forfeiture. Headwaters will ordinarily be entitled
to a deduction at the same time and in the same amounts as the compensation
income recognized by the recipient of a grant of restricted stock, subject to
the limitations of Section 162(m). Depending upon the positions taken by the
Internal Revenue Service in regulations under the new federal tax legislation
referred to above, the tax consequences of restricted stock described above may
change.
Restricted Stock Units. A recipient does not recognize taxable income
on the grant of restricted stock units, but does recognize ordinary income when
they vest, unless settlement of the units (whether in shares and/or cash) is
deferred in accordance with the requirements of federal tax law. If these
requirements are met, the recipient will recognize taxable income when the
shares and/or cash are delivered. The amount of this ordinary income will be the
fair market value of the shares on the date of vesting or delivery, as
applicable, plus the amount of cash payable or paid, as applicable. Any
dividends paid on the restricted stock units are also taxable as compensation
income upon vesting or payment, as applicable. Headwaters will ordinarily be
entitled to a deduction at the same time and in the same amounts as the
compensation income recognized by the recipient of a grant of restricted stock
units, subject to the limitations of Section 162(m).
Other Benefits. In the case of an exercise of a SAR or an award of
performance stock, performance units, unrestricted Common Stock or cash, the
Participant will generally recognize ordinary income in an amount equal to any
cash received and the fair market value of any shares received on the date of
payment or delivery. In that taxable year, Headwaters will generally receive a
federal tax income deduction in an amount equal to the ordinary income which the
Participant has recognized.
Withholding. Headwaters shall retain the right to deduct or withhold,
or require the recipient to remit to Headwaters, an amount sufficient to satisfy
federal, state and local taxes, required by law or regulation to be withheld
with respect to any taxable event as a result of the LTIP.
29
Change of Control and Parachute Payments. The accelerated vesting of
awards upon a change of control could result in a Participant being considered
to receive "excess parachute payments" (as defined in Section 280G of the Code),
which payments are subject to a 20% excise tax imposed on the Participant.
Section 162(m) Limitations. Section 162(m) of the Code generally places
a $1,000,000 annual limit on a company's tax deduction for compensation paid to
certain senior executives, other than compensation that satisfies the applicable
requirements for a performance-based compensation exception. The LTIP is
designed so that options and SARs qualify for this exemption, and it permits the
Compensation Committee also to grant other awards designed to qualify for this
exception. However, the Compensation Committee reserves the right to grant
awards that do not qualify for this exception, and in some cases, including a
Change of Control, the exception may cease to be available for some or all
awards (including options and SARs) that otherwise so qualify. Thus, it is
possible that Section 162(m) may disallow compensation deductions that would
otherwise be available to Headwaters.
Further Information Regarding the LTIP. The foregoing is only a summary
of the LTIP and is qualified in its entirety by reference to its full text, a
copy of which is attached hereto as Exhibit B and is incorporated herein by
reference. Stockholders are urged to read the LTIP in its entirety before
casting their votes.
Vote Required; Recommendation of Board of Directors. The approval of
the Headwaters Long Term Incentive Compensation Plan requires the affirmative
vote of a majority of the shares present and entitled to vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE
APPROVAL OF THE HEADWATERS INCORPORATED LONG TERM INCENTIVE COMPENSATION PLAN
STOCKHOLDER PROPOSALS
Stockholders may submit proposals on matters appropriate for
stockholder action at Headwaters' annual meeting consistent with regulations
adopted by the SEC. For such proposals to be considered for inclusion in the
proxy statement and form of proxy relating to the 2006 annual meeting, they must
be received by Headwaters not later than September 16, 2005 or such later date
as Headwaters may specify in its SEC filings. Such proposals should be addressed
to Headwaters at 10653 South River Front Parkway, Suite 300, South Jordan, Utah
84095, Attn: Corporate Secretary.
It is anticipated that proxies solicited in connection with Headwaters'
2006 annual meeting will confer discretionary authority to vote on matters,
among others, of which Headwaters does not receive notice prior to September 16,
2005.
OTHER MATTERS
Management does not intend to present, and has no information as of the
date of preparation of this Proxy Statement that others will present, any
business at the Meeting other than business pertaining to matters required to be
set forth in the Notice of Annual Meeting and Proxy Statement. However, if other
matters requiring the vote of the stockholders properly come before the Meeting,
it is the intention of the person named in the enclosed proxy to vote the
proxies held by him in accordance with his best judgment on such matters.
SOLICITATION OF PROXIES
The accompanying form of proxy is being solicited on behalf of the
Board. The expense of solicitation of proxies for the Meeting will be paid by
Headwaters. In addition to the mailing of the proxy material, such solicitation
may be made in person or by written communication, telephone or mail by
directors, officers, employees or agents of Headwaters or its subsidiaries. In
addition to the foregoing, Headwaters has retained Morrow & Co., a shareholder
services company, to assist in this proxy solicitation. Headwaters will pay
Morrow & Co. approximately $15,000 for its services, plus reimbursement of
out-of-pocket expenses. Also, Headwaters will reimburse banks, brokers and other
persons holding Common Stock for their expenses in forwarding proxy solicitation
materials to beneficial owners of Common Stock.
30
If you have any questions about giving your proxy or require any
assistance, please contact Sharon Madden, Headwaters' Director of Investor
Relations, at 1-800-316-6214.
YOUR VOTE IS IMPORTANT. YOU ARE URGED TO DATE, SIGN AND PROMPTLY RETURN
YOUR PROXY CARD SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES
AND THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. THE PROMPT RETURN OF YOUR
SIGNED PROXY CARD, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD, WILL AID
HEADWATERS IN AVOIDING THE EXPENSE OF ADDITIONAL PROXY SOLICITATIONS. GIVING
YOUR PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON AT THE MEETING OR YOUR
RIGHT TO RESUBMIT LATER DATED PROXY CARDS.
Headwaters Incorporated
By Order of the Board of Directors,
/s/ Harlan M. Hatfield
----------------------------
Harlan M. Hatfield
Secretary
31
HEADWATERS INCORPORATED
PROXY SOLICITED BY THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS -TUESDAY, MARCH 1, 2005
The undersigned stockholder(s) of Headwaters Incorporated, a Delaware
corporation (the "Company"), revoking all previous proxies, hereby appoints
Harlan M. Hatfield and Curtis J. Brown, each as the attorney and proxy of the
undersigned, with full power of substitution, to cast all votes for all shares
of Common Stock of Headwaters which the undersigned would be entitled to cast if
personally present at the Annual Meeting of Stockholders of Headwaters to be
held at Tuesday, March 1, 2005, starting at 2:00 p.m., Mountain Standard Time,
at the Country Inn & Suites, 10499 South Jordan Gateway, South Jordan, Utah
84095, and any and all adjournments or postponements thereof. Said proxies are
authorized and directed to vote as indicated with respect to the following
matters:
(Please date and sign below)
1. ELECTION OF DIRECTORS: Please mark your vote as this [X]
Kirk A. Benson FOR [ ] WITHHOLD AUTHORITY [ ]
(If elected, Mr. Benson's term would
expire in 2008)
Raymond J. Weller FOR [ ] WITHHOLD AUTHORITY [ ]
(If elected, Mr. Weller's term would
expire in 2008)
E.J. "Jake" Garn FOR [ ] WITHHOLD AUTHORITY [ ]
(If elected, Mr. Garn's term would
expire in 2008)
Blake O. Fisher, Jr. FOR [ ] WITHHOLD AUTHORITY [ ]
(If elected, Mr. Fisher's term would
expire in 2006)
2. RATIFY THE SELECTION BY THE BOARD OF FOR [ ] AGAINST [ ] ABSTAIN [ ]
ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS OF HEADWATERS FOR FISCAL 2005
3. AMENDMENT OF HEADWATERS' RESTATED FOR [ ] AGAINST [ ] ABSTAIN [ ]
CERTIFICATE OF INCORPORATION TO INCREASE
THE NUMBER OF HEADWATERS AUTHORIZED
COMMON STOCK FROM 50,000,000 TO 100,000,000
4. APPROVE THE HEADWATERS SHORT TERM FOR [ ] AGAINST [ ] ABSTAIN [ ]
INCENTIVE BONUS PLAN
5. APPROVE THE HEADWATERS LONG TERM FOR [ ] AGAINST [ ] ABSTAIN [ ]
INCENTIVE COMPENSATION PLAN
This Proxy is solicited on behalf of the Board of Directors. Unless
otherwise specified, the shares will be voted "FOR" items 1, 2, 3, 4 and 5. This
Proxy also delegates discretionary authority to the proxy to vote with respect
to any other business which may properly come before the Annual Meeting of
Stockholders and any and all adjournments or postponements thereof to the extent
allowed by Rule 14a-4(c) as promulgated by the U.S. Securities and Exchange
Commission.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL
MEETING AND PROXY STATEMENT OF HEADWATERS INCORPORATED.
Date: ________________________, 2005
_________________________________________
Name(s) of Stockholder(s)
PLEASE RETURN YOUR COMPLETED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
Appendix A
HEADWATERS INCORPORATED
SHORT TERM INCENTIVE BONUS PLAN
Effective 1 October 2005
(Subject to Stockholder Approval)
1. PURPOSE
The purpose of this Short Term Incentive Bonus Plan is to promote the
success of Headwaters Incorporated and Headwaters' subsidiaries, by
providing financial incentive for employees to strive for more
effective operation of the business through ongoing development and use
of their knowledge, skill, ingenuity, resourcefulness and industry. The
Plan provides that annual Awards may be made to employees who are
responsible for successful operation and management of the Company.
2. DEFINITIONS
The following definitions shall be applicable throughout the Plan:
(a) "Award" means the total dollar amount that may be paid to a
Participant following a given Performance Year.
(b) "Banked Award" means a portion of an Award earned as provided
in Section 8(b) below.
(c) "Base Compensation" means the annualized base wages of a
Participant reported on the Participant's Internal Revenue
Service Form W-2 as determined on the last day of a
Performance Year.
(d) "Board" means the Board of Directors of Headwaters
Incorporated.
(e) "Bonus Percent" means the percentage assigned to a Participant
based on position, responsibility, and other factors, as
determined by the Committee, in it sole discretion.
(f) "Change in Control" means:
(i) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if persons who were not stockholders of the
Company immediately prior to such merger, consolidation or
other reorganization own immediately after such merger,
consolidation or other reorganization 50% or more of the
voting power of the outstanding securities of each of (A) the
continuing or surviving entity and (B) any direct or indirect
parent corporation of such continuing or surviving entity;
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(iii) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of
securities of the Company representing at least 50% of the
total voting power represented by the Company's then
outstanding voting securities. For purposes of this Paragraph
(iii), the term "person" shall have the same meaning as when
used in sections 13(d) and 14(d) of the Securities Exchange
Act of 1934 but shall exclude (A) a trustee or other fiduciary
holding securities under an employee benefit plan of the
Company or of a parent or subsidiary of the Company and (B) a
corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their
ownership of the common stock of the Company.
A transaction shall not constitute a Change in Control if its
sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be
owned in substantially the same proportions by the persons who
held the Company's securities immediately before such
transaction.
(g) "Chief Executive Officer" means the Chief Executive Officer of
Headwaters Incorporated.
(h) "Code" means the Internal Revenue Code of 1986, as amended.
(i) "Committee" means the Compensation Committee of the Board
unless another committee comprised of members of the Board is
designated by the Board to oversee and administer the Plan,
provided, that the Committee shall consist of two or more
members of the Board as the Board may designate from time to
time, each of whom shall satisfy such requirements as:
(i) the rules of a stock exchange on which the securities
of the Company are traded as may be established
pursuant to its rule-making authority of such stock
exchange; and
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(ii) the Internal Revenue Service may establish for
outside directors acting under plans intended to
qualify for exemption under Section 162(m) of the
Code.
(j) "Company" means collectively Headwaters Incorporated, a
Delaware corporation.
(k) "Completion Factor" means the percentage completion of IBO
commitments of the Participants.
(l) "Covered Employee" means a person within the meaning of such
term given by Section 162(m) of the Code and income tax
regulations promulgated thereunder.
(m) "Disability" means a physical or mental medical condition that
prevents the Participant from performing the duties of his or
her position with the Company and is likely to last at least
twelve months or result in death, as determined by the
Committee in its sole discretion.
(n) "EVA" means the net operating profit before taxes, as adjusted
pursuant to items identified in this Section 2(m) ("NOPAT"),
less the average cost of capital employed by the Company
during the Performance Year. The Committee shall have the
discretion to adjust NOPAT to include or exclude: (i)
extraordinary, unusual and/or non-recurring items of gain or
loss, (ii) gains or losses on the disposition of a business,
(iii) changes in tax or accounting regulations or laws, or
(iv) the effect of a merger or acquisition, as identified in
the Company's quarterly and annual earnings releases. In all
other respects, Performance Criteria shall be calculated in
accordance with the Company's financial statements, generally
accepted accounting principles, or under a methodology
established by the Committee prior to the issuance of an Award
which is consistently applied and identified in the audited
financial statements, including footnotes, or the Management
Discussion and Analysis section of the Company's annual
report.
(o) "EVA Multiplier" means that factor identified on the EVA
Multiplier Table for the Company, associated with different
levels of EVA obtained during the Performance Year that
exceeds the Threshold EVA.
(p) "EVA Multiplier Table" means a table of percentages or
multiples of Base Compensation at different levels of EVA
during a Performance Year, which table shall be established
periodically by the Committee in its sole discretion.
(q) "Individual Business Objective" or "IBO" means the goal or
goals established by the Company for each Participant (other
than a Covered Employee) used to determine his or her
Performance Adjustment Factor.
(r) "Participant" means a full-time employee of the Company,
employed by the Company on the last day of a Performance Year
and who otherwise meets the eligibility requirements for
participation set forth in section 4.
(s) "Performance Adjustment Factor" or "PAF" means the multiplier
obtained by combining the completion factors from the IBOs of
a Participant as determined by the Committee in its sole
discretion. The Performance Adjustment Factor can vary from 0%
to 100% depending upon the attainment of the Participant's
IBOs.
(t) "Performance Year" means a designated fiscal year of the
Company during which Company and individual performance will
be measured and Participant services will be rendered for
which an Award may be granted.
(u) "Plan" means this Headwaters Incorporated Short Term Incentive
Bonus Plan.
(v) "Retrospective Review" means the formal report prepared
annually which details the Company's and the Participants'
performance during the Performance Year and provides the basis
for the Committee's determination of the Performance
Adjustment Factor and Participant Awards.
(w) "Target Award" means the Award that would be payable to a
Participant assuming a EVA Multiplier of 1 as described in
Section 5.
(x) "Threshold EVA" means the level of EVA performance below which
there will be no payment of an Award as determined by the
Committee in its sole discretion.
3. POWERS AND ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall
have the authority to construe and interpret the Plan and any Awards
granted thereunder, to establish and amend rules for Plan
administration, to change the terms and conditions of options and other
Awards at or after grant, and to make all other determinations which it
deems necessary or advisable for the administration of the Plan. The
determinations of the Committee shall be made in accordance with its
judgment as to the best interests of the Company and its stockholders
and in accordance with the purposes of the Plan. The Committee may take
action by a meeting in which a quorum of the Committee is present. The
meeting may be in person, by telephone or in such other manner in which
the members of the Committee participating in the meeting may
communicate directly with each other. A majority of the members of the
Committee shall constitute a quorum, and all determinations of the
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Committee shall be made by a majority of its members. Any determination
of the Committee under the Plan may be made without notice or meeting
of the Committee, in a writing signed by all the Committee members.
The Committee shall have the authority to reduce but not increase the
payouts on such Awards and the Committee shall have the authority to
limit but not waive the performance-based vesting of such Awards, in
both cases in its sole discretion. The Committee may prescribe rules
and procedures for the administration of the Plan and shall have the
authority to delegate ministerial duties to agents for the Committee
(and allocate responsibilities among the agents appointed by the
Committee for the performance of the ministerial duties) in the
administration of the Plan.
4. ELIGIBILITY FOR PARTICIPATION
(a) Those key employees of the Company and its subsidiaries,
including but not limited to the Covered Employees of the
Company, who are employed by the Company on the last day of
the Performance Year who are designated to participate in the
Plan by the Committee and have achieved pre-determined Plan
performance criteria shall be eligible to participate in the
Plan.
(b) Participation in a Performance Year does not entitle
participation in any subsequent Performance Year.
5. CALCULATION OF AWARDS
The potential Award for a Participant for a Performance Year shall be
computed as follows:
EVA Multiplier x the Participant's Base Compensation x the
Participant's Bonus Percent x the Participant's PAF.
For purposes of the computation, Covered Employees shall have a PAF of
1. The potential Award payable under the Plan to a Participant may be
reduced (but not increased) by the Committee in its sole discretion to
determine the actual Award to be paid to the Participant.
6. PARTICIPANT SELECTION AND AWARD DETERMINATION
(a) Each year the Chief Executive Officer shall present to the
Committee the list of recommended Participants, their
respective PAFs, the computation of their proposed Awards, and
the Award amounts recommended for each Participant.
(b) The Committee shall consider the Chief Executive Officer's
report referred to in Section 6(a) and shall, in its sole
discretion, determine the employees of the Company or its
subsidiaries to be designated as Participants in the Plan, the
potential Awards to be granted to such Participants for the
Performance Year, and the terms and conditions for such
Awards.
7. INDIVIDUAL AWARDS
(a) A Participant's Award shall be prorated based upon number of
months of service in a given Performance Year or if the
Participant is changed to a different employment category or
different employment categories during a Performance Year,
provided, that Awards for a Covered Employee shall be based
solely on his or her employment category as of the start of
the Performance Year.
(b) The actual Award, if any, to be paid to any individual
Participant hereunder shall be based upon the Company's
overall performance and individual performance considerations,
and shall be determined by the Committee in its sole
discretion, provided, that in all events the Committee shall
have the authority to decrease the actual Award payout below
the potential Award as computed in Section 5 but not to
increase the actual Award payout in excess of the Award
payable under the Award as computed in Section 5 above.
(c) No Award will be granted if the Company's overall performance
is below the Threshold EVA established by the Committee for
the Performance Year, or if a Participant's individual
performance is unsatisfactory, as determined by the Committee
in its sole discretion.
(d) Under the Plan, the maximum cash payment that may be made to a
single Participant under a single Award shall not exceed
$3,000,000.
8. FORM AND TIME OF PAYMENT
(a) An Award shall be paid to the Participant in cash, less
applicable federal, state and local income and employment
taxes, as soon as practicable after the date on which all
awards are approved for payment by the Committee.
A-3
(b) If banking applies to a Participant as determined by the
Committee, then 50% of the amount of the Award (after any
applicable reduction by the Committee) that is in excess of
the Award that would be computed if the EVA multiplier were 1
(Target Award), shall be paid, if at all, as provided in the
following sentences. The payment of the withheld Award (the
"Banked Award") shall not become vested until earned in the
subsequent years and shall be earned and paid over the two
years immediately subsequent to the Performance Plan Year, 50%
of the Banked Award shall be earned in the first subsequent
year and 50% in the second subsequent year if the Company
reaches the Threshold EVA respectively for each of the
subsequent years. If the Company fails to achieve the
applicable Threshold EVA in one of the two subsequent years,
the withheld amounts that would have been payable for that
year shall not be earned and will be forfeited.
Notwithstanding the foregoing, any Banked Awards will be paid
to a Participant upon the occurrence of (i) the Participant's
retirement from the Company after reaching age 60; or (ii) a
Change in Control of the Company.
9. RETIREMENT, DISABILITY, DEATH AND TERMINATION
(a) Subject to the provisions of Section 8(b) relating to Banked
Awards in the event of the retirement of a Participant or a
Change in Control of the Company, in the event of the
termination of a Participant's employment due to his or her
retirement, Disability, or death, such Participant (or the
Participant's probate estate, in the event of death) may
receive an Award that would be otherwise payable to the
Participant, prorated to the effective date of such event, at
the sole discretion of the Committee, provided, that in the
event of the retirement, Disability or death of a Covered
Employee, such individual shall be entitled to the pro-rated
portion of the Award he or she (or the Participant's probate
estate, in the event of death) would otherwise have been
entitled to receive had he or she not terminated his or her
employment. Any such prorated Award shall be determined and
paid in accordance with the regular procedures of the Plan.
(b) Should a post-termination Award be approved under Section
9(a), such Award shall be paid in cash, less applicable
federal, state, and local income and employment taxes, on the
normal Award payout date to the Participant (or to the
Participant's probate estate, in the event of death) or to the
person or persons who have acquired, by will or by the laws of
descent and distribution or by other legal proceedings, the
right to such Award, in the sole discretion of the Committee.
(c) If the employment of a Participant is terminated for reasons
other than due to his or her retirement, Disability or death,
then the Participant shall cease to have any rights to the
payment of or under any Award.
10. NO RESERVE OR TRUST
Nothing contained in the Plan shall require the Company to segregate
any monies from its general funds, or to create any trust or make any
special deposit in respect of any amounts payable under the Plan to or
for any Participant or group of Participants. All amounts payable under
the Plan shall be paid out of the general funds of the Company.
11. NO RIGHT TO ASSIGN
No right or interest of any Participant in the Plan or in any unpaid
Award shall be assignable or transferable in whole or in part, either
voluntarily or by operation of law or otherwise, or be subject to
payment of debts of any Participant by execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner.
12. NO EMPLOYMENT RIGHTS CONFERRED
Nothing contained in the Plan or any Award shall (i) confer upon any
employee any right with respect to continuation of employment with the
Company in any capacity, (ii) interfere in any way with the right of
the Company to terminate an employee's employment at any time, or (iii)
interfere with the Company's right to determine the terms and
conditions of any other employee benefit plan of the Company.
13. SUCCESSORS AND MERGERS, CONSOLIDATIONS OR CHANGE IN CONTROL
The terms and conditions of this Plan shall inure to the benefit of and
bind the Company, the Participants, their successors, assignees, and
personal representatives. If substantially all of the stock or assets
of the Company are acquired by another corporation or entity or if the
A-4
Company is merged into, or consolidated with another corporation or
entity, then upon such event the outstanding Banked Awards shall be
immediately payable to the Participants and all other obligations
created hereunder shall be obligations of the acquirer or successor
corporation or entity without the requirement of further action by the
acquirer or successor corporation or entity.
14. GOVERNING STATE LAW
The provisions of this Plan shall be construed and administered in
accordance with the laws of the State of Utah.
15. AMENDMENT AND TERMINATION OF THE PLAN
The Board and the Committee may from time to time amend, suspend,
terminate or reinstate any or all of the provisions of the Plan.
However, the Board and the Committee may not adopt any amendment which
changes the eligibility requirements under the Plan, the performance
business criteria used to compute the Awards under the Plan, or the
maximum payment under the Plan, without prior stockholder approval, and
the Board and the Committee may not cancel Awards, including any Banked
Awards, payable on account of a completed Performance Year, except as
otherwise provided in the Plan.
16. EFFECTIVE DATE AND TERM OF THE PLAN
The Plan shall become effective for the Performance Year commencing on
or after October 1, 2005, upon adoption by the Board and subject to the
approval of the stockholders of the Company, and thereafter shall
remain in effect until such time as the Board or the Committee may
terminate it.
A-5
Appendix B
HEADWATERS INCORPORATED
LONG TERM INCENTIVE COMPENSATION PLAN
Effective 1 March 2005
(Subject to Stockholder Approval)
1. PURPOSES
The purposes of this Long Term Incentive Compensation Plan are to
promote the long-term success of Headwaters Incorporated and its
subsidiaries and to provide financial incentives to employees of
Headwaters Incorporated and its subsidiaries to strive for long-term
creation of stockholder value. The Plan provides long-term incentives
to employees of the Company and its subsidiaries who are able to
contribute towards the creation of or have created stockholder value by
providing them stock options and other stock and cash incentives.
2. DEFINITIONS
The following definitions shall be applicable throughout the Plan:
(a) "Award" means an incentive award as described in Section 5(a).
(b) "Board" means the Board of Directors of the Company.
(c) "Change in Control" means:
(i) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if persons who were not stockholders of the
Company immediately prior to such merger, consolidation or
other reorganization own immediately after such merger,
consolidation or other reorganization 50% or more of the
voting power of the outstanding securities of each of (A) the
continuing or surviving entity and (B) any direct or indirect
parent corporation of such continuing or surviving entity;
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(iii) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of
securities of the Company representing at least 50% of the
total voting power represented by the Company's then
outstanding voting securities. For purposes of this Paragraph
(iii), the term "person" shall have the same meaning as when
used in sections 13(d) and 14(d) of the Securities Exchange
Act of 1934 but shall exclude (A) a trustee or other fiduciary
holding securities under an employee benefit plan of the
Company or of a parent or subsidiary of the Company and (B) a
corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their
ownership of the common stock of the Company.
A transaction shall not constitute a Change in Control if its
sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be
owned in substantially the same proportions by the persons who
held the Company's securities immediately before such
transaction.
(d) "Chief Executive Officer" or "CEO" means the Chief Executive
Officer of the Company.
(e) "Chief Financial Officer" or "CFO" means the Chief Financial
Officer of the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means the Compensation Committee of the Board
unless another committee comprised of members of the Board is
designated by the Board to oversee and administer the Plan,
provided, that the Committee shall consist of two or more
members of the Board as the Board may designate from time to
time, each of whom shall satisfy such requirements as:
(i) the Securities and Exchange Commission may establish
for administrators acting under plans intended to
qualify for exemption under Rule 16b-3 or its
successor under the Exchange Act;
B-1
(ii) the rules of a stock exchange on which the securities
of the Company are traded as may be established
pursuant to its rule-making authority of such stock
exchange; and
(iii) the Internal Revenue Service may establish for
outside directors acting under plans intended to
qualify for exemption under Section 162(m) of the
Code.
(h) "Company" means Headwaters Incorporated, a Delaware
corporation.
(i) "Covered Employee" shall have the meaning given that term by
Section 162(m) of the Code and income tax regulations
promulgated thereunder.
(j) "Disability" means a physical or mental medical condition that
prevents the Participant from performing the duties of his or
her position with the Company and is likely to last at least
twelve months or result in death, as determined by the
Committee in its sole discretion.
(k) "EVA Award" means the award described in Section 11.
(l) "Exchange Act" means the federal Securities Exchange Act of
1934, as amended.
(m) "Fair Market Value" means, with respect to the common stock of
the Company, the closing sale price of such common stock at
four o'clock p.m. (Eastern Time), on the principal United
States national stock exchange on which the common stock of
the Company is traded, as determined by the Committee, or, if
the common stock shall not have been traded on such date, the
closing sale price on such stock exchange on the first day
prior thereto on which the common stock was so traded, or, if
the common stock is not traded on a United States national
stock exchange, such other amount as may be determined by the
Committee by any fair and reasonable means. Fair Market Value
determined by the Committee in good faith shall be final,
binding and conclusive on all parties.
(n) "Incentive Stock Option" means an option to purchase the stock
of the Company as described in Section 422 of the Code.
(o) "LTIPA" means an agreement establishing the terms and
conditions for an Award granted under the Plan, including any
applicable performance goals.
(p) "Nonstatutory Stock Option" means an option to purchase the
stock of the Company which is designated not to be an
Incentive Stock Option.
(q) "Participant" means, subject to the provisions of Section 11
with respect to EVA Awards, a full-time employee of the
Company who meets the requirements of Section 4(b).
(r) "Performance Stock" means the award described in Section 9.
(s) "Performance Unit" means the award described in Section
10.
(t) "Plan" means this Headwaters Incorporated Long Term Incentive
Compensation Plan.
(u) "Restricted Stock" means the award described in Section 8.
(v) "Restricted Stock Unit" means the award described in Section
8.
(w) "Service" means that the Participant's service with the
Company or an affiliated entity, whether as an employee,
consultant or member of the Board, is not interrupted or
terminated. The Participant's Service shall not be deemed to
have been interrupted or terminated merely because of a change
in the capacity in which the Participant renders service to
the Company or an affiliated entity as an employee, consultant
or member of the Board or a change in the entity for which the
Participant renders such service, provided, that there
otherwise is no interruption or termination of the
Participant's Service. For example, a change in status from an
employee of the Company to a consultant of an affiliate or a
member of the Board will not constitute an interruption of
Service. The Committee, in its sole discretion, may determine
whether Service shall be considered interrupted in the case of
any leave of absence approved by the Company, including sick
leave, military leave or any other personal leave.
(x) "Stock Appreciation Right" or "SAR" means the award described
in Section 7.
(y) "Stock Option" means the award described in Section 6, which
may be either an Incentive Stock Option or a Nonstatutory
Stock Option, as determined by the Committee.
(z) "Ten Percent Shareholder" means a person who owns (or is
deemed to own pursuant to Section 424(d) of the Code) stock
possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or of any
of its Affiliates (as defined in Section 424 of the Code).
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3. POWERS AND ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall
have the authority to construe and interpret the Plan and any Awards
granted thereunder, to establish and amend rules for Plan
administration, to change the terms and conditions of options and other
Awards at or after grant, and to make all other determinations which it
deems necessary or advisable for the administration of the Plan. The
determinations of the Committee shall be made in accordance with its
judgment as to the best interests of the Company and its stockholders
and in accordance with the purposes of the Plan. The Committee may take
action by a meeting in which a quorum of the Committee is present. The
meeting may be in person, by telephone or in such other manner in which
the members of the Committee participating in the meeting may
communicate directly with each other. A majority of the members of the
Committee shall constitute a quorum, and all determinations of the
Committee shall be made by a majority of its members. Any determination
of the Committee under the Plan may be made without notice or meeting
of the Committee, in a writing signed by all the Committee members.
The Committee shall have the authority to reduce (but not increase) the
payouts on such Awards and the Committee shall have the authority to
limit (but not waive) the actual performance-based vesting of such
Awards, in both cases in its sole discretion. The Committee may
prescribe rules and procedures for the administration of the Plan and
shall have the authority to delegate ministerial duties to agents for
the Committee (and allocate responsibilities among the agents appointed
by the Committee for the performance of the ministerial duties) in the
administration of the Plan.
4. ELIGIBILITY AND PARTICIPATION
(a) Eligibility. Only employees of the Company and its
subsidiaries designated by this Plan or selected by the
Committee to participate in the Plan shall be eligible to
participate in the Plan. Any corporation or other entity in
which a 50% or greater interest is at the time directly or
indirectly owned by the Company shall be a subsidiary for
purposes of the Plan.
(b) Participation. The CEO and the CFO shall participate in the
Plan and their Awards and rights under the Plan shall be
determined by the Committee. In addition, each year the CEO
shall present to the Committee a list of employees of the
Company or its subsidiaries that the CEO recommends be
designated as Participants for an upcoming Performance Period
(or a concurrent Performance Period with respect to a newly
hired employee of the Company or a subsidiary of the Company),
proposed Awards to such employees, and proposed terms for the
LTIPAs for the proposed Awards to such employees. In addition,
the CEO may present recommended amendments to any existing
LTIPAs, and the proposed Phase Level advancement for existing
LTIPAs with respect to EVA Awards. The Committee shall
consider the CEO's recommendations and shall determine the
Awards, if any, to be granted and the terms of the LTIPAs for
such Awards, any amendments to existing LTIPAs (subject to the
restrictions on the authority granted to the Committee in
Section 3), and Phase Level advancements. Designation of an
employee as a Participant for any Performance Period shall not
require the Committee to designate that person to be a
Participant or to receive an Award in any Performance Period
or to receive the same type or amount of Award as granted to
the Participant in such year. Grants of Awards to Participants
need not be of the same type or amount and may have different
terms. Employment with the Company or its subsidiary prior to
completion of or during a Performance Period does not entitle
the employee to participate in the Plan or vest in any
interest in any Award under the Plan. The Committee shall
consider all factors that it deems relevant in selecting
Participants and in determining the type and amount of their
respective Awards.
5. AWARDS AVAILABLE
(a) Types of Awards. The Awards available under the Plan shall
consist of Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units, Performance Stock,
Performance Units, EVA Awards, and other stock or cash awards,
as described below.
(b) Shares Available under the Plan. There is hereby reserved for
issuance under the Plan an aggregate of one million five
hundred thousand (1,500,000) shares of the Company common
stock. All shares issued under the Plan may be either
authorized and unissued shares or issued shares reacquired by
the Company. Shares covered by an Award granted under the Plan
shall not be counted as used unless and until they are
actually issued and delivered to a Participant. Any shares
covered by an SAR shall be counted as used only to the extent
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shares are actually issued to the Participant upon exercise of
the right. In addition, any shares of common stock exchanged
by an optionee as full or partial payment to the Company of
the exercise price under any Stock Option exercised under the
Plan, any shares retained by the Company pursuant to a
Participant's tax withholding election, and any shares covered
by a Award which is settled in cash shall be added to the
shares available for Awards under the Plan. All of the
available shares may, but need not, be issued pursuant to the
exercise of Incentive Stock Options. Notwithstanding anything
else contained in this Section 5 the total number of shares of
the common stock of the Company that may be issued under the
Plan for Awards other than cash Awards shall not exceed a
total of 1,500,000 shares (subject to adjustment in accordance
with Sections 16 and 17).
(c) Annual Limit on Total Grants of Restricted Stock, Restricted
Stock Units and Performance Stock. Notwithstanding any else in
this Section 5, the Restricted Stock, Restricted Stock Units
and Performance Shares granted under the Plan in any one
calendar year shall not relate to more than 300,000 shares of
Common Stock in the aggregate, provided, that any portion of
such 300,000 share limit not reserved for grants of Restricted
Stock, Restricted Stock Units or Performance Shares made in
any calendar year beginning in 2005, shall be added to the
300,000 share limit for subsequent calendar years.
(d) Reversion of Shares. If there is a lapse, expiration,
termination or cancellation of any Stock Option issued under
the Plan prior to the issuance of shares thereunder or if
shares of common stock are issued under the Plan and
thereafter are reacquired by the Company, the shares subject
to those options and the reacquired shares shall be added to
the shares available for Awards under the Plan.
(e) Limits on Individual Grants. Under the Plan, no Participant
may receive in any calendar year (i) Stock Options relating to
more than 500,000 shares, (ii) Restricted Stock or Restricted
Stock Units that are subject to the attainment of Performance
Goals below hereof relating to more than 500,000 shares, (iii)
Stock Appreciation Rights relating to more than 500,000
shares, or (iv) Performance Stock relating to more than
500,000 shares. Under the Plan, the maximum cash payment that
may be made to a single Participant in any calendar year under
a Performance Unit Award, an EVA Award or other cash Award
shall not exceed $20,000,000.
(f) Minimum Vesting. Subject to the provisions of Section 16 and
24, all stock and cash bonus Awards under the Plan, other than
EVA Awards, shall be subject to a minimum service vesting
requirement over a period of at least three years, with
vesting in each of the first two years of the vesting period
for such Awards not to exceed one-third of the total Award,
provided, however, that the Committee shall have the
discretion to provide for faster vesting in the event of the
Disability, death or retirement (as defined by the Committee)
of a Participant.
(g) Adjustments. The shares reserved for issuance and the
limitations set forth above shall be subject to adjustment in
accordance with Sections 16 and 17 hereof.
6. STOCK OPTIONS
(a) Grant of Stock Options. Stock Options may be granted to
Participants by the Committee, at any time as determined by
the Committee.
(b) Terms of Stock Options. The Committee shall determine the
terms and conditions of each Stock Option, the number of
shares subject to the Stock Option, and whether the Stock
Option is an Incentive Stock Option or a Nonstatutory Stock
Option. The option price for each Stock Option shall be
determined by the Committee but shall not be less than 100% of
the Fair Market Value of the Company's common stock on the
date the Stock Option is granted. Notwithstanding the
foregoing, a Stock Option may be granted with an exercise
price lower than that set forth in the preceding sentence if
such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.
(c) Term of Stock Options. Each Stock Option shall expire at such
time as the Committee shall determine at the time of grant.
(d) Exercisability of Stock Options. Each Stock Option shall be
exercisable at such time and subject to such terms and
conditions as the Committee shall determine; provided,
however, that no Stock Option shall be exercisable later than
the tenth anniversary of its grant. The option price, upon
exercise of any Stock Option, shall be payable to the Company
in full by (i) cash payment or its equivalent, (ii) tendering
previously acquired shares (held for at least six months to
the extent necessary to avoid any variable accounting on such
option) or purchased on the open market and having a Fair
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Market Value at the time of exercise equal to the option
price, or certification of ownership of such
previously-acquired shares, (iii) delivery of a properly
executed exercise notice, together with irrevocable
instructions to a broker to promptly deliver to the Company
the amount of sale proceeds from the option shares or loan
proceeds to pay the exercise price and any withholding taxes
due to the Company, and (iv) such other methods of payment as
the Committee, at its discretion, deems appropriate, provided,
that payment of the common stock's "par value," as defined in
the Delaware General Corporation Law, shall not be made by
deferred payment. Except as otherwise provided in a LTIPA, in
the event the Service of a Participant holding a Stock Option
terminates (other than upon the Participant's death or
Disability), the Participant may exercise his or her Stock
Option (to the extent that the Participant was entitled to
exercise such Stock Option as of the date of termination) but
only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the
Participant's Service (or such longer or shorter period
specified in the LTIPA for such Stock Option), or (ii) the
expiration of the term of the Stock Option as set forth in the
LTIPA. If, after termination, the Participant does not
exercise his or her Option within the time specified in the
LTIPA, the Stock Option shall thereafter terminate.
(e) Vesting. Subject to the provisions of Sections 5(f), 16 and
24, the total number of shares of Common Stock subject to a
Stock Option shall be subject to the following vesting
provisions of this Subsection 6(e):
(i) The total number of shares of Common Stock subject to
a Stock Option may, but need not, vest and therefore
become exercisable in periodic installments that may,
but need not, be equal.
(ii) The Option may be subject to such other terms and
conditions on the time or times when it may be
exercised (which may be based on performance or other
criteria) as the Committee may deem appropriate.
(iii) The vesting provisions of individual Stock Options
may vary.
(iv) The provisions of this Subsection 6(e) are subject to
any Stock Option provisions governing the minimum
number of shares of Common Stock as to which a Stock
Option may be exercised.
(f) Incentive Stock Option Requirements. Stock Options granted
under the Plan as Incentive Stock Options shall have such
terms as required by Sections 422 of the Code for an Incentive
Stock Option, including, but not limited to, the following
terms in this Section 6(f).
(i) Incentive stock options shall be granted only to
employees of the Company or its subsidiary.
(ii) The exercise price of each Incentive Stock Option
shall be not less than one hundred percent (100%) of
the Fair Market Value of the Common Stock subject to
the Option on the date the Option is granted or one
hundred ten percent (110%) in the case of a grant of
an Incentive Stock Option to a Ten Percent
Shareholder. Notwithstanding the foregoing, an
Incentive Stock Option may be granted with an
exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant
to an assumption or substitution for another option
in a manner satisfying the provisions of Section
424(a) of the Code.
(iii) The maximum term of an Incentive Stock Option shall
be ten years from the date of grant provided that the
maximum term of an Incentive Stock Option granted to
a Ten Percent Shareholder shall be five years from
the date of grant of the Incentive Stock Option.
(iv) To the extent that the aggregate Fair Market Value
(determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are
exercisable for the first time by any Participant
during any calendar year (under all plans of the
Company and its affiliated corporations) exceeds one
hundred thousand dollars ($100,000), the Stock
Options or portions thereof which exceed such limit
(according to the order in which they were granted)
shall be treated as Nonstatutory Stock Options.
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(v) The maximum number of shares which may be issuable
pursuant to the exercise of Incentive Stock Options
shall not exceed 1,500,000.
(e) No Repricings Permitted. In no event shall the Committee
cancel any outstanding Stock Option for the purpose of
reissuing the Stock Option to the Participant at a lower
exercise price or reduce the option price of an outstanding
Stock Option.
7. STOCK APPRECIATION RIGHTS
(a) Stock Appreciation Rights may be granted to Participants at
any time as determined by the Committee. An SAR may be granted
in tandem with a Stock Option granted under this Plan or on a
free-standing basis. The Committee also may, in its
discretion, substitute SARs which can be settled only in stock
for outstanding Stock Options, at any time when the Company is
subject to fair value accounting.
(b) The grant price of a tandem or substitute SAR shall be equal
to the option price of the related option. The grant price of
a free-standing SAR shall be equal to the Fair Market Value of
the Company's common stock on the date of its grant. An SAR
may be exercised upon such terms and conditions and for the
term as the Committee in its sole discretion determines to
apply to the SAR; provided, however, that the term of the SAR
shall not exceed the option term in the case of a tandem or
substitute SAR or ten years in the case of a free-standing
SAR, and the terms and conditions applicable to a substitute
SAR shall be substantially the same as those applicable to the
Stock Option which it replaces.
(c) Upon exercise of an SAR, the Participant shall be entitled to
receive payment from the Company in an amount determined by
multiplying the excess of the Fair Market Value of a share of
common stock of the Company on the date of exercise over the
grant price of the SAR by the number of shares with respect to
which the SAR is exercised. The payment may be made in cash or
stock, at the discretion of the Committee, except in the case
of a substitute SAR which may be made only in stock.
8. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
Restricted Stock and Restricted Stock Units may be awarded or sold to
Participants under such terms and conditions as shall be established by
the Committee. Restricted Stock and Restricted Stock Units shall be
subject to such restrictions as the Committee determines, including,
without limitation, any or both of the following:
(a) a prohibition against sale, assignment, transfer, pledge,
hypothecation or other encumbrance for a specified period; or
(b) a requirement that the holder forfeit (or in the case of
shares or units sold to the Participant resell to the Company
at cost) such shares or units in the event of termination of
employment during the period of restriction.
All restrictions shall expire at such times as the Committee shall
specify.
9. PERFORMANCE STOCK
The Committee shall designate the Participants to whom long-term
performance stock "Performance Stock") is to be awarded and determine
the number of shares, the length of the performance period and the
other terms and conditions of each such award; provided the stated
performance period will not be less than 12 months. Each award of
Performance Stock shall entitle the Participant to a payment in the
form of shares of common stock of the Company upon the attainment of
performance goals and other terms and conditions specified by the
Committee.
Notwithstanding satisfaction of any performance goals, the number of
shares issued under a Performance Stock award may be adjusted by the
Committee on the basis of such further consideration as the Committee
in its sole discretion shall determine. However, the Committee may not,
in any event, increase the number of shares earned upon satisfaction of
any performance goal by any Participant who is a Covered Employee. The
Committee may, in its discretion, make a cash payment equal to the fair
market value of shares of common stock otherwise required to be issued
to a Participant pursuant to a Performance Stock award.
10. PERFORMANCE UNITS
The Committee shall designate the Participants to whom long-term
performance units ("Performance Units") are to be awarded and determine
B-6
the number of units and the terms and conditions of each such award;
provided the stated performance period will not be less than 12 months.
Each Performance Unit award shall entitle the Participant to a payment
in cash upon the attainment of performance goals and other terms and
conditions specified by the Committee.
Notwithstanding the satisfaction of any performance goals, the amount
to be paid under a Performance Unit Award may be adjusted by the
Committee on the basis of such further consideration as the Committee
in its sole discretion shall determine. However, the Committee may not,
in any event, increase the amount earned under Performance Unit Awards
upon satisfaction of any performance goal by any Participant who is a
Covered Employee and the maximum amount earned by a Covered Employee in
any calendar year may not exceed $20,000,000. The Committee may, in its
discretion, substitute actual shares of common stock for the cash
payment otherwise required to be made to a Participant pursuant to a
Performance Unit award.
11. EVA AWARDS
(a) Definitions. The following terms shall have the meanings given
them below in this Section 11 for purposes of the EVA Awards
granted under the Plan.
(1) "Adjusted Basic Award" means the Basic Award adjusted
by the percentage completion of a Target Goal.
(2) "Annual Review" means the annual review by the
Committee of each LTIPA entered into under the Plan.
The review will determine the Phase Level attainment
by the Participant, any proposed changes to the
LTIPA, evaluate the Participant's performance during
the Performance Period and provides the basis for the
Committee's determination of an individual Award.
(3) "Basic Award" means that monetary value set forth in
the LTIPA that could form the basis of the Award that
may be achieved upon full attainment of the Target
Goal.
(4) "EVA" means the net operating profit after taxes, as
adjusted to eliminate the effect of non-economic
elements of generally accepted accounting principles,
("NOPAT"), less the weighted average cost of capital
employed during the year ("Employed Capital"). The
Committee shall have the discretion to adjust NOPAT
to include or exclude: (i) extraordinary, unusual
and/or non-recurring items of gain or loss, (ii)
gains or losses on the disposition of a business,
(iii) changes in tax or accounting regulations or
laws, or (iv) the effect of a merger or acquisition,
as identified in the Company's quarterly and annual
earnings releases. In all other respects, Performance
Criteria shall be calculated in accordance with the
Company's financial statements, generally accepted
accounting principles, or under a methodology
established by the Committee prior to the issuance of
an Award which is consistently applied and identified
in the audited financial statements, including
footnotes, or the Management Discussion and Analysis
section of the Company's annual report.
(5) "EVA Unit" means the designated unit of EVA
identified in the LTIPA.
(6) "Payment Cycle" shall mean that period of time over
which an Award, if earned, may be paid.
(7) "Phase Level" means the level of attainment achieved
during a Performance Period towards accomplishment of
a Target Goal. The Phase Level shall be determined
annually by the Committee based on recommendations
from the CEO and is a factor in determining the
Award.
(8) "Performance Period" means a period of time
designated in the LTIPA during which performance
under the Plan will be measured and may be a period
of at least one year and up to ten years in length
and which may overlap, provided that no two
Performance Periods under the Plan of equal length
shall coincide.
(9) "Target Goal" means the EVA objective set forth in
the LTIPA.
(b) Eligibility and Participation. Only the following employees of
the Company or its subsidiary shall be eligible for an EVA
Award. Employees employed by the Company or its subsidiary on
the last day of the Performance Period, who:
(1) are specifically designated as Participants in the
Plan by the Committee;
(2) have been designated to be eligible to receive an EVA
Award by the Committee;
(3) have executed an LTIPA which is executed by the CEO
(or, with respect to the LTIPA of the CEO, a
non-employee member of the Committee);
(4) have achieved relevant LTIPA performance criteria;
and
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(5) have participated in Annual Reviews of the LTIPA
during the Performance Period.
(c) EVA Award. The EVA Award is the Adjusted Basic Award
multiplied by the Phase Level attained by the Participant and
a factor the numerator of which is the average of the closing
price of the common stock of the Company (on the principal
stock exchange on which the Company's common stock is traded,
as determined by the Company) for the six months preceding the
last day of a Performance Period and the denominator is the
average closing price of the common stock of the Company (on
the principal stock exchange on which the Company's common
stock is traded, as determined by the Committee) for the six
months preceding the execution of a Participant's LTIPA
("Beginning Stock Price"). The factor so determined shall not
be less than one.
The Adjusted Basic Award shall be determined based on the EVA
Unit and the Participant's achievement of the Target Goal. At
an achievement level of 49.99%, the Adjusted Basic Award is 0%
of the Basic Award. The Adjusted Basic Award is the percent of
the Target Goal achieved (at 50% or higher) multiplied by the
Basic Award, not to exceed 100% of the Basic Award.
(1) A Participant's potential Award shall be earned after
the last day of a Performance Period and upon the
final approval of the Compensation Committee of the
Award. Portions of the Award are subject to
forfeiture during the Payment Cycle as provided in
Section 11(d). The Participant shall have no interest
in the Award until the final approval of the
Compensation Committee of the Award.
(2) The actual Award granted to a Participant hereunder
shall be based upon the Company's overall
performance, the EVA Unit's overall performance and
the Participant's individual performance and shall be
determined by the Committee, in its sole discretion.
(3) No Award will be granted if a Participant's
individual performance is unsatisfactory, as
determined by the Committee in its sole discretion,
upon the advice of the Chief Executive Officer.
(d) Form and Time of Payment of EVA Award. The form of payment
shall be in stock or cash at the sole discretion of the
Committee. The amounts paid under an Award shall be paid to
the Participant less applicable federal, state, local income
and employment taxes, during the Payment Cycle after the date
on which the Award has been approved by Committee. If the
Award is paid in stock, then sufficient shares shall be
withheld to meet withholding obligations unless other
arrangements have been made by the Participant. The shares to
be delivered in payment (including any Deferred Award Payments
as provided below) shall be valued at the average price for
the five trading days prior to the date payment to the
Participant.
(1) The Committee shall have the authority to approve,
reduce or eliminate an potential EVA Award and
portions thereof. The Payment Cycle shall commence on
the date that an EVA Award is approved by the
Committee and shall extend for 24 months after the
end of the Performance Period.
(2) As provided in the LTIPA for the EVA Award, the
Committee shall determine in its discretion what
portion, if any, of one-half of the potential EVA
Award shall be paid initially to a Participant
("Initial Award Payment"). The amount of the Initial
Award Payment to be paid shall be paid as soon as
administratively practicable after approval by the
Committee of the EVA Award.
(3) The Committee shall determine in its discretion what
portion of the remaining half of the potential EVA
Award shall be paid to a Participant ("Deferred Award
Payment"). Except as otherwise provided in the LTIPA
for the EVA Award (as determined by the Compensation
Committee in its sole discretion), Deferred Award
Payments shall not be vested or earned until the
conditions for payment set forth below or in the
LTIPA for the EVA Award under which the Deferred
Award Payment would be paid. The amount of the
Deferred Award Payment that may be paid to the
Participant shall be subject to the following
forfeiture provisions in this Section 11(d)(3):
(i) One-half of the approved Deferred Award
Payment shall be paid 12 months after the
end of the Performance Period and one-half
of the approved Deferred Award Payment shall
be paid 24 months after the end of the
Performance Period subject to the following
forfeiture provisions.
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(ii) As provided in the Participant's LTIPA for
the EVA Award, (A) failure of the EVA Unit
to achieve the same level of the Target Goal
as was obtained during the Performance
Period in the 12 months following the
Performance Period will result in forfeiture
of one-half of the Deferred Award Payment,
and (B) failure to achieve the EVA Unit in
the 12 months beginning 12 months after the
ending of the Performance Period and ending
24 months after the end of the Performance
Period will result in the forfeiture of
one-half of the Deferred Award Payment.
Payment of a portion of the Deferred Award
Payment, if applicable, shall be made as
soon as administratively practicable
following the end of the applicable 12-month
period.
(iii) Among other conditions to be included in a
Participant's LTIPA, the Committee may
require a Participant who is eligible to
receive a Deferred Award Payment to remain
in employment with the Company or its
subsidiary through the payment date as a
condition for such payment.
(e) Disability, Death and Other Terminations
(1) In the event of the termination of a Participant's
employment due to his or her Disability or death,
such Participant (or the Participant's probate
estate, in the event of his or her death) may receive
payment of an EVA Award, consistent with the terms of
the Plan, subject to the terms of the LTIPA for the
EVA Award and at the sole discretion of the
Committee. Any such Award shall be determined and
paid in accordance with the regular procedures of the
Plan.
(2) In the event of the Participant's death, should an
EVA Award be approved under Section 11(e)(1), such
EVA Award shall be paid in cash or stock, less
applicable federal, state, and local income and
employment taxes, on the normal EVA Award payout date
and subject to the terms of forfeiture, to the
Participant's estate, or to the person or persons who
have acquired, by will or by the laws of descent and
distribution or by other legal proceedings, the right
to such Award, in the determination and discretion of
the Committee.
(3) In the event of the termination of a Participant's
employment for reasons other than his or her
Disability or death, such Participant's right to
receive an EVA Award, if any, shall be determined by
the following terms in this Section 11(e)(3):
(i) If the Participant's employment is
terminated during the Performance Period for
the EVA Award, then the Participant shall
not be eligible to any payment under the EVA
Award.
(ii) If the Participant's employment is
terminated following the Performance Period
for the EVA Award and the Committee has
approved the payment of the EVA Award to the
Participant, then the EVA Award shall be
paid to the Participant subject to the
conditions for the payment of the EVA Award
(including the achievement of the EVA Unit's
Target Goals during the two 12-month periods
following the Performance Period required
for the payment of the Deferred Award
Payments set forth in Section 11(d)).
(f) No Reallocation of EVA Awards. In no event may the portion of
the potential EVA Award allocated to a Participant be
increased in any way, including as a result of the reduction
of any other Participant's allocated portion.
12. CASH BONUS AWARDS
The Committee may designate the employees of the Company who are
eligible to receive a cash bonus payment in any calendar year based on
an incentive pool to be determined by the Committee. The Committee
shall allocate an incentive pool percentage to each designated
Participant for each calendar year. In no event may the incentive pool
percentage for any one Participant exceed fifty (50%) of the total
pool.
As soon as possible after the determination of the incentive pool for a
calendar year, the Committee shall calculate the Participant's
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allocated portion of the incentive pool based upon the percentage
established at the beginning of the calendar year. The Participant's
incentive award then shall be determined by the Committee based on the
Participant's allocated portion of the incentive pool subject to
adjustment in the sole discretion of the Committee. In no event may the
portion of the incentive pool allocated to a Participant be increased
in any way, including as a result of the reduction of any other
Participant's allocated portion.
13. OTHER STOCK OR CASH AWARDS
In addition to the incentives described in sections 6 through 12 above,
the Committee may grant other incentives payable in cash or in common
stock under the Plan as it determines to be in the best interests of
the Company and subject to such other terms and conditions as it deems
appropriate; provided, an outright grant of stock will not be made
unless it is offered in exchange for cash compensation that has
otherwise already been earned by the recipient.
14. PERFORMANCE GOALS
Except as provided with respect to EVA Awards, cash bonus Awards and
awards of Restricted Stock, Restricted Stock Units, Performance Stock,
Performance Units and other incentives under the Plan may be made
subject to the attainment of performance goals relating to any one or
more business criteria within the meaning of Section 162(m) of the
Code, including, but not limited to, cash flow; cost; ratio of debt to
debt plus equity; profit before tax; economic profit; earnings before
interest and taxes; earnings before interest, taxes, depreciation and
amortization; earnings per share; operating earnings; economic value
added; ratio of operating earnings to capital spending; free cash flow;
net profit; net sales; sales growth; price of the Company common stock;
return on net assets, equity or stockholders' equity; market share; or
total return to stockholders ("Performance Criteria"). Any one or more
Performance Criteria may be used to measure the performance of the
Company as a whole or any business unit of the Company and may be
measured relative to a peer group or index.
Any Performance Criteria may include or exclude Special Items. Special
Items shall include (i) extraordinary, unusual and/or non-recurring
items of gain or loss, (ii) gains or losses on the disposition of a
business, (iii) changes in tax or accounting regulations or laws, or
(iv) the effect of a merger or acquisition, as identified in the
Company's quarterly and annual earnings releases. In all other
respects, Performance Criteria shall be calculated in accordance with
the Company's financial statements, generally accepted accounting
principles, or under a methodology established by the Committee prior
to the issuance of an award which is consistently applied and
identified in the audited financial statements, including footnotes, or
the Management Discussion and Analysis section of the Company's annual
report.
With respect to Awards subject to a Performance Criteria, the Committee
shall have the authority to reduce (but not increase) the payouts on
such Awards and shall have the authority to limit (but not waive) the
actual performance-based vesting of such Awards in its sole discretion.
15. DEFERRAL OF PAYMENT ON AWARDS
Subject to the provisions of Section 409A of the Code and any
regulatory guidance promulgated thereunder, a Participant and the
Company may enter into an agreement under which the payment of amounts
payable under a vested Award shall be deferred on terms and conditions
to be established by the Participant and the Company.
16. ADJUSTMENT PROVISIONS
(a) If the Company shall at any time change the number of issued
shares of common stock by stock dividend, stock split,
spin-off, split-off, spin-out, recapitalization, merger,
consolidation, reorganization, combination, or exchange of
shares, the total number of shares reserved for issuance under
the Plan, the maximum number of shares which may be made
subject to an Award or all Awards in any calendar year, and
the number of shares covered by each outstanding Award and the
price therefor, if any, shall be equitably adjusted by the
Committee, in its sole discretion.
(b) In the event of any merger, consolidation or reorganization of
the Company with or into another corporation which results in
the outstanding common stock of the Company being converted
into or exchanged for different securities, cash or other
property, or any combination thereof, the Company shall have
the authority to provide in the controlling agreement for such
transaction (i) that there shall be substituted, as determined
by the Committee in its discretion, for each share of common
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stock then subject to an Award granted under the Plan, the
number and kind of shares of stock, other securities, cash or
other property to which holders of common stock of the Company
will be entitled pursuant to the transaction, (ii) that the
acquiring or surviving corporation in the transaction shall
assume the outstanding Awards under the Plan (which may be
exercisable into the securities of the acquiring or surviving
corporation), (iii) that all unexercised Awards shall
terminate immediately prior to such transaction unless
exercised prior to the closing of the transaction, or (iv) a
combination of the foregoing.
17. SUBSTITUTION AND ASSUMPTION OF AWARDS
Without affecting the number of shares reserved or available hereunder,
the Board or the Committee may authorize the issuance of Awards under
this Plan in connection with the assumption of, or substitution for,
outstanding Awards previously granted to individuals who become
employees of the Company or any subsidiary as a result of any merger,
consolidation, acquisition of property or stock, or reorganization
other than a Change in Control, upon such terms and conditions as the
Committee may deem appropriate.
18. TRANSFERABILITY
Each Award granted under the Plan shall not be transferable otherwise
than by will or the laws of descent and distribution and each Stock
Option and SAR shall be exercisable during the Participant's lifetime
only by the Participant or, in the event of Disability, by the
Participant's personal representative. In the event of the death of a
Participant, exercise of any Award or payment with respect to any Award
shall be made only by or to the executor or administrator of the estate
of the deceased Participant or the person or persons to whom the
deceased Participant's rights under the Award shall pass by will or the
laws of descent and distribution.
19. TAXES
The Company shall be entitled to withhold the amount of any tax
attributable to any amounts payable or shares deliverable under the
Plan, after giving the person entitled to receive such payment or
delivery notice and the Company may defer making payment or delivery as
to any award, if any such tax is payable until indemnified to its
satisfaction. A Participant may pay all or a portion of any required
withholding taxes arising in connection with the exercise of a Stock
Option or SAR or the receipt or vesting of shares hereunder by electing
to have the Company withhold shares of common stock, having a fair
market value equal to the amount required to be withheld.
20. OTHER PROVISIONS
(a) The grant of any Award under the Plan may also be subject to
other provisions (whether or not applicable to the Award
awarded to any other Participant) as the Committee determines
appropriate, including provisions intended to comply with
federal or state securities laws and stock exchange
requirements, understandings or conditions as to the
Participant's employment, requirements or inducements for
continued ownership of common stock after exercise or vesting
of Awards, forfeiture of awards in the event of termination of
employment shortly after exercise or vesting, or breach of
non-solicitation, non-disparagement, non-competition or
confidentiality agreements following termination of
employment, or provisions permitting the deferral of the
receipt of a Award for such period and upon such terms as the
Committee shall determine.
(b) In the event any Award under this Plan is granted to an
employee who is employed or providing services outside the
United States and who is not compensated from a payroll
maintained in the United States, the Committee may, in its
sole discretion, modify the provisions of the Plan as they
pertain to such individuals to comply with applicable law,
regulation or accounting rules.
(c) The Committee, in its sole discretion, may permit or require a
Participant to have amounts or shares of common stock that
otherwise would be paid or delivered to the Participant as a
result of the exercise or settlement of an award under the
Plan credited to a deferred compensation or stock unit account
established for the Participant by the Committee on the
Company's books of account.
(d) As a condition for the receipt of stock Awards under the Plan,
a Participant shall agree to be bound by the employment
policies of the Company pertaining to the securities of the
Company including but not limited to the insider trading
restrictions of the Company.
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21. NO RESERVE OR TRUST
Nothing contained in the Plan shall require the Company to segregate
any monies from its general funds, or to create any trust or make any
special deposit in respect of any amounts payable under the Plan to or
for any Participant or group of Participants. All amounts payable under
the Plan shall be paid out of the general funds of the Company.
22. NO RIGHT TO ASSIGN
No right or interest of any Participant in the Plan or in any unpaid
Award shall be assignable or transferable in whole or in part, either
voluntarily or by operation of law or otherwise, or be subject to
payment of debts of any Participant by execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner.
23. NO EMPLOYMENT RIGHTS CONFERRED
Nothing contained in the Plan or any Award shall confer upon any
employee any right with respect to continuation of employment with the
Company in any capacity or interfere in any way with the right of the
Company to terminate an employee's employment at any time or guarantee
any right of participation in any other employee benefit or
compensation plan of the Company.
24. SUCCESSORS AND MERGERS, CONSOLIDATIONS OR CHANGE IN CONTROL
The terms and conditions of this Plan shall inure to the benefit of and
bind the Company, the Participants, their successors, assignees, and
personal representatives. If a Change of Control occurs, then this Plan
shall immediately terminate.
Except as otherwise provided in an LTIPA, upon a Change in Control of
the Company, the Committee, in its sole discretion, may (but shall not
be required to) make all outstanding Stock Options and SARs fully
vested and exercisable, all restrictions on Restricted Stock and
Restricted Stock Units terminated, all performance goals deemed
achieved at target levels and all other terms and conditions met, and
deliver all Performance Stock, and pay out all Performance Units and
Restricted Stock Units. The Committee shall in its sole discretion
determine the status of achievement of a particular Target Goal and
shall specify an Adjusted Basic Award based upon its determination of
achievement of the performance goals under the Awards as of the Change
in Control ("Change in Control Award"). A Change in Control Award shall
be modified as outlined below and shall be paid 30 days after the
consummation of the Change in Control. Any Deferred Award payments
outstanding upon a Change in Control shall be paid 30 days after the
Change in Control In the event of a Change in Control, all EVA Awards
or cash Awards shall be paid on a pro-rated basis (as determined by the
Committee) based on the portion of the Performance Goals achieved under
the EVA Awards or cash Awards as of the date of the Change in Control,
subject to the discretion of the Committee to reduce the EVA Awards.
25. GOVERNING STATE LAW AND COMPLIANCE WITH SECURITIES LAWS
(a) The Plan and any actions taken in connection herewith shall be
governed by and construed in accordance with the laws of the
state of Delaware (without regard to applicable Delaware
principles of conflict of laws).
(b) The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to
issue and sell shares of Common Stock upon exercise of the
Stock Awards; provided, however, that this undertaking shall
not require the Company to register under the Securities Act
the Plan, any stock Award or any common stock issued or
issuable pursuant to any such stock Award. If, after
reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which
counsel for the Company deems necessary for the lawful
issuance and sale of common stock under the Plan, the Company
shall be relieved from any liability for failure to issue and
sell common stock upon exercise of such stock Awards unless
and until such authority is obtained.
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26. DURATION, AMENDMENT AND TERMINATION
The Board or the Committee may amend, suspend, terminate or reinstate
the Plan from time to time or terminate the Plan at any time. However,
no such action shall reduce the amount of any existing Award (subject
to the reservation of the authority of the Committee to reduce payments
on Awards) or change the terms and conditions thereof without the
Participant's consent. No amendment of the Plan shall be made without
stockholder approval to the extent stockholder approval is expressly
required under applicable rules and regulations of the Securities and
Exchange Commission, the applicable rules of a stock exchange on which
the securities of the Company are traded as may be established pursuant
to its rule-making authority of such stock exchange, and the rules and
regulations of the Internal Revenue Service for plans intended to
qualify for the performance-based exemption under Section 162(m) of the
Code.
Neither the Board nor the Committee may cancel an Award once the Award
has been granted by the Committee, including any Deferred Award
Payments. Each year on the anniversary of the LTIPAs, the CEO shall
present to the Committee any recommendations for changes in the Plan or
in the LTIPAs previously approved by the Committee (subject to the
restrictions on the grant of authority to the Committee in Section 3).
27. EFFECTIVE DATE AND TERM OF THE PLAN
The Plan was adopted by the Board of Directors on January 3, 2005, to
be effective March 1, 2005, subject to stockholder approval. The Plan
shall continue for a term of ten years from the date of its adoption.
The Plan and any Awards granted thereunder shall be null and void if
stockholder approval is not obtained at the next annual meeting of
stockholders.
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Appendix C
HEADWATERS INCORPORATED
COMPENSATION COMMITTEE CHARTER
November 6, 2004
This Charter governs the operation of the Compensation Committee of the
Board of Directors of Headwaters Incorporated (the "Corporation").
Composition
The Compensation Committee shall be comprised of two (2) or more
individuals selected by the Board of Directors from among its own members. The
members of the Compensation Committee shall be elected each year by the Board of
Directors, shall be comprised of "independent" directors as defined by the
listing standards of the National Association of Securities Dealers, and shall
serve until such time as they resign or their successors are duly elected and
qualified by the Board of Directors. Unless a chairperson for the Compensation
Committee is designated by election of the Board of Directors, the members of
the Compensation Committee may elect, by there own majority vote, a chairperson.
Statement of Policy
The Compensation Committee shall provide assistance to the Board of
Directors in overseeing compensation policies and practices of the Corporation.
Compensation shall be understood to include all cash, benefits, and equity paid,
in whatever form, to an employee, officer, or director of the Corporation.
The criteria used by the Committee to evaluate compensation policies
and practices shall include but not be limited to (1) value added during a
compensation period, (2) level of responsibility, (3) appropriate incentives,
(4) industry comparables, (5) principles of fairness and balance, and (6)
general principles of sound business practice.
Responsibilities and Processes
The following shall be the principal recurring responsibilities and
processes of the Compensation Committee. The responsibilities and processes are
set forth as a guide with the understanding that the Compensation Committee may
alter or supplement them as appropriate.
1. Review and approve the compensation levels and policies for the
members of the Board of Directors of the Corporation.
2. Review and approve the corporate goals and objectives with respect
to compensation for the chief executive officer. Evaluate the chief executive
officer's performance in light of corporate goals and objectives and, based upon
these evaluations, set the chief executive officer's compensation, including
salary, bonus, incentive, and equity compensation.
3. Review and approve the compensation structure set by chief executive
officer for the Corporation's other senior executive officers, including salary,
bonus, incentive, and equity compensation.
4. Review and approve the compensation guidelines or practices for the
Company's employees and the criteria by which bonuses to the Company's employees
are determined.
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5. Administer the Corporation's stock incentive plans, authorize grants
under such plans, and recommend changes in such plans to the Board of Directors,
as needed. Changes may include recommendations to amend such plans or change the
number of shares reserved for issuance thereunder.
6. The Compensation Committee shall perform such other activities and
functions related to the compensation policies and practices of the Corporation
as may be assigned from time to time by the Board of Directors.
7. In performing any of its duties and responsibilities, the Committee
may retain compensation consultants, experts, or advisors, as needed, and may
consult with the Corporation's internal or outside legal counsel. Further, the
Committee may and shall have the authority to retain independent legal counsel
and to approve such counsel's fees and other terms of retention.
Reports and Meetings
1. The Compensation Committee shall prepare or cause the preparation of
a report as required by the Securities and Exchange Commission to be included in
the Corporation's annual proxy statement or annual report.
2. The Committee shall maintain minutes of its meetings and regularly
report its activities to the Board of Directors of Directors.
3. The Committee shall submit any recommendations for changes to the
Compensation Committee Charter to the full Board of Directors for approval.
Reliance on Information Provided
In adopting this Compensation Committee Charter, the Board of Directors
acknowledges that the Compensation Committee members may not be legal experts
and are not providing any expert or special assurance as to the Corporation's
legal compliance. Each member of the Compensation Committee shall be entitled to
rely on the accuracy and completeness of the compensation information and other
information provided by persons and organizations within and outside the
Corporation, absent actual knowledge to the contrary.
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