UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material under ss.240.14a-12
HEADWATERS INCORPORATED
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(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:
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[ ] Fee paid previously with preliminary materials.
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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:
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(4) Date Filed:
HEADWATERS INCORPORATED
10653 South River Front Parkway, Suite 300
South Jordan, Utah 84095
January 18, 2006
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
of Headwaters Incorporated, which will be held on Tuesday, February 28, 2006, 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 11,
2006 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
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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
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON TUESDAY, FEBRUARY 28, 2006
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To the Stockholders of Headwaters Incorporated:
The 2006 Annual Meeting of Stockholders (the "Meeting") of Headwaters
Incorporated, a Delaware corporation ("Headwaters"), will be held on Tuesday,
February 28, 2006, 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 two Class III directors to serve until the 2009
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, 2006; and
3. 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 11,
2006, 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 25, 2006.
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
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Harlan M. Hatfield
Secretary
South Jordan, Utah
January 18, 2006
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
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PROXY STATEMENT
Annual Meeting of Stockholders
To Be Held on Tuesday, February 28, 2006
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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, February 28, 2006,
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 25,
2006.
PURPOSE OF ANNUAL MEETING
At the Meeting, stockholders will be asked: (1) to elect two Class III
directors of Headwaters to serve until the 2009 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, 2006; and (3) 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 11, 2006 (the "Record Date"), will be entitled to
notice of, and to vote at, the Meeting. As of the Record Date, there were
42,051,096 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 or 2. A broker
"non-vote" occurs when a nominee holding shares for a beneficial owner does not
vote on a particular proposal because the nominee does not have the
discretionary voting instructions with respect to that item and has not received
instructions from the beneficial owner. Shares held by brokers who do not have
discretionary authority to vote on a particular matter and have not received
voting instructions from their customers are not counted or deemed to be present
or represented for purposes of determining whether stockholders have approved
that matter.
1
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 2 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.
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 will reimburse banks, brokers and other persons holding Common Stock
for their expenses in forwarding proxy solicitation materials to beneficial
owners of Common Stock.
All stockholders who receive proxy materials will receive instructions
for voting by mail, telephone, or by using the internet.
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 55 Chief Executive Officer 1999
and Chairman of the Board
Scott K. Sorensen 44 Chief Financial Officer 2005
Harlan M. Hatfield 45 Vice President, General Counsel 1998
and Secretary
Kenneth R. Frailey 52 President, Headwaters Energy Services 1998
Craig R. Hickman 56 President, Headwaters Technology 2002
Innovation Group, Inc.
John N. Lawless, III 45 President, Tapco International 2004
Michael S. Lewis 54 President, Eldorado Stone LLC 2004
William H. Gehrmann, III 49 President, Headwaters Resources, Inc. 2004
Murphy K. Lents 54 President, Headwaters Construction 2004
Materials
See "Proposal No. 1 -- Election of Directors, Nominees for Election as
Directors" for biographical information regarding Mr. Benson.
Scott K. Sorensen was appointed Chief Financial Officer of Headwaters
in October 2005. Mr. Sorensen served as Vice President and Chief Financial
Officer of Hillenbrand Industries, Inc. from March 2001 through July 2005. From
February 1998 to February 2001, Mr. Sorensen was the Executive Vice President,
Chief Financial Officer and Treasurer of Pliant Corporation (formerly Huntsman
Packaging) and prior to that time served as the senior financial executive
within two divisions of Westinghouse Electric Corporation / CBS and in various
2
leadership positions with Phelps Dodge Industries and McKinsey & Company, Inc.
Mr. Sorensen graduated from the University of Utah in 1986 with a B.S. degree in
Accounting and obtained an MBA degree from the Harvard Business School in 1990.
Mr. Sorensen is currently serving as a member of the Board of Directors of
Wabash National Corporation (NYSE - WNC). He was elected a director of Wabash in
March 2005 and serves on the Audit and Compensation Committees.
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 in 1979.
Craig R. Hickman joined Headwaters in June 2002 and was appointed
President of Headwaters Technology Innovation Group ("HTI") in April 2003. Under
Mr. Hickman's leadership, HTI has formed a joint venture with Degussa AG to
commercialize its hydrogen peroxide nanotechnology, completed the successful
commercial trial of HTI's heavy oil upgrading technology, advanced the
commercialization of its coal liquefaction technology in China, India, the
Philippines and Mongolia, and streamlined the technology development and
commercialization process to accelerate nanotechnology innovation and
application. Prior to joining Headwaters, Mr. Hickman worked in the areas of
strategic planning, organizational design, mergers and acquisitions, and
innovation management at Dart Industries (Tupperware, Duracell Batteries,
Westbend Appliances), Ernst & Young and his own firm, Management Perspectives
Group. Mr. Hickman received an MBA from the Harvard Business School in 1976 and
a B.A. in Economics from Brigham Young University in 1974.
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' 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 in 1983 and his MBA from the
University of Notre Dame in 1985.
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. Mr. Gehrmann graduated from the University of Texas at
Austin in 1984 with a B.S. degree in Architectural Engineering, with
specializations in structural engineering and construction management.
3
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 CFO of a Houston real estate developer for six years, was an executive
with Beacon Management, a venture capital firm for two years, and was employed
in banking for five years with J.P. Morgan and Company. Mr. Lents received his
B.A. degree from Rice University in English and Spanish Literature in 1973 and
his MBA from the Wharton School of the University of Pennsylvania in 1975.
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, 2005. Unless
otherwise noted, the amounts shown represent what was earned in the respective
fiscal years.
SUMMARY COMPENSATION TABLE
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Long-Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
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Securities
Restricted Underlying
Other Annual Stock Options/ LTIP All Other
Name and Principal Salary Bonus Compensation Awards SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#)(3) ($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
Kirk A. Benson............ 2005 562,991 2,271,974 3,565 - 500,000 - 100,745 (4)
Chief Executive 2004 400,000 2,025,686 1,621 - 75,000 - 15,692
Officer 2003 416,924 1,004,883 1,810 - 175,000 - 163,891
Steven G. Stewart(1) ....... 2005 301,692 1,267,598 2,525 - - - 6,300 (5)
Chief Financial 2004 265,000 752,556 1,183 116,500(9) 40,654 - 15,135
Officer 2003 272,135 347,147 1,299 - 15,000 - 69,152
Harlan M. Hatfield......... 2005 207,981 1,233,899 1,582 - 85,644 - 6,300 (6)
Vice President and 2004 174,923 492,183 890 76,937(9) 25,338 - 48,507
General Counsel 2003 176,327 203,918 959 - 15,000 - 3,833
Kenneth R. Frailey(2) ...... 2005 213,923 1,058,720 1,804 - 126,105 - 7,532 (7)
President, Headwaters 2004 177,346 615,328 898 79,126(9) 39,133 - 25,763
Energy Services
Michael S. Lewis(2) ........ 2005 248,077 618,972 21,171 - 125,589 - 6,300 (8)
President, Eldorado 2004 77,885 159,505 7,056 77,722(9) 55,000 - -
Stone LLC
- ------------------
(1) Mr. Stewart retired as Headwaters' Chief Financial Officer effective
September 30, 2005. Mr. Sorensen was appointed Headwaters' Chief
Financial Officer effective October 1, 2005.
(2) Messrs. Frailey and Lewis became executive officers in 2004. The 2004
information shown above for Mr. Lewis represents compensation for the
period from June 2, 2004 through September 30, 2004 because Headwaters
acquired Eldorado Stone on June 2, 2004 and Mr. Lewis was not employed
by Headwaters prior to that time.
(3) All grants shown for 2003 and 2004 represent options granted under the
2003 Stock Incentive Plan. All grants shown for 2005 represent stock
appreciation rights ("SARs") granted under the 2003 Stock Incentive
Plan and the Long Term Incentive Compensation Plan.
(4) All other compensation for Mr. Benson consists of the following: For
2005, (i) $94,445 of retroactive pay for the period from May 2003 to
September 2004 which was paid in 2005, and (ii) $6,300 of matching
401(k) and deferred compensation plan contributions. 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 payments in lieu of paid time off related to 2002,
which was also paid in 2003, and (iii) $5,077 of matching 401(k)
contributions.
(5) All other compensation for Mr. Stewart consists of the following: For
2005, matching 401(k) and deferred compensation plan contributions. For
2004, (i) $8,000 of matching 401(k) contributions, and (ii) $7,135 of
4
payments in lieu of paid time off. For 2003, (i) $64,466 of payments in
lieu of paid time off related to 2002, which was paid in 2003, and (ii)
$4,686 of matching 401(k) contributions.
(6) All other compensation for Mr. Hatfield consists of the following: For
2005, matching 401(k) and deferred compensation plan contributions. For
2004, (i) $39,880 of payments in lieu of paid time off, and (ii) $8,627
of matching 401(k) contributions. For 2003, matching 401(k)
contributions.
(7) All other compensation for Mr. Frailey consists of the following: For
2005, matching 401(k) and deferred compensation plan contributions. For
2004, (i) $14,279 of payments in lieu of paid time off, and (ii)
$11,484 of matching 401(k) contributions.
(8) All other compensation for Mr. Lewis for 2005 consists of matching
401(k) and deferred compensation plan contributions.
(9) 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.
Lewis - $100,820 (3,267 shares).
SAR Grants in Fiscal 2005
The following table sets forth certain information concerning SARs
granted during fiscal 2005 to the Named Executives.
SAR GRANTS IN FISCAL 2005
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Number of % of Total SARs
Securities and Options
Underlying Granted to Grant Date
SARs Granted Employees in Exercise Expiration Present Value
Name (#) 2005 (3) Price ($/SAR) (4) Date ($) (5)
- -------------------------------------------------------------------------------------------------------------------
Kirk A. Benson ............ 318,750(1) 9.9% $31.97 March 2015 2,629,688
181,250(2) 5.6% $31.97 March 2015 2,084,919
Harlan M. Hatfield ........ 54,598(1) 1.7% $31.97 March 2015 434,054
31,046(2) 1.0% $31.97 March 2015 357,122
Kenneth R. Frailey......... 80,392(1) 2.5% $31.97 March 2015 639,116
45,713(2) 1.4% $31.97 March 2015 525,837
Michael S. Lewis........... 80,063(1) 2.5% $31.97 March 2015 636,501
45,526(2) 1.4% $31.97 March 2015 523,686
- ------------------
(1) All of these SARs vested at grant date and, with the exception of Mr.
Benson's award, require a payment by grantees of $2.00 per SAR, payable
over a 52-month period. The maximum gain that may be received for each
of these SARs is limited to the fair market value of one share of
Headwaters' common stock at the date of grant, or $31.97 per share.
(2) These SARs vest over five years, with 20% vesting on May 1, 2005 and
80% vesting from March 31, 2007 through March 31, 2010. These SARs are
exercisable based on the achievement of performance criteria related to
the economic growth or economic value added ("EVA") of Headwaters
during the five-year period.
(3) The percentages reflected in the table above were computed based on the
total number of SARs and options granted in fiscal 2005, or 3,227,320.
(4) The exercise prices shown equal the fair market value on the date of
grant, which fair market value was determined by the closing price of
the Common Stock as reported by the New York Stock Exchange.
(5) The fair value of each SAR grant was determined using the
Black-Scholes-Merton option pricing model (B-S-M model) and the
following assumptions: expected stock price volatility of 30%,
risk-free interest rates ranging from 3.8% to 4.25%, weighted average
expected lives (beyond vest date) ranging from 3.5 years to 5 years and
no dividend yield. For those SARs with an appreciation cap, a 24%
reduction in value from the B-S-M output was used. For those SARs for
which a payment is required, a $0.30 reduction in value from the B-S-M
output was used. The B-S-M 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 certain subjective assumptions, including expected stock
price volatility. Because Headwaters' stock options and SARs have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect their fair value, in management's opinion, the existing models
do not necessarily provide a reliable measure of the fair value of
stock options or other stock-based compensation.
5
Aggregated Option/SAR Exercises in Fiscal 2005 and Fiscal Year-End
Option/SAR Values
The following table summarizes for the Named Executives the number of
stock options exercised during fiscal 2005, the aggregate dollar value realized
upon exercise, the total number of unexercised options and SARs held at
September 30, 2005 and the aggregate dollar value of in-the-money unexercised
options and SARs held at September 30, 2005. 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 National Market for exercises prior to April 6, 2005, or
the New York Stock Exchange for exercises on or subsequent to April 6, 2005) and
the exercise price of the option. Options and SARs are in-the-money if the fair
market value of the underlying securities exceeds the exercise price of the
option or SAR. The value of unexercised, in-the-money options and SARs at
September 30, 2005 is the aggregate amount of the difference between their
exercise price and $37.40 per share, the fair market value of the underlying
stock on September 30, 2005, based on the closing price of the Common Stock on
that date. The underlying options and SARs have not been and may never be
exercised. The actual gains, if any, on exercise will depend on the value of the
Common Stock on the actual date of exercise. There can be no assurance that
these values will be realized.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 2005 AND FISCAL YEAR-END OPTION/SAR VALUES
- -------------------------------------------------------------------------------------------------------------------
Shares Number of Securities Value of Unexercised
Acquired on Underlying Unexercised In-the-Money Options/SARs
Exercise Value Options/SARs at 9/30/05 (#) at 9/30/05 ($)
Name (#) Realized ($) Exercisable / Unexercisable Exercisable / Unexercisable
- -------------------------------------------------------------------------------------------------------------------
Kirk A. Benson ........ 348,751 9,594,235 867,249 / 170,000 15,028,729 / 1,335,350
Steven G. Stewart...... 95,000 2,439,660 55,654 / 5,000 808,951 / 102,550
Harlan M. Hatfield .... 80,458 2,247,726 235,688 / 29,836 4,391,225 / 237,409
Kenneth R. Frailey..... - - 232,001 / 43,237 3,816,935 / 335,315
Michael S. Lewis ...... - - 144,169 / 36,420 1,194,738 / 197,761
Long-Term Incentive Plan Awards
The following table summarizes for the Named Executives long-term
incentive plan awards granted in fiscal 2005.
LONG-TERM INCENTIVE PLAN AWARDS IN FISCAL 2005
- --------------------------------------------------------------------------------
Performance or Other
Number of Shares, Units Period Until
Name or Other Rights (#) Maturation or Payout
- --------------------------------------------------------------------------------
Kirk A. Benson ........... 25,000 March 2010
In August 2005, in connection with the negotiation of Mr. Benson's
employment agreement with Headwaters, the Compensation Committee approved the
issuance of up to 25,000 shares of Common Stock to Mr. Benson, which shares will
vest in March 2010 if the market value of a share of Headwaters' Common Stock
meets or exceeds stipulated thresholds. The entire 25,000 shares would be issued
if the stock price is at least $60.00 as of March 31, 2010. The fair value of
this "contingent performance stock" was $975,000 and was estimated by an
independent valuation firm by calculating the probabilities that Headwaters'
common stock would reach the various market value thresholds.
Acceleration of Vesting of Options in Fiscal 2005
In May 2005, the Compensation Committee of the Board of Directors
("Compensation Committee") approved the acceleration of vesting of options for
the purchase of approximately 1,059,000 shares of Common Stock for 138 officers,
directors and employees which were not fully vested as of the date of
acceleration (prior to acceleration, there were in total unvested outstanding
options to purchase approximately 1,291,000 shares). Options for which vesting
was accelerated consisted of all options with an exercise price equal to or
greater than $21.29 per share and all but 172,000 of the options accelerated
were "in the money" at the date of acceleration. Of the options accelerated,
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options to purchase a total of 188,098 shares of common stock were held by the
Named Executives, as follows: Mr. Benson - 60,000, Mr. Stewart - 32,523, Mr.
Hatfield - 20,270, Mr. Frailey - 31,306, and Mr. Lewis - 43,999. Compensation
expense totaling approximately $1,500,000 was recognized related to the
acceleration of vesting of options held by the Named Executives.
Stock Option and Stock Incentive Plans
1995 Stock Option Plan. A total of 2,400,000 shares of Common Stock are
reserved for issuance under the 1995 Stock Option Plan (the "1995 Plan"). A
committee of Headwaters' Board of Directors (the "Committee"), or in its
absence, the Board, administers and interprets the 1995 Plan. This Committee was
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 expired in 2005 and awards can no longer be granted. The 1995 Plan
provided 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, were determined by the Committee. Options
granted under the 1995 Plan vested over periods ranging from zero to ten years,
expire not later 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 were
required to meet the requirements of the Internal Revenue Code and could be made
only to employees of Headwaters.
2002 Stock Incentive Plan. In April 2002, the Board of Directors
adopted the 2002 Stock Incentive Plan (the "2002 Plan"). The number of shares
reserved under the 2002 Plan is currently 850,000. NSOs, restricted stock, 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
adopted 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, which
increased the number of shares available for award grants 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.
Long Term Incentive Compensation Plan. In January 2005, the Board of
Directors adopted the Long Term Incentive Compensation Plan (the "LTIP"). The
LTIP was approved by Headwaters' stockholders at the 2005 annual meeting. The
total number of shares of Common Stock available for issuance pursuant to awards
over the entire term of the LTIP (through March 1, 2015) is 1,500,000. The LTIP
authorizes the grant of several types of awards, including ISOs, NSOs, SARs,
restricted stock and restricted stock unit awards, performance stock and
performance unit awards, unrestricted stock awards, cash awards and other
performance awards. Most awards under the LTIP are subject to a minimum service
vesting requirement of at least three years. There are also annual limits on
certain types of awards and on the number of awards that can be granted to a
single participant in any calendar year. The administration of the LTIP is the
responsibility of the Compensation Committee.
Other Options. In addition to options granted under the above-described
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.
No Loans for Option Exercises. It is the policy of Headwaters to not
make loans to employees for the purpose of paying for the exercise of stock
options.
Stockholder Approval of Equity Compensation Plans. The following table
presents information as of September 30, 2005 about Headwaters' Common Stock
that may be issued upon the exercise of options, SARs and other equity-based
awards 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 four primary stock option and
stock incentive plans under which options and other awards have been granted.
Headwaters has also issued options not covered by any plan. The 1995 Plan, the
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2003 Plan and the LTIP have been 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 plan.
(in thousands of shares)
- ------------------------------ -------------------- ----------------------- -----------------------------
Maximum shares to be Weighted-average Shares remaining available
issued upon exercise exercise price of for future issuance under
of options and other outstanding options and existing equity compensation
Plan Category awards other awards plans
- ------------------------------ -------------------- ----------------------- -----------------------------
Plans approved by stockholders 4,379 $26.21 358
Plans not approved by
stockholders 1,447 23.39 506
-------------------- ----------------------- -----------------------------
Total 5,826 $25.51 864
==================== ======================= =============================
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 Headwaters by purchasing Common Stock on favorable terms
and to pay for such purchases through payroll deductions. The Board has
subsequently amended the ESPP, most recently in May 2005. The ESPP was approved
by stockholders in September 2000.
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 common stock were initially reserved for
issuance under the Plan, and approximately 240,000 shares remain available for
future issuance as of September 30, 2005. Under the ESPP, employees purchase
shares of stock directly from Headwaters, which shares are made available from
treasury shares which have been 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 fair market value at the end of each 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 Board approved the Short Term Incentive Bonus Plan ("IBP") in
January 2005, the specifics of which are approved annually by the Compensation
Committee, the administrator of the plan. The IBP provides for annual cash
bonuses to be paid if Headwaters accomplishes certain financial goals and if
participating employees meet individual goals. Headwaters' financial goals are
based upon an economic value added concept ("EVA") that attempts to more closely
align with a company's share price performance than other measurements of
performance. The IBP was approved by stockholders in March 2005.
Under the terms of the IBP, annual cash awards can be earned by
participants selected by the Compensation Committee 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 IBP are selected based on their roles
and responsibilities at Headwaters. 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 is 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 2003 in the Summary Compensation Table represent the cash
awards paid to the Named Executives for fiscal 2003, and include 50% of the
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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. The
bonus amounts for 2005 in the Summary Compensation Table represent the cash
awards paid to the Named Executives for fiscal 2005, and include 50% of the
banked amounts from fiscal 2003 and fiscal 2004, which were earned in 2005.
The total bonus amounts for fiscal 2003, 2004 and 2005 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 $5,005,737, $14,051,890, and $20,268,361, respectively.
Deferred Compensation Plan
In November 2004, Headwaters' Board of Directors approved a
nonqualified Deferred Compensation Plan ("DCP") for certain designated officers
and employees, which became effective on January 1, 2005. The DCP is a deferred
compensation plan that is not qualified under Section 401(a) of the Internal
Revenue Code and 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 DCP. Participants in the DCP
can annually elect to defer up to 50% of base salary and up to 100% of incentive
compensation into the Plan. Participant deferrals are matched by Headwaters at a
rate of 50% of the first six percent of salary or incentive compensation
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 DCP is funded through a "rabbi trust" and
trust-owned life insurance on Plan participants. The Plan is intended to meet
all applicable regulatory requirements, including Section 409A of the Internal
Revenue Code.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Kirk A. Benson. In August 2005, Headwaters and Mr. Benson entered into
an employment agreement covering Mr. Benson's "at will" employment for the
5-year period commencing April 1, 2005 through March 31, 2010. The agreement
calls for payment of a gross annual salary of $600,000 for the 12-month period
ending March 31, 2006, $650,000 for the 12-month period ending March 31, 2007,
$700,000 for the 12-month period ending March 31, 2008, $750,000 for the
12-month period ending March 31, 2009, and $800,000 for the 12-month period
ending March 31, 2010. The employment agreement further provides for
participation in Headwaters' IBP and LTIP, the grant of 25,000 shares of
contingent performance stock previously described, severance pay, and other
standard benefits such as vacation, participation in Headwaters' employee
benefit plans and reimbursement for certain stipulated fees and expenses and
necessary and reasonable business expenses.
Upon termination of his employment, Headwaters and Mr. Benson will
enter into a consulting agreement requiring no more than 20% of Mr. Benson's
time for a three-year period, for which Mr. Benson will receive remuneration
totaling $500,000. 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 in his employment agreement (including as a result of certain
change in control circumstances), he is entitled to termination benefits equal
to 300% of his annual base salary in effect when his employment terminates. In
the event of such termination, i) all of Mr. Benson's outstanding options, SARs
and restricted stock shall immediately become fully vested and exercisable, ii)
Mr. Benson will be paid a prorated bonus calculated under the provisions of the
fiscal year's IBP arrangements then in effect, and iii) Mr. Benson will be paid
for any "banked" amounts under the provisions of previous fiscal years' IBP
arrangements.
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. In October 2005, Headwaters and Mr. Stewart entered into an employment
transition agreement that superseded the terms of the employment agreement. The
employment transition agreement provides for Mr. Stewart's continued employment
with Headwaters in the position of Treasurer through March 31, 2006 and as an
employee through March 31, 2009. According to the terms of the agreement, Mr.
Stewart receives compensation as follows: during the period October 1, 2005
through March 31, 2006 at the rate of $24,300 per month; during the period April
1, 2006 through September 30, 2006 at the rate of $15,000 per month; and during
the period October 1, 2006 through March 31, 2009 at the rate of $10,000 per
month. In addition, the agreement calls for i) a bonus payment for fiscal 2006
at the rate of 50% of what would otherwise be paid under terms of Headwaters'
IBP; ii) a severance payment of $583,000 called for by the original employment
agreement; iii) a cash payment of $400,000 in lieu of participation in the
9
long-term incentive compensation awarded to executive officers in 2005; and iv)
the grant of 6,500 shares of restricted stock, which vest over a two-year period
ending November 2007, provided Mr. Stewart remains employed during that period.
Michael S. Lewis. In connection with the purchase of Eldorado Stone in
June 2004, Headwaters entered into an employment agreement with Mr. Lewis. The
employment agreement has an initial three-year term and subsequently remains in
effect for one-year periods unless terminated by notice by either party. The
agreement calls for an initial annual salary of $225,000, with an increase to
$250,000 in October 2004. Thereafter Mr. Lewis' salary is to be reviewed
annually and increased at the same time other executives' salaries are
increased. Mr. Lewis' current annual salary is $259,459. In addition, the
agreement calls for i) Mr. Lewis' participation in Headwaters' bonus plan; ii)
the grant of options to purchase 30,000 shares of Common Stock, which grant was
made in June 2004; iii) the grant of 3,267 shares of restricted stock, vesting
through March 2009, which grant was also made in June 2004; iv) payment of
"stay-put" bonuses of $300,000 on September 30, 2005 and $350,000 on September
30, 2006, provided that Mr. Lewis is still employed on those dates; and v) other
standard benefits such as vacation, a car allowance, participation in
Headwaters' employee benefit plans and reimbursement for necessary and
reasonable business expenses. Upon termination of employment by Mr. Lewis for
good reason, as defined, or upon termination by Headwaters without cause,
Headwaters has agreed to pay Mr. Lewis a severance allowance at his then current
annual salary for a period of 18 months plus i) the full amount of the bonus
under the IBP which would otherwise have been paid during the severance period,
and ii) a prorated amount of the stay-put bonus, if applicable.
Scott K. Sorensen. In connection with Mr. Sorensen's appointment as
Chief Financial Officer on October 1, 2005, Headwaters provided Mr. Sorensen an
Offer of Employment and the parties entered into an Executive Severance
Agreement. The significant terms of Mr. Sorensen's employment arrangements
pursuant to these two agreements include an annual salary of $290,000,
participation in Headwaters' IBP and other benefit plans available to
Headwaters' executives and employees, a grant of 100,000 SARs under terms of
Headwaters' 2003 Plan and LTIP (which grant was made in September 2005), and
under certain circumstances, and only if termination occurs within 12 months of
employment, severance pay equal to salary earned during the period of
employment, not to exceed 12 months of salary.
CORPORATE GOVERNANCE
Headwaters upholds a set of basic values to guide its actions and is
committed to maintaining the highest standards of business conduct and corporate
governance. Headwaters has adopted a Code of Ethics and Business Conduct for
directors, officers (including our principal executive officer and principal
financial officer) and employees and Corporate Governance Guidelines, which, in
conjunction with its Certificate of Incorporation, Bylaws and Board of Directors
committee charters, form the framework for governance of Headwaters. The Code of
Ethics and Business Conduct, Corporate Governance Guidelines, Board of Directors
committee charters, Bylaws and Certificate of Incorporation are available at
www.headwaters.com. Headwaters will post on this web site any amendments to
these governing documents or waivers of the Code of Ethics and Business Conduct
for directors and executive officers. Stockholders may also request free printed
copies of these documents from:
Sharon Madden
Director of Investor Relations
Headwaters Incorporated
10653 South River Front Parkway, Suite 300
South Jordan, UT 84095
Board of Directors Independence
The Board of Directors has determined that each of R. Sam Christensen,
William S. Dickinson, Blake O. Fisher, Jr., E.J. "Jake" Garn, James A.
Herickhoff, and Malyn K. Malquist has no material relationship with Headwaters
(either directly or as a partner, stockholder or officer of an organization that
has a relationship with Headwaters) and satisfies the independence requirements
required by the New York Stock Exchange. New directors participate in
orientation and training following their appointment to the Board. The
independent directors periodically meet in executive session, without
management, as part of the agenda for Board meetings. Mr. Herickhoff, an
independent director and Vice Chairman of the Board, chairs all executive
session meetings of directors.
10
Committees of the Board of Directors
The Board of Directors has adopted written charters for each of its
three standing committees: the Nominating and Corporate Governance Committee,
the Audit Committee and the Compensation Committee. The Board has determined
that all members of the Nominating and Corporate Governance, Audit, and
Compensation Committees are independent and satisfy the relevant SEC or New York
Stock Exchange independence requirements for the members of such committees.
Nominating and Corporate Governance Committee. The Nominating and
Corporate Governance Committee provides assistance to the Board in overseeing
corporate governance and identifies individuals qualified to become members of
the Board of Directors consistent with Board criteria. The committee also
oversees the evaluation of the Board of Directors and management. The current
charter of the Nominating and Corporate Governance Committee is attached to this
proxy statement as Appendix A and is also available at www.headwaters.com. A
free printed copy is available to any stockholder who requests it from the
address shown above.
Audit Committee. The members of the Audit Committee are directors R.
Sam Christensen, Blake O. Fisher, Jr., E.J. "Jake" Garn, and Malyn K. Malquist,
each of whom except for Mr. Garn the Board of Directors has determined is an
"audit committee financial expert" as defined under SEC rules. This committee
oversees the integrity of Headwaters' financial statements, disclosure controls
and procedures, the systems of internal accounting and financial controls,
compliance with legal and regulatory requirements, the qualifications and
independence of the independent auditors and the performance of Headwaters'
internal audit function and independent auditors, and the quarterly reviews and
annual independent audit of Headwaters' financial statements. The Audit
Committee's report appears hereafter. Ernst & Young LLP, Headwaters' independent
auditors, reports directly to the Audit Committee. The current charter of the
Audit Committee is attached to this proxy statement as Appendix B and is also
available at www.headwaters.com. A free printed copy is available to any
stockholder who requests it from the address shown above.
Compensation Committee. The Compensation Committee provides assistance
to the Board of Directors in overseeing compensation policies and practices of
Headwaters. It reviews and approves the compensation levels and policies for the
Board of Directors; reviews and approves corporate goals and objectives with
respect to CEO compensation and, based upon these evaluations, determines and
approves the CEO's compensation; makes recommendations to the Board of Directors
with respect to non-CEO executive officer compensation, including any required
approval of incentive and equity-based plans; reviews and approves bonus
compensation guidelines and practices; and administers Headwaters' stock
incentive plans and authorizes grants under the plans. The Compensation
Committee also has the responsibility to produce the report to stockholders on
executive officer compensation, which appears hereafter. The current charter of
the Compensation Committee is attached to this proxy statement as Appendix C and
is also available at www.headwaters.com. A free printed copy is available to any
stockholder who requests it from the address shown above.
Communicating Concerns to Directors
The non-employee directors have established procedures to enable
anyone wishing to communicate with the Headwaters Board of Directors, including
the Vice Chair or other non-management directors, in one of the following ways:
o E-mailing the directors at directors@headwaters.com, or
o Writing to the directors, at the following address:
Board of Directors
Headwaters Incorporated
c/o Corporate Secretary
10653 South River Front Parkway, Suite 300
South Jordan, UT 84095
The Audit Committee has established procedures for employees who have a
concern about the Company's accounting, internal accounting controls or auditing
matters, to communicate that concern directly to the Audit Committee in one of
the following ways:
o E-mailing to the Audit Committee at
headwaters-hotline@blackbearventures.com, or
11
o Writing to the Audit Committee, at the following address:
Chair of the Headwaters Incorporated Audit Committee
PO Box 5100
La Quinta, CA 92248
The Corporate Secretary will forward any communications related to
Headwaters' accounting, internal accounting controls, or auditing matters to the
Chair of the Audit Committee, together with any other director named in the
communication. All other communications will be forwarded to the Vice Chair or
other designated lead independent director of the Board of Directors, together
with any other director named in the communication. Communications may be
anonymous.
Board and Committee Meetings
The Board held a total of six meetings during fiscal 2005. All
directors attended all of the meetings, except for one director who attended
five meetings. Headwaters encourages but does not require Board member
attendance at the Headwaters' annual meeting. Two directors attended the 2005
annual meeting.
The Board currently has three committees, a Nominating and Corporate
Governance Committee, an Audit Committee, and a Compensation Committee. The
Nominating and Corporate Governance Committee currently consists of Mr.
Dickinson, as chair, Mr. Garn, and Mr. Herickhoff. The Nominating and Corporate
Governance Committee held four meetings in fiscal 2005. The Audit Committee
currently consists of Mr. Christensen, as chair, Mr. Fisher, Mr. Garn, and Mr.
Malquist. The Audit Committee held nine meetings in fiscal 2005. The
Compensation Committee currently consists of Mr. Herickhoff, as chair, Mr.
Fisher and Mr. Malquist. The Compensation Committee held six meetings in fiscal
2005. Each director attended at least 75% of all applicable committee meetings.
Nominating and Corporate Governance Committee Report
The Nominating and Corporate 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 current
charter is attached to this proxy statement as Appendix A.
The Nominating and Corporate Governance Committee has responsibility
for identifying and evaluating new nominees to the Board. In evaluating director
nominees, the 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 New York Stock Exchange. In addition,
directors must have time available to devote to Board activities and to enhance
their knowledge of Headwaters' business. 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.
In accordance with company's Corporate Governance Guidelines, the Board
is comprised of three tiers of members with staggered three-year terms. One tier
of members is elected each year by Headwaters' stockholders at the annual
meeting. Between annual meetings of stockholders, the Board may elect directors
to serve until the next annual meeting. Nominees for directorship will be
selected by the Nominating and Corporate Governance Committee, in accordance
with the policies and principles in its charter, and nominated by the Board for
stockholder elections. 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. However, Headwaters' stockholders may recommend director
nominees, and 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
12
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 committee may prefer nominees who are personally
known to the existing directors and whose reputations are highly regarded. The
committee will consider all relevant qualifications as well as the needs of
Headwaters in terms of compliance with New York Stock Exchange listing standards
and SEC rules.
All of the nominees for directors being voted upon at the Meeting are
directors standing for reelection.
The Nominating and Corporate Governance Committee assisted the Board
and each of its committees in conducting self-evaluations of their functioning
and effectiveness. The committee also reviewed and approved the Company's CEO
succession plan.
Nominating and Corporate Governance Committee
William S. Dickinson, Chairman
E. J. "Jake" Garn
James A. Herickhoff
Audit Committee Report
The Audit Committee oversees Headwaters' financial reporting process on
behalf of the Board. Headwaters' management has the primary responsibility for
the financial statements, for maintaining effective internal control over
financial reporting, and for assessing the effectiveness of internal control
over financial reporting. In fulfilling its oversight responsibilities, the
committee reviewed and discussed the audited consolidated financial statements
with Headwaters' management, including a discussion of the quality, not just the
acceptability, of the accounting principles used; the reasonableness of
significant judgments made; and the clarity of the disclosures in the financial
statements.
The Audit Committee reviewed with Ernst & Young LLP, Headwaters'
auditor, which is responsible for expressing an opinion on the conformity of the
consolidated financial statements with U.S. generally accepted accounting
principles, its judgments as to the quality, not just the acceptability, of
Headwaters' accounting principles and such other matters as are required to be
discussed with the committee by Statement on Auditing Standards No. 61, other
standards of the Public Company Accounting Oversight Board, rules of the
Securities and Exchange Commission and other applicable regulations. In
addition, the committee has discussed with Ernst & Young the firm's independence
from Headwaters, including the matters in the letter from Ernst & Young required
by Independence Standards Board Standard No. 1, and considered the compatibility
of non-audit services with Ernst & Young's independence.
The Audit Committee also reviewed management's report on its assessment
of the effectiveness of Headwaters' internal control over financial reporting
and Ernst & Young's report on management's assessment and the effectiveness of
Headwaters' internal control over financial reporting.
The Audit Committee discussed with Headwaters' internal auditors and
Ernst & Young the overall scope and plans for their respective audits. The
committee regularly meets with the internal auditors and Ernst & Young, with and
without management present, to discuss the results of their examinations; their
evaluations of Headwaters' internal control, including internal control over
financial reporting; and the overall quality of Headwaters' financial reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board, and the Board approved, that the audited
consolidated financial statements and management's assessment of the
effectiveness of Headwaters' internal control over financial reporting, together
with Ernst & Young's reports thereon, be included in Headwaters' Annual Report
on Form 10-K for the fiscal year ended September 30, 2005 filed with the
Securities and Exchange Commission. The committee and the Board also have
recommended, subject to stockholder approval, the selection of Ernst & Young LLP
to audit Headwaters' 2006 consolidated financial statements.
13
The Audit Committee acts pursuant to a written charter that was
approved by the Board of Directors, a current copy of which is attached to this
proxy statement as Appendix B.
Audit Committee
R. Sam Christensen, Chairman
Blake O. Fisher
E. J. "Jake" Garn
Malyn K. Malquist
Compensation Committee Report on Executive Compensation
The Board amended the Compensation Committee charter in March 2005, a
current 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 committee also oversees the
granting of stock options, restricted stock, SARs, other equity-based
compensation 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, restricted stock and SAR grants as well as a bonus plan. The
committee believes 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 the
committee believes that EVA-based plans are 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 August 2005. The Compensation Committee recommended
the fiscal 2005 cash compensation, cash bonus and grant of SARs and contingent
performance stock 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 equity-based compensation granted under the 1995 Plan and the
2003 Plan is treated as performance-based compensation if (1) the awards are
granted by the Compensation Committee; (2) the Plans restrict the number of
shares for which awards may be granted to an executive during a specified
period; and (3) the awards 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 2003 Plan 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 committee may award compensation that is
not fully tax deductible if the committee determines that such award is
consistent with its philosophy and in the best interests of Headwaters and its
stockholders.
14
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
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.
All outside directors are entitled to base annual cash compensation of
$50,000, which is paid quarterly. The following additional annual compensation
is also 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 normally
vest at the rate of 12,000 shares each year. However, in 2005, due to the
acceleration of vesting of options held by any optionee with an exercise price
equal to or greater than $21.29 per share, 144,000 options held by directors
vested in fiscal 2005 that would otherwise have vested in fiscal 2006, 2007 and
2008. 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 January and March 2003, Messrs. Christensen, Dickinson, and Malquist
were each granted options to purchase a total of 36,000 shares of Common Stock
at exercise prices equal to the closing price of the Common Stock on the grant
dates. These options vested ratably in December 2003, 2004 and 2005 and were
granted under the 1995 Plan, the 2002 Plan, and the 2003 Plan. In 2004, Messrs.
Herickhoff, Fisher, Garn, and Weller were each granted options to purchase a
total of 36,000 shares of Common Stock at exercise prices equal to the closing
price of the Common Stock on the grant date. These options, which were granted
under the 2003 Plan, were originally set to vest ratably in December 2005, 2006
and 2007, but due to the acceleration of vesting described above, were vested in
May 2005.
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, 2000 through September 30, 2005, on Headwaters' Common Stock with (1) the
New York Stock Exchange Composite Index, (2) the Nasdaq Composite Index - U.S.,
(3) the Standard & Poors - 500 Energy Sector Index, and (4) the Standard & Poors
- - 500 Building Products Index. The comparison assumes $100 was invested on
September 30, 2000. Headwaters' Common Stock traded on the Nasdaq National
Market until April 6, 2005, at which time it began trading on the New York Stock
Exchange. Accordingly, indices for both the Nasdaq National Market and the New
York Stock Exchange are presented.
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]
15
9/30/00 9/30/01 9/30/02 9/30/03 9/30/04 9/30/05
------- ------- ------- ------- ------- -------
Headwaters $100 $383 $481 $561 $1,073 $1,301
NYSE Composite Index $100 $74 $70 $76 $87 $116
Nasdaq Composite Index - U.S. $100 $41 $33 $51 $54 $62
S&P - 500 Energy Sector Index $100 $86 $75 $88 $127 $188
S&P - 500 Building Products Index $100 $106 $107 $139 $197 $199
16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 11,
2006 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 11, 2006, there were 42,051,096 shares of Common Stock
outstanding, including 315,628 shares of treasury stock. As of that date, there
were options to purchase 2,578,131 shares of Common Stock and 2,989,816 SARs
outstanding.
Name and Address of Amount and Nature of Percent
Beneficial Owner (1) Beneficial Ownership(2) of Class
-------------------- ----------------------- --------
5% Stockholders:
- ----------------
EARNEST Partners, LLC
The Grand
75 14th Street - 2300
Atlanta, GA 30309-3675 4,108,437 9.8%
Waddell and Reed Investment
Management Company
6300 Lamar Avenue
PO Box 29217
Shawnee Mission, KS 66201-9217 3,014,672 7.2%
Franklin Advisers, Inc.
One Franklin Parkway
San Mateo, CA 94403-1906 2,563,419 6.1%
Directors:
- ----------
Kirk A. Benson 1,625,724(3) 3.8%
Raymond J. Weller 251,424(4) *
James A. Herickhoff 103,500(5) *
E. J. "Jake" Garn 72,000(6) *
R. Sam Christensen 41,500(7) *
Malyn K. Malquist 40,500(8) *
Blake O. Fisher, Jr. 38,000(9) *
William S. Dickinson 37,700(10) *
Executive Officers:
- -------------------
Steven G. Stewart 72,853(11) *
Harlan M. Hatfield 248,847(12) *
Kenneth R. Frailey 237,096(13) *
Michael S. Lewis 148,380(14) *
All directors and executive officers
as a group (17 persons) 3,532,969(15) 8.0%
* 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 11, 2006, 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
11, 2006. All shareholdings for 5% stockholders consist of shares held
by them.
(3) Consists of 938,475 shares owned by Mr. Benson, options to purchase
332,249 shares held by Mr. Benson exercisable within 60 days of January
11, 2006 and 355,000 SARs exercisable within 60 days of January 11,
2006.
(4) Consists of 212,924 shares owned by Mr. Weller and options to purchase
38,500 shares held by Mr. Weller exercisable within 60 days of January
11, 2006.
17
(5) Consists of 8,000 shares owned by Mr. Herickhoff and options to
purchase 95,500 shares held by Mr. Herickhoff exercisable within 60
days of January 11, 2006.
(6) Consists of options to purchase 72,000 shares held by Mr. Garn
exercisable within 60 days of January 11, 2006.
(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
36,000 shares held by Mr. Christensen exercisable within 60 days of
January 11, 2006.
(8) Consists of 4,500 shares owned by Mr. Malquist and options to purchase
36,000 shares held by Mr. Malquist exercisable within 60 days of
January 11, 2006.
(9) Consists of 2,000 shares owned by Mr. Fisher and options to purchase
36,000 shares held by Mr. Fisher exercisable within 60 days of January
11, 2006.
(10) Consists of 1,700 shares owned by Mr. Dickinson and options to purchase
36,000 shares held by Mr. Dickinson exercisable within 60 days of
January 11, 2006.
(11) Consists of 23,199 shares owned by Mr. Stewart and options to purchase
49,654 shares held by Mr. Stewart exercisable within 60 days of January
11, 2006.
(12) Consists of 13,159 shares owned by Mr. Hatfield, options to purchase
174,880 shares held by Mr. Hatfield exercisable within 60 days of
January 11, 2006 and 60,808 SARs exercisable within 60 days of January
11, 2006.
(13) Consists of 5,095 shares owned by Mr. Frailey, options to purchase
142,466 shares held by Mr. Frailey exercisable within 60 days of
January 11, 2006 and 89,535 SARs exercisable within 60 days of January
11, 2006.
(14) Consists of 4,211 shares owned by Mr. Lewis, options to purchase 55,000
shares held by Mr. Lewis exercisable within 60 days of January 11, 2006
and 89,169 SARs exercisable within 60 days of January 11, 2006.
(15) Consists of 1,229,115 shares issued and outstanding, options to
purchase 1,390,936 shares exercisable within 60 days of January 11,
2006 and 912,918 SARs exercisable within 60 days of January 11, 2006.
TRANSACTIONS WITH RELATED PARTIES
Employment and Related Agreements. As of September 30, 2005, Headwaters
had employment agreements with Messrs. Benson, Stewart, Lewis and Sorensen which
provide for significant benefits. See "Employment Contracts and Termination of
Employment and Change in Control Arrangements." As of September 30, 2005,
Headwaters and its subsidiaries have also entered into employment agreements
with 22 other officers and employees. The agreements have original terms ranging
up to five years, many of which are renewable by Headwaters, often for one-year
terms. Including the Named Executives, the agreements provide for annual
salaries as of September 30, 2005 which range from approximately $69,000 to
$600,000 annually per person. Assuming all agreements set to expire in 2006 are
renewed, the annual commitment under all employment agreements combined would
approximate $4,345,000. The aggregate commitment as of September 30, 2005,
assuming no renewals, is approximately $6,590,000. Most agreements provide for
termination benefits, which vary widely from agreement to agreement.
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. Commissions paid to that company by providers of insurance
services to Headwaters totaled approximately $120,000 in fiscal 2003, $130,000
in fiscal 2004 and $196,000 in fiscal 2005.
Eldorado Stone Product. Eldorado Stone purchases product from an entity
located in Mexico in which Mr. Lewis has a minority ownership interest. Costs
incurred for materials purchased from this entity were approximately $2,712,000
in fiscal 2004 and $11,826,000 in fiscal 2005.
SCP. Headwaters acquired SCP in 2004 and agreed to pay an earn-out to
the sellers if certain earnings targets were exceeded during the 12 months ended
December 31, 2005 (the "earn-out period"). The additional earn-out consideration
will be the product of 5.7 times the amount that earnings before interest,
taxes, depreciation and amortization ("EBITDA") of SCP exceeds $5,500,000 during
the earn-out period. Headwaters currently expects earn-out consideration in the
range of approximately $10,000,000 to $12,500,000 could be paid. Mr. Lents, an
executive officer of Headwaters, owned approximately 30% of SCP prior to the
acquisition and was one of the sellers. Also, a majority of SCP's transportation
needs are provided by a company, two of the principals of which are related to
Mr. Whisnant, an officer of SCP. Costs incurred were approximately $970,000 in
fiscal 2004 and $4,904,000 in fiscal 2005.
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 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 fiscal 2004,
Headwaters recorded an expense for $1,500,000 related to this obligation, which
was paid in fiscal 2005. No other payments were made related to these agreements
nor are there any future obligations.
18
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. 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, 2004 and September 30,
2005, on year-end reports furnished to Headwaters after September 30, 2005, and
on representations that no other reports were required, Headwaters believes that
during the 2005 fiscal year all applicable 16(a) filing requirements were met,
except that Craig R. Hickman filed one Form 4 after the due date for such Form
4.
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Nominees for Election as Directors
At the Meeting, the stockholders will elect two Class III directors of
Headwaters to serve until the 2009 annual meeting, or until their successors are
duly elected and qualified. The Board of Directors is divided into three
classes, currently comprised of two Class III directors whose terms will expire
at the Meeting in February 2006 and who are standing for election at the
Meeting; three Class I directors, whose terms will expire at Headwaters' annual
meeting in 2007; and three Class II directors, whose terms will expire at
Headwaters' annual meeting in 2008.
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, and Malyn K. Malquist.
The Board proposes that the two individuals listed below as Class III
nominees (each a current Class III director) be elected as Class III directors
of Headwaters. The nominees have consented to serve if elected to the Board. In
the event that one or more of the nominees 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 III nominees, together with certain information
about them, is set forth below:
Name Age Position with Headwaters Director Since
---- --- ------------------------ --------------
James A. Herickhoff 63 Vice Chairman and Director 1997
Blake O. Fisher, Jr. 61 Director 2004
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, and became a director
of Raser Technologies, Inc. in 2005. 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.
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 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 1996 Mr. Fisher was Chief Financial Officer of IES
19
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. Mr. Fisher became a director of UCN, Inc. in
2004 and currently serves on the Audit and Compensation Committees of that
company.
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 Kirk A. Benson,
Raymond J. Weller, and E.J. "Jake" Garn, Class II directors whose terms expire
in 2008. Information about these directors is set forth below.
Class I Directors:
Name Age Position with Headwaters Director Since
---- --- ------------------------ --------------
R. Sam Christensen 57 Director 2003
William S. Dickinson 71 Director 2003
Malyn K. Malquist 53 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. 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 26 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.
Class II Directors:
Name Age Position with Headwaters Director Since
---- --- ------------------------ --------------
Kirk A. Benson 55 Chairman and Chief Executive Officer 1999
Raymond J. Weller 60 Director 1991
E. J. "Jake" Garn 73 Director 2002
Kirk A. Benson has served as a Director of Headwaters since January
1999 and as Chairman and CEO since April 1999. Mr. Benson was Senior Vice
President of Foundation Health Systems, Inc., one of the nation's largest
20
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. 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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
THE ELECTION OF MESSRS. HERICKHOFF 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 2006 and to perform other appropriate
accounting services and are requesting ratification of such appointment by the
stockholders.
Audit and Non-Audit Fees
The following table summarizes the fees paid or payable to E&Y for
services rendered for the fiscal years ended September 30, 2004 and September
30, 2005. Audit fees include the cost of the annual audit of Headwaters and its
subsidiaries including the audit of management's assessment and E&Y's assessment
of internal control over financial reporting, plus the costs of quarterly
reviews, SEC filings requiring the consents of Headwaters' independent auditor,
and comfort letters provided to underwriters. Audit-related fees in 2004
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 consisted primarily of an annual subscription to
E&Y's online accounting research library. The Audit Committee approved 100% of
the audit fees, the audit-related fees, the tax fees, and all other fees for
2004 and 2005.
Fiscal Year Fiscal Year
2004 2005
------------ ------------
Audit fees $1,100,325 $2,747,855
Audit-related fees 74,305 --
Tax Fees 964,281 892,571
All other fees 1,599 1,640
------------ ------------
Total $2,140,510 $3,642,066
============ ============
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.
21
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
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 2007 annual meeting, they must
be received by Headwaters not later than September 25, 2006 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'
2007 annual meeting will confer discretionary authority to vote on matters,
among others, of which Headwaters does not receive notice prior to September 25,
2006.
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.
Headwaters will reimburse banks, brokers and other persons holding Common Stock
for their expenses in forwarding proxy solicitation materials to beneficial
owners of Common Stock.
If you have any questions about giving your proxy or require any
assistance, please contact Sharon Madden, Headwaters' Director of Investor
Relations, at 1-800-316-6214.
YOUR VOTE IS IMPORTANT. YOU ARE URGED TO DATE, SIGN AND PROMPTLY RETURN
YOUR PROXY CARD SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES
AND THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. THE PROMPT RETURN OF YOUR
SIGNED PROXY CARD, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD, WILL AID
HEADWATERS IN AVOIDING THE EXPENSE OF ADDITIONAL PROXY SOLICITATIONS. GIVING
YOUR PROXY DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON AT THE MEETING OR YOUR
RIGHT TO RESUBMIT LATER DATED PROXY CARDS.
Headwaters Incorporated
By Order of the Board of Directors,
/s/ Harlan M. Hatfield
-------------------------
Harlan M. Hatfield
Secretary
22
HEADWATERS INCORPORATED
PROXY SOLICITED BY THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS -TUESDAY, FEBRUARY 28, 2006
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 Tuesday, February 28, 2006, 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]
James A. Herickhoff FOR[ ] WITHHOLD AUTHORITY[ ]
(If elected, Mr. Herickhoff's term
would expire in 2009)
Blake O. Fisher, Jr. FOR[ ] WITHHOLD AUTHORITY[ ]
(If elected, Mr. Fisher's term
would expire in 2009)
2. RATIFY THE SELECTION BY THE BOARD OF FOR[ ] AGAINST[ ] ABSTAIN[ ]
ERNST & YOUNG LLP AS INDEPENDENT
AUDITORS OF HEADWATERS FOR FISCAL 2006
This Proxy is solicited on behalf of the Board of Directors. Unless
otherwise specified, the shares will be voted "FOR" items 1 and 2. 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: ________________, 2006
Name(s) of Stockholder(s)
PLEASE RETURN YOUR COMPLETED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
Appendix A
HEADWATERS INCORPORATED
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHARTER
April 25, 2005
Composition
This Charter governs the operations of the Nominating and Corporate
Governance Committee. The Nominating and Corporate Governance Committee shall be
comprised of such number of directors as determined by the Board of Directors.
The members of the Nominating and Corporate Governance Committee shall
be elected by the Board of Directors annually, shall be comprised of
"independent" directors as defined by the listing standards of the NYSE and
shall serve until their successors are duly elected and qualified. Unless a
Chair is elected by the full Board of Directors, the members of the Nominating
and Corporate Governance Committee may designate a Chair.
Statement of Policy
The Nominating and Corporate Governance Committee (hereafter referred
to as "the Committee") shall provide assistance to the Board of Directors in
overseeing corporate governance, and shall identify individuals qualified to
become Board members, consistent with criteria set by the Board of Directors.
The Committee shall make recommendations to the Board of Directors regarding a
slate of persons for the Board of Directors to nominate (or direct to be
nominated) for election to the Board of Directors at the annual shareholders
meeting. The Committee shall also oversee the evaluation of the Board of
Directors and management.
Annual Performance Evaluation
The Committee shall perform an annual self-evaluation of its
performance.
Responsibilities and Processes
The following shall be the principal recurring responsibilities and
principal recurring processes of the Committee. The responsibilities and
processes are set forth as a guide with the understanding that the Committee may
alter or supplement them as appropriate.
1. Annually, the Committee shall evaluate and select the director
nominees of the Corporation to be considered for election at the annual meeting
of stockholders. The Committee shall also select nominees to the Board of
Directors with respect to filling vacancies on the Board of Directors. The
criteria used by the Committee to evaluate and to select director nominees shall
include, but shall not be limited to, 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 NYSE. The Committee
shall have the sole authority and shall be granted the resources to retain
independent advisers, such as search firms, in order to assist the Committee in
identifying and selecting nominees. Such authority shall include the sole
authority to approve such advisor's fees and other retention terms.
Notwithstanding anything to the contrary contained herein, if the Corporation is
required by contract or otherwise to provide third parties with the ability to
nominate directors, the selection and nomination of any such directors are not
subject to the powers or oversight of this Committee, except to the extent that
any such director shall be subject to the Corporate Governance Guidelines and
the Code of Conduct of the Corporation and general oversight of this Committee.
2. The Committee shall review and make recommendations to the Board of
Directors with respect to candidates for director proposed by stockholders of
the Corporation.
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3. The Committee shall formulate and recommend to the Board of
Directors a list of "Corporate Governance Guidelines", which shall address, at a
minimum, director qualification standards; director responsibilities; director
access to management and, as necessary and appropriate, independent advisors;
director compensation; director orientation and continuing education; management
succession; and annual performance evaluation of the Board of Directors. The
Committee shall from time to time or as necessary recommend to the Board of
Directors any revisions to the Corporate Governance Guidelines that the
Committee deems appropriate or to ensure compliance with applicable securities
law and regulations and stock market rules.
4. The Committee shall formulate and recommend to the Board of
Directors a code of ethics and business conduct for directors, officers and
employees of the Corporation, which shall address, at a minimum, conflicts of
interest, corporate opportunities, confidentiality, fair dealing, protection and
proper use of company assets, compliance with laws, rules and regulations
(including insider trading laws), and encouraging the reporting of any illegal
or unethical behavior (a "Code of Conduct"). The Committee shall from time to
time or as necessary recommend to the Board of Directors any revisions to the
Code of Conduct that the Committee deems appropriate or to ensure compliance
with applicable securities laws and regulations and stock market rules.
5. The Committee shall review on an annual basis the functioning and
effectiveness of the Board of Directors, its committees and its individual
members, and to the extent the Committee deems appropriate, recommend changes or
additions to the composition of the committees of the Board of Directors.
6. The Committee shall consider and make recommendations on matters
related to the practices, policies and procedures of the Board of Directors.
7. The Committee shall perform such other activities and functions
related to the selection and nomination of directors and corporate governance as
may be assigned from time to time by the Board of Directors.
8. In performing any of its duties and responsibilities, the Committee
may consult with the Corporation's internal or outside legal counsel and shall
have the sole authority and shall be granted the resources to retain independent
legal counsel, which shall include the sole authority to approve any such
counsel's fees and other retention terms.
9. The Committee may delegate its duties and responsibilities to a
subcommittee consisting of one or more members of the Nominating and Corporate
Governance Committee, or to senior officers of the Corporation. Any delegation
may be made only to the extent permitted by the NYSE rules, Securities and
Exchange Commission rules and applicable law.
Reports
1. The Committee may, as it desires, prepare or cause the preparation
of a report for inclusion in the Corporation's annual proxy statement.
2. The Committee shall submit any recommendations for changes to the
Nominating and Corporate Governance Committee Charter to the full Board of
Directors for approval.
3. The Committee shall maintain minutes of its meetings and regularly
report its activities to the Board of Directors.
Reliance on Information Provided
In adopting this Nominating and Corporate Governance Committee Charter,
the Board of Directors acknowledges that the Nominating and Corporate Governance
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 -
Committee shall be entitled to rely on the integrity of those persons and
organizations within and outside the Corporation that provide information to the
Committee and the accuracy and completeness of the corporate governance and
other information provided to the Committee by such persons or organizations
absent actual knowledge to the contrary.
A-2
Appendix B
HEADWATERS INCORPORATED
AUDIT COMMITTEE CHARTER
March 9, 2005
Purpose and Composition
This Charter governs the operations of the Audit Committee. The Audit
Committee shall be comprised of three or more directors as determined by the
Board of Directors and shall meet the qualification requirements of the New York
Stock Exchange listing standards.
The members of the Audit Committee shall be elected by the Board of
Directors annually and shall serve until their successors are duly elected and
qualified. Unless a Chair is elected by the full Board of Directors, the members
of the Audit Committee may designate a Chair by majority vote of the full Audit
Committee membership.
Statement of Policy
The Audit Committee shall provide assistance to the Board of Directors
in overseeing the integrity of the Corporation's financial statements,
disclosure controls and procedures, the systems of internal accounting and
financial controls, the Corporation's compliance with legal and regulatory
requirements, the qualifications and independence of the independent auditors,
the performance of the Corporation's internal audit functions and independent
auditors, and the quarterly reviews and annual independent audit of the
Corporation's financial statements.
The independent auditor for the Corporation is ultimately accountable
to the Audit Committee and the Board of Directors. The Audit Committee and the
Board shall have the ultimate authority and responsibility to select, evaluate
and, where appropriate, replace the independent auditor.
Annual Performance Evaluation
The Audit Committee shall conduct an annual self-evaluation of the
Audit Committee's performance.
Responsibility and Processes
The primary responsibility of the Audit Committee is to oversee the
Corporation's financial reporting process on behalf of the Board of Directors
and report the results of its activities to the Board of Directors. It is not
the duty of the Audit Committee to plan or conduct audits, to determine that the
Corporation's financial statements are complete and accurate and are in
accordance with generally accepted accounting principles or to assure compliance
with laws. These are the responsibilities of management, the internal auditor,
and the independent auditor.
The following shall be the principal recurring processes of the Audit
Committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the Audit Committee may alter or
supplement them as appropriate.
1. Annually, the Audit Committee shall recommend to the Board of
Directors the selection of the Corporation's independent auditor, subject to
stockholder ratification of the selection, if such ratification is required or
sought.
2. The Audit Committee shall discuss with the internal auditors and
independent auditor the overall scope and plans for their respective audit
examinations. The Audit Committee shall be responsible for the compensation,
retention, and oversight of the work of the independent auditor (including
B-1
resolution of any disagreements between management and the auditor regarding
financial reporting) for the purpose of preparing or issuing an audit report or
performing other audit, review, or attest services for the Corporation.
3. The Audit Committee shall ensure that the independent auditor
submits annually a formal written statement delineating all relationships
between the independent auditor and the Corporation. The Audit Committee is
responsible for engaging in a dialogue with the independent auditor with respect
to such disclosed relationships that may impact the objectivity and independence
of the independent auditor and recommending that the Board of Directors take
appropriate action to satisfy itself of the independent auditor's independence.
4. The Audit Committee shall establish policies and procedures for the
engagement of the independent auditor to provide non-audit services, and
consider whether the independent auditor's performance of non-audit services is
compatible with the independent auditor's independence.
5. The Audit Committee shall at least annually obtain and review a
report by the independent auditor describing: the firm's internal
quality-control procedures; any material issues raised by the most recent
internal quality-control review, or peer review, of the firm, or by any inquiry
or investigation by governmental or professional authorities, within the
preceding five years, respecting one or more independent audits carried out by
the firm, and any steps taken to deal with any such issues.
6. The Audit Committee should review the auditor's qualifications,
performance, and independence. This evaluation should include the review and
evaluation of the lead partner of the independent auditor. In making its
evaluation, the Audit Committee should take into account the opinions of
management and the Corporation's internal auditors. In addition to assuring the
regular rotation of the lead audit partner as required by law, the Audit
Committee should further consider whether, in order to assure continuing auditor
independence, there should be regular rotation of the audit firm itself. The
Audit Committee should present its conclusions with respect to the independent
auditor to the Board of Directors of the Corporation.
7. The Audit Committee shall discuss with management, the internal
auditors, and the independent auditor the adequacy and effectiveness of the
Corporation's internal controls, accounting and financial records, and the
system for monitoring and managing business risk and legal compliance. Further,
the Audit Committee shall meet separately with the independent auditor, with and
without management present, to discuss the results of their examinations.
8. The Audit Committee shall review and discuss with management, the
internal auditors, and the independent auditor the Corporation's interim
financial results to be included in the Corporation's quarterly reports filed
with the Securities and Exchange Commission, and the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communications with Audit
Committees), as it may be modified or supplemented.
9. The Audit Committee shall review with management, the internal
auditors, and the independent auditor the financial statements, including
reviewing the Corporation's specific disclosures under "Management's Discussion
and Analysis of Financial Condition and Results of Operations," to be included
in the Corporation's Annual Report on Form 10-K (or the annual report to
shareholders if distributed prior to the filing of Form 10-K), as well as the
auditor's judgment about the quality, not just acceptability, of the
Corporation's accounting principles as applied in its financial reporting. The
review shall also include a discussion of the reasonableness of judgments and
estimates made in the preparation of the financial statements that may be viewed
as critical, as well as the clarity of financial statement disclosures. In
addition, the Audit Committee shall discuss the results of the annual audit and
any other matters required to be communicated to the Audit Committee by the
independent auditor under generally accepted auditing standards, including the
matters required to be discussed by Statement on Auditing Standards No. 61
(Communications with Audit Committees), as it may be modified or supplemented.
10. Based on its review and discussions of items 3 and 8, the Audit
Committee shall recommend to the Board of Directors whether the financial
statements, including the Corporation's specific disclosures under "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
should be included in the Annual Report on Form 10-K (or the annual report to
shareholders if distributed prior to the filing of Form 10-K).
B-2
11. As a whole, or through the Chair, the Audit Committee shall review
the impact on the financial statements of significant events, transactions, or
changes in accounting principles or estimates which potentially affect the
quality of the financial reporting with management and the independent auditor
prior to the filing of the Corporation's Reports on Form 10-Q or 10-K, or as
soon as practicable if the communications cannot be made prior to its filing.
12. Management and the independent auditor shall discuss with the Audit
Committee significant changes to the Corporation's auditing and accounting
principles, policies, controls, procedures and practices proposed or
contemplated by the independent auditor or management.
13. The Audit Committee shall review and reassess this Charter annually
and recommend any appropriate changes to the Board of Directors.
14. The Audit Committee shall discuss the Corporation's earnings press
releases, as well as financial information and earnings guidance provided to
analysts and ratings agencies.
15. The Audit Committee shall discuss guidelines and policies with
respect to risk assessment and risk management, including the Corporation's
major financial risk exposures and the steps management has taken to monitor and
control such exposures.
16. The Audit Committee shall meet separately, periodically, with
management, with internal auditors (or other personnel responsible for the
internal audit function) and with independent auditors.
17. The Audit Committee shall set clear hiring policies for employees
or former employees of the independent auditors.
18. The Audit Committee shall establish procedures for the receipt,
retention, and treatment of complaints received by the Corporation regarding
accounting, internal accounting controls, or auditing matters. The Audit
Committee shall also establish procedures for the confidential, anonymous
submission by employees of the Corporation of concerns regarding questionable
accounting or auditing matters.
19. The Corporation shall provide for appropriate funding, as
determined by the Audit Committee, for payment of compensation to the
independent auditor, compensation to any advisors employed by the Audit
Committee, and ordinary administrative expenses of the Audit Committee that are
necessary or appropriate in carrying out its duties.
20. The Audit Committee shall review with the independent auditor any
audit problems or difficulties, and management's response. The scope of review
should include any restrictions on the scope of the independent auditor's
activities or access to requested information, and any significant disagreement
that is brought to its attention, after inquiry, among management and the
independent auditor or internal auditor in connection with the preparation of
the Corporation's financial statements. The Audit Committee should encourage
both management and the independent auditor to communicate openly with the Audit
Committee regarding such disagreements. In addition, the Audit Committee shall
review with management and the independent auditor any pending or threatened
action by regulators or government agencies and any employee complaints or
published reports that raise material issues regarding the Corporation's
financial statements or accounting policies. The Audit Committee may request any
officer or employee of the Corporation or the Corporation's outside counsel or
independent auditor to attend a meeting of the Audit Committee or to meet with
any members of, or consultants to, the Audit Committee. The Audit Committee
shall also have the resources and authority appropriate to discharge its
responsibilities, including the authority to engage outside auditors for special
audits, reviews and other procedures and to retain special counsel and other
experts or consultants.
Reports
1. The Audit Committee shall prepare or cause the preparation of the
report required by the rules of the Securities and Exchange Commission for
inclusion in the Corporation's annual proxy statement.
B-3
2. The Committee shall submit any recommendations for changes to the
Audit Committee Charter to the full Board of Directors for approval.
3. The Audit Committee shall maintain minutes of its meetings and
regularly report its activities to the Board of Directors.
Reliance on Information Provided
In adopting this Audit Committee Charter, the Board of Directors
acknowledges that the Audit Committee members are not employees of the
Corporation and are not providing any expert or special assurance as to the
Corporation's financial statements or any professional certification as to the
independent auditor's work or auditing standards. Each member of the Audit
Committee shall be entitled to rely on the integrity of those persons and
organizations within and outside the Corporation that provide information to the
Audit Committee and the accuracy and completeness of the financial and other
information provided to the Audit Committee by such persons or organizations
absent actual knowledge to the contrary.
B-4
Appendix C
HEADWATERS INCORPORATED
COMPENSATION COMMITTEE CHARTER
March 9, 2005
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 New York Stock Exchange ("NYSE"), 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 their 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.
Annual Performance Evaluation
The Compensation Committee shall perform an annual self-evaluation of
the performance of the Compensation Committee.
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 ("CEO"). Evaluate the chief
executive officer's performance in light of corporate goals and objectives and,
based upon these evaluations, determine and approve the CEO's compensation,
including salary, bonus, incentive, and equity compensation. In determining the
long-term incentive component of the CEO's compensation, the Compensation
Committee should consider the Corporation's performance and relative stockholder
return, the value of similar incentive awards to CEOs at comparable companies,
and the awards given to the Corporation's CEO in past years.
C-1
3. Make recommendations to the Board of Directors with respect to
non-CEO executive officer compensation, and incentive-compensation and
equity-based plans that are subject to Board of Director approval, including
salary, bonus, incentive, and equity compensation.
4. Produce a Compensation Committee report on executive officer compensation as
required by the Securities Exchange Commission (the "SEC") to be included in the
Corporation's annual proxy statement or annual report on Form 10-K filed with
the SEC.
5. 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.
6. 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.
7. 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.
8. 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.
9. Compensation Committee members shall be chosen based on their competence and
ability to add substance to the deliberations of the Compensation Committee.
10. The Compensation Committee may delegate its duties and responsibilities to a
subcommittee consisting of one or more members of the Compensation Committee, or
to senior officers of the Corporation. Any delegation may be made only to the
extent permitted by the NYSE rules, Securities and Exchange Commission rules and
applicable law. The Compensation Committee may not, however, delegate any of its
duties and responsibilities with regard to (i) compensation arrangements,
including salary and short term and long term incentive awards, with respect to
the CEO and any Section 16 Officer, or (ii) the Corporation's annual proxy
statement.
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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