-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CS7KwuBkjxTLdDx9jJwhkTol8pDYPzrx4EAZYE1ZBLHNJhavvkLg6sHe60E50DkS k09Wz/qsjL4DfhbceIdPUA== 0001038838-02-000990.txt : 20021224 0001038838-02-000990.hdr.sgml : 20021224 20021224115526 ACCESSION NUMBER: 0001038838-02-000990 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEADWATERS INC CENTRAL INDEX KEY: 0001003344 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRODUCTS OF PETROLEUM & COAL [2990] IRS NUMBER: 870547337 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27808 FILM NUMBER: 02868292 BUSINESS ADDRESS: STREET 1: 11778 S ELECTION DRIVE STREET 2: STE 210 CITY: DRAPER STATE: UT ZIP: 84043 BUSINESS PHONE: 8019849400 MAIL ADDRESS: STREET 1: 11778 S ELECTION DRIVE STREET 2: STE 210 CITY: DRAPER STATE: UT ZIP: 84020 FORMER COMPANY: FORMER CONFORMED NAME: COVOL TECHNOLOGIES INC DATE OF NAME CHANGE: 19951113 10-K 1 k093002.txt 10-K YEAR ENDED SEPTEMBER 30, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2002, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-27808 HEADWATERS INCORPORATED ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 87-0547337 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11778 South Election Road, Suite 210 Draper, Utah 84020 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (801) 984-9400 -------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: ------------------------------------------------------------ None Securities registered pursuant to Section 12(g) of the Act: ----------------------------------------------------------- Common Stock, $.001 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 31, 2002 was $358,682,169 based upon the closing price on the Nasdaq National Market reported for such date. This calculation does not reflect a determination that persons whose shares are excluded from the computation are affiliates for any other purpose. The number of shares outstanding of the registrant's common stock as of November 30, 2002 was 27,377,539. ___________________________ DOCUMENTS INCORPORATED BY REFERENCE Portions of the following document are incorporated herein by reference: Portions of the registrant's definitive proxy statement to be issued in connection with registrant's annual stockholders' meeting to be held in 2003. TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS...........................................................3 ITEM 2. PROPERTIES.........................................................9 ITEM 3. LEGAL PROCEEDINGS.................................................10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................................11 ITEM 6. SELECTED FINANCIAL DATA...........................................13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................35 ITEM 11. EXECUTIVE COMPENSATION............................................35 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....35 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................35 PART IV ITEM 14. CONTROLS AND PROCEDURES...........................................35 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.....................................................36 SIGNATURES.................................................................[TBA] Forward-looking Statements Statements in this Form 10-K, including those concerning the Registrant's expectations regarding its business, and certain of the information presented in this report, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As such, actual results may vary materially from such expectations. For a discussion of the factors that could cause actual results to differ from expectations, please see the captions entitled "Forward-looking Statements" and "Risk Factors Affecting Future Results of Operations" in Item 7 hereof. There can be no assurance that the Registrant's results of operations will not be adversely affected by such factors. Registrant undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinion only as of the date hereof. Availability of SEC Filings Headwaters makes available, free of charge, through its website (www.hdwtrs.com) its Forms 10-K, 10-Q and 8-K, as well as its registration statements, as soon as reasonably practicable after those reports are electronically filed with the SEC. 2 PART I ITEM 1. BUSINESS General Development of Business Introduction. Headwaters Incorporated is a world leader in developing and deploying energy related technologies to the marketplace. Headwaters is focused on converting fossil fuels such as gas, coal and heavy oils into alternative energy products. As part of its long-term growth strategy, Headwaters acquired Hydrocarbon Technologies, Inc. ("HTI") on August 28, 2001 and Industrial Services Group, Inc. ("ISG") on September 19, 2002 and these entities are now wholly-owned subsidiaries of Headwaters. ISG, through its own wholly-owned operating subsidiary, ISG Resources, Inc., is the nation's largest manager and marketer of coal combustion products. With the ISG acquisition, Headwaters is in a unique position to provide a full range of value-added services to the coal-fired electric generating industry, as well as capitalize on opportunities to develop related energy technologies. Headwaters' Company History. Headwaters was incorporated in Delaware in 1995 under the name Covol Technologies, Inc. In September 2000, Covol's name was changed to Headwaters Incorporated. Headwaters' stock trades under the Nasdaq symbol HDWR. Unless the context otherwise requires, "ISG" refers to Industrial Services Group, Inc. and its operating subsidiary ISG Resources, Inc., together with their consolidated subsidiaries. References to "Headwaters," "combined company," "company," "we," "our," and "us," refer to Headwaters Incorporated and its division Covol Fuels, together with its consolidated subsidiaries ISG and HTI. Headwaters operates its business through two wholly-owned subsidiaries and one division: ISG focuses on utilizing, marketing, and disposing of large volumes of coal combustion products. HTI develops and markets innovative energy and catalyst technologies. Covol Fuels licenses technology and sells chemical reagents to produce solid alternative fuel. ISG ISG's Company History. ISG was incorporated in Delaware in 1997. Beginning in October 1997, ISG acquired through a series of transactions a number of companies to form a national coal combustion products business. ISG Resources, Inc., which was incorporated in Utah in August 1998, and its subsidiaries, operate this business. Principal Products and their Markets by Division. ISG's coal combustion products ("CCPs") division is a supplier of post-combustion services and technologies to the coal-fired electric utility industry. ISG manages approximately 20 million tons annually of CCPs for a majority of the nation's largest coal-fired utilities, as well as for other industrial clients. ISG markets CCPs (primarily fly ash and bottom ash) to replace manufactured or mined materials, such as Portland cement, lime, agricultural gypsum, fired lightweight aggregate, granite aggregate and limestone. Based upon available information, ISG believes it is the largest manager and marketer of CCPs in North America. Fly ash is a pozzolan that, in the presence of water, will combine with an activator (lime, Portland cement or kiln dust) to produce a cement-like material. This characteristic makes fly ash a cost-competitive substitute for other more expensive cementitious building materials. Concrete manufacturers can typically use fly ash as a substitute for 15% - 30% of their cement requirements, depending on the quality of the fly ash and the end-use of the concrete. In addition to its cost-benefit, fly ash provides greater structural strength and durability in applications such as road and dam construction. Bottom ash is utilized as an aggregate in concrete block construction and for road base construction. ISG's manufactured products division manages the production and sale of masonry mortars, block and stucco materials, as well as some of ISG's value-added technology products for the construction market. Key geographic areas of production and sales are Texas, California, Georgia, Florida and Louisiana. ISG utilizes high volumes of CCPs as ingredients in the mortars, blocks and stuccos that ISG produces. 3 ISG has developed and continues to develop new technologies to promote the use of CCPs. Projects currently in development and/or use include (i) rapid setting, high strength concretes for road repairs and other uses; (ii) fiber reinforced, non-autoclaved aerated concrete panels and block for residential and commercial construction; (iii) carbon fixation technology which utilizes chemical additives to increase the marketability of fly ash with high or unpredictable levels of residual carbon; and (iv) ammonia removal technology to remove ammonia from fly ash that has been contaminated by pollution control devices or natural operating conditions. Sources of Available Raw Materials and Inventory Requirements. Coal is the largest indigenous fossil fuel resource in the United States, with current U.S. annual coal production in excess of one billion tons. The use of coal to generate electricity has nearly tripled in the last 30 years. Today, coal generates over half of all electricity consumed in the U.S., more than all other fuel sources combined. The government estimates that electricity generated from coal will increase 25% by 2020. The combustion of coal results in a high percentage of residual materials which serve as the "raw material" for the CCP industry. According to the American Coal Ash Association, more than two-thirds of CCPs produced in 2000 were disposed of in landfills, providing ample opportunities for continuing increases in CCP utilization. As long as the majority of electricity in this country comes from the use of coal-fired generation, ISG believes it will have an adequate supply of raw materials. Competitive Business Conditions. Although ISG is the nation's leading manager and marketer of CCPs, ISG still faces significant competition. Such competitors include LaFarge North America, Boral, Holcim, Inc. and Mineral Resource Technologies. Although CCPs have been utilized since the mid-1960's, in recent years fly ash has seen greater acceptance in the construction industry. Fly ash is now widely used for its superior strength, durability, alkali resistance and environmental friendliness. ISG expects to continue to be a leader in this industry with its nation-wide infrastructure, long-term contractual relationships with existing utilities, and aggressive growth strategies. ISG's manufactured products division faces challenges from its many larger competitors in the mortar, stucco and construction materials industries. ISG intends to maintain its competitiveness and expand its operations through the development of unique proprietary formulas and by implementing aggressive marketing and distribution strategies. Electric Utility Deregulation. The process of electric utility deregulation has slowed substantially compared to predictions from previous years. The impact that full deregulation of the industry will have on ISG is something that cannot be accurately projected. The major area of impact concerns the individual sources of CCPs that ISG manages and markets. Deregulation could result in some sources being put out of service because they are not economically competitive. Alternatively, deregulation efforts have spurred renewed interest in the construction of new coal-fired electric generating facilities. ISG believes that no significant changes to the availability of CCPs will occur. However, since this change to the industry continues to evolve, ISG could be materially adversely affected if major changes occur. Covol Fuels Principal Products. Covol Fuels develops and applies proprietary technologies used to produce coal-based solid alternative fuel. As an operating division of Headwaters, Covol Fuels has developed, patented and commercialized a chemical technology that converts carbon-based feedstock, such as coal, to a qualified solid alternative fuel that is eligible for federal tax credits under Section 29 of the Internal Revenue Code. Covol Fuels licenses this technology to owners of solid alternative fuel facilities for which it receives royalty revenues. The owners of the solid alternative fuel facilities are eligible to receive federal tax credits based on the amount of qualified solid alternative fuel produced using Covol Fuels' technology. Covol Fuels has pioneered work with the IRS relating to Section 29 credits and obtained one of the first Private Letter Rulings from the IRS for a coal-based synthetic fuel process. Covol Fuels' in-house personnel work closely with customers to achieve compliance with IRS guidelines and to improve alternative fuel production. In addition to royalty revenues, Covol Fuels also sells its proprietary chemical reagents essential to the production of solid alternative fuels both to its licensee plants and to other customers' plants. In fiscal 2002, prior to its acquisition of ISG, Headwaters generated over 90% of its revenues through license fees from its technology and sale of chemical reagents to owners of solid alternative fuel facilities whose facilities were placed into service prior to July 1, 1998, qualifying them for Section 29 tax credits. Covol Fuels currently has technology licensing agreements with 28 alternative fuel facilities. Under the terms of the contracts, 4 Covol Fuels is generally paid a quarterly royalty fee based on either facility production or tax credits generated by the facilities. In certain instances, Covol Fuels was also paid initial license fees when certain events occurred or when certain production levels were reached. Sources of Available Raw Materials and Inventory Requirements. Covol Fuels' chemical reagents are manufactured by Dow Reichhold Specialty Latex LLC ("Dow") under a long-term, fixed-price supply contract. Covol Fuels relies on Dow through its several regional distribution centers to supply its licensees and customers with timely and adequate supplies of chemicals. Separately, the alternative fuel facility owners have unrelated feedstock agreements that provide a supply of raw coal for processing at their facilities. These licensees and customers in turn have production agreements to supply alternative fuel to end users (usually coal-fired electric generating facilities). Competitive Business Conditions. Covol Fuels' alternative fuel technologies compete with other alternative fuel products as well as traditional fuels. Competitive factors include price, quality, delivery cost, and handling costs. Covol Fuels may experience competition from other alternative fuel technology companies and their licensees, particularly those companies with technologies to produce coal-based solid alternative fuels. Competition may come in the form of the licensing of the competing technologies to process coal derivatives, the marketing of competitive chemical reagents, the marketing of end products qualifying as synthetic fuel, and the development of alternative fuel projects. Competition includes, for example, Nalco Chemical Company in the chemical reagent sales business. Headwaters also experiences competition from traditional coal and fuel suppliers and natural resource producers, in addition to those companies that specialize in the recycling and upgrading of industrial waste products. Many of these companies have greater financial, management, and other resources than Headwaters. Covol Fuels believes that it will be able to compete effectively, but there can be no assurance that it will be able to do so successfully. Major Customers. The following table presents revenues for all customers that accounted for over 10% of total revenue during 2000, 2001 or 2002. Most of the named customers are energy companies.
(thousands of dollars) 2000 2001 2002 ---------------------------------------- ----------------- ---------------- ----------------- TECO Coal Corporation affiliates Less than 10% $16,044 $20,292 DTE Energy Services, Inc. affiliates Less than 10% 5,111 19,660 Marriott International, Inc. affiliates Less than 10% Less than 10% 19,105 AIG Financial Products Corp. affiliates Less than 10% Less than 10% 16,900 PacifiCorp affiliates $15,511 4,978 Less than 10% Pace Carbon Fuels, L.L.C. affiliates Less than 10% 4,675 Less than 10% Fluor Corporation affiliate 3,138 Less than 10% Less than 10%
HTI HTI has developed catalyst and nano-catalyst technologies to convert coal, gas and heavy/waste oils to liquid fuels. The conversion from low to high value products also allows HTI to extract troublesome elements such as sulfur, nitrogen and heavy metals out of the fuel, resulting in ultra clean fuels. The development of nano-catalyst technology places HTI at the forefront of applying advanced molecular science to multiple energy and chemical processes. HTI maintains a staff of engineers, scientists, and technicians at its pilot plant and laboratory facilities with experience in the design and operation of high-pressure and temperature process plants. These facilities are used to further technology development efforts as well as for outside services provided to other companies and government agencies. Initially formed in 1943 as Hydrocarbon Research, Inc., HTI and its predecessor have a long history of developing and commercializing chemical and energy technologies. One of the core competencies developed by HTI is working at the molecular level to control how atoms of precious metals catalysts are fixed on substrate materials. Nanotechnology is one of the most significant advancements in catalysis technology during the past 20 years, and HTI is currently positioning to participate within this market through its research expertise and increasing portfolio of patents. 5 HTI offers technology for producing ultra-clean liquid fuels directly from coal. In this process, coal molecules are changed into diesel, gasoline and other fuel molecules, and sulfur, nitrogen, ash and other impurities are removed, leaving a very high grade liquid fuel. HTI has developed a patented technology to change complex heavy oil molecules into lighter molecules. The HTI process is a novel hydrocracking process using HTI's proprietary slurry catalyst and close-coupled hydrotreating to produce ultra-clean diesel fuel, jet fuel, gasoline or fuel oil. The technology can be applied in new or existing hydrocrackers. Commercialization of slurry-phase Fischer-Tropsch (F-T) technology is a major objective of both government and industry to provide the nation with adequate clean diesel fuels from indigenous fossil fuel resources. HTI has developed a novel skeletal-iron F-T catalyst specifically designed for slurry-phase reactors. It is stronger than conventional F-T catalysts and delivers improved economics, making F-T technology more competitive in the marketplace. Research and Development In 2001, research and development expenses consisted of $2,400,000 of acquired in-process research and development related to the HTI acquisition. The acquired in-process research and development consisted primarily of efforts focused on developing catalysts and catalytic processes to lower the cost of producing alternative fuels and chemicals while improving energy efficiency and reducing environmental risks. In 2002, research and development expenses of $2,322,000 consisted primarily of ongoing activities at HTI. In 2003, research and development expenses are expected to increase as a result of the ISG acquisition in late 2002. Headwaters' Business Strategy Headwaters' competitive strengths include: (i) pre- and post-combustion coal market leadership; (ii) strong cash flows; (iii) ability to provide comprehensive services along the coal value chain; (iv) nationwide capabilities and infrastructure; (v) development of leading energy technologies; (vi) strong growth profile driven by increasing market acceptance; (vii) responsiveness to industry demands; and (viii) the ability to provide products and services that address environmental concerns. Headwaters intends to capitalize on these strengths in pursuing the following strategic initiatives: Expand and Enhance Core Businesses. Headwaters intends to expand its coal-based alternative fuel business by expanding royalty and chemical reagent revenues by assisting customers to increase production and offering value-added services, such as technical and plant support, that drive increased production at facilities using its technology and chemical reagents. Headwaters believes ISG can increase the market penetration of fly ash and other CCPs in the concrete and other construction products industries through established and historically successful customer training programs. In addition, ISG intends to continue to provide CCP management services to current coal-fired utility customers and seek new service opportunities with other utilities. Leverage Complementary Relationships and Capabilities. Covol Fuels and ISG each maintains long-standing relationships with many of the nation's largest producers of electricity derived from coal. Most of these relationships are complementary, which Headwaters believes will provide significant opportunities to expand and strengthen its position among coal-fired power generation utilities. By leveraging these complementary relationships Headwaters intends to increase ISG's penetration with coal-fired power generation companies that are Covol Fuels' customers and to capitalize on ISG's numerous nationwide relationships with coal-fired power generation facilities to increase awareness and acceptance of Covol Fuels' coal-based solid alternative fuel technology. Develop and License New Energy Technologies. Headwaters intends to develop technologies that address various needs along the coal value chain, in particular in the pre-combustion and post-combustion stages, primarily for licensing, rather than building and owning manufacturing assets. As part of its pre-combustion strategy, Covol Fuels intends to continue to develop technologies that improve coal handling, enhance coal combustion characteristics and reduce air emissions. ISG is developing new technologies such as ammonia removal and carbon fixation, as well as proprietary chemical surfactant technology that increases both the quality and usefulness of fly ash from coal combustion. In addition to developing coal-based technologies, HTI is developing other technologies 6 that add value to other fossil fuels and chemicals. These efforts focus on upgrading heavy oil to lighter fuels, changing gas into liquid fuels, turning otherwise unusable products into fuels and other energy-related nanotechnologies. Pursue Complementary and Expansionary Acquisitions. Headwaters intends to identify and analyze additional acquisition opportunities to strengthen and fortify its position as a leading value enhancer to fuels. Specifically, Headwaters will evaluate possible acquisitions of complementary businesses aligned to the chemical, mineral, or energy industries in which Headwaters does business. If suitable candidates are not found in these industries, Headwaters may pursue possible acquisition candidates in other growing industries where promising financial returns exist. Intellectual Property ISG has 14 U.S. patents that expire between 2009 and 2018 and nine U.S. patent applications pending. ISG has 14 registered trademarks and two pending trademark applications. While these collective patents and trademarks are important to ISG's competitive position, no single patent or trademark is material to ISG. Covol Fuels has nine U.S. patents that expire between 2011 and 2014. Covol Fuels has one registered trademark and one pending trademark application. HTI has 16 U.S. patents that expire between 2011 and 2020 and 17 U.S. patent applications pending. HTI has two registered trademarks and one pending trademark application. There can be no assurance as to the scope of protection afforded by the patents. In addition, there are other technologies in use and others may subsequently be developed, which do not, or will not, utilize processes covered by the patents. There can be no assurance that Headwaters' patents will not be infringed or challenged by other parties or that Headwaters will not infringe on patents held by other parties. Because many of these patents represent new technology, the importance of the patents to Headwaters' business will depend on its ability to commercialize these technologies successfully, as well as its ability to protect its technology from infringement or challenge by other parties. In addition to patent protection, Headwaters also relies on trade secrets, know-how, and confidentiality agreements to protect these technologies. However, such methods may not afford complete protection and there can be no assurance that others will not independently develop such know-how or obtain access to Headwaters' know-how, concepts, ideas, and documentation. Since Headwaters' proprietary information is important to its business, failure to protect ownership of its proprietary information would likely have a material adverse effect on Headwaters. Headwaters' current revenues are dependent upon license fees and chemical sales. Headwaters believes that its patents, trade secrets, know-how and confidential information are the basis upon which it obtains and secures licensing agreements. Effect of Federal, State and Local Laws Headwaters and its subsidiaries are subject to federal, state, and local environmental regulations. Headwaters believes that it has obtained all required permits pertaining to its business and operations, and that it is in substantial compliance with all applicable laws. ISG. The Federal Clean Air Act of 1970 ("Clean Air Act"), Amendments to the Clean Air Act, and corresponding state laws regulating air emissions, affect the coal industry directly and indirectly. The coal industry may be directly affected by permitting requirements of the Clean Air Act and/or emissions control requirements relating to particulate matter (e.g., "fugitive dust"). The coal industry may also be impacted by future regulation of fine particulate matter. In July 1997, the United States Environmental Protection Agency ("EPA") adopted new, more stringent National Ambient Air Quality Standards ("NAAQS") for particulate matter and ozone. Because electric utilities emit nitrogen oxides, which are precursors to ozone, ISG's utility customers and suppliers are likely to be affected when the revisions to the NAAQS are implemented by the states. State and federal regulations, including the new NAAQS, may reduce the available quantities of CCPs. The extent of the potential impact of the NAAQS on the coal industry will depend on the policies and control strategies associated with the 7 state implementation process under the Clean Air Act. Nonetheless, the NAAQS could have a material adverse effect on ISG's financial condition and operations. The Clean Air Act indirectly affects ISG's operations by limiting the air emissions of sulfur dioxides, nitrous oxides, and other compounds emitted by coal-fired utility power plants. The affected utilities have been (or may be) able to meet these requirements by switching to lower sulfur fuels, installing new more efficient equipment and pollution control devices such as scrubbers, reducing electricity generating levels, or purchasing or trading "pollution credits." Specific emission sources will receive these credits, which utilities and other industrial concerns can trade or sell to allow other units to emit higher levels of sulfur dioxide. The Clean Air Act Amendments also require utilities that are currently major sources of nitrogen oxides in moderate or higher ozone nonattainment areas, to install reasonably available control technology for nitrogen oxides. In addition, the EPA currently plans to implement stricter ozone standards (discussed above) by 2004. EPA promulgated a rule (the "SIP call") in 1998 requiring 22 eastern states to make substantial reductions in nitrogen oxide emissions. Under this proposal, the EPA expects that states will achieve these reductions by requiring power plants to make substantial reductions in their nitrogen oxide emissions. Installation of reasonably available control technology and additional control measures required under the SIP call will make it more costly to operate coal-fired utility power plants and could make coal a less attractive fuel alternative in the planning and building of future utility power plants. Any reduction in coal-fired power generation could have a material adverse effect on ISG's financial condition and operations. ISG cannot predict the effect of these regulations on the coal industry with any certainty. No assurance can be given that the implementation of the Clean Air Act Amendments or any future regulatory provisions will not materially adversely affect ISG. As utilities take steps to meet more stringent emissions control guidelines, residual carbon in fly ash becomes a growing problem for ISG. ISG cannot fully utilize this lower quality fly ash in some products and applications. Therefore, ISG has pursued research and development technologies to develop a carbon fixation process to treat fly ash that could not otherwise be used due to its quality. This technology renders some ash products usable for the first time without having any negative impact on the quality of the finished concrete product. ISG is successfully working with several utilities utilizing this technology. ISG has also filed a provisional patent application for a technology to control ammonia in fly ash. Ammonia is another emerging challenge in the ash industry. As utilities implement more stringent air pollution controls, many are treating boiler exhaust gases with ammonia to remove nitrous oxides. Some of the unreacted ammonia is deposited on fly ash particles. To address this challenge, ISG's technology uses a chemical reagent to convert ammonia into harmless compounds. ISG is currently working with two utilities to implement the technology. Covol Fuels. Covol Fuels and the alternative fuel operations of its licensees are subject to federal, state and local environmental regulations that impose limitations on the discharge of pollutants and establish standards for the treatment, storage and disposal of waste materials. In order to establish and operate alternative fuel plants, Covol Fuels and its licensees have obtained various state and local permits. In processing alternative fuel from coal, acid is the only hazardous material which is used and stored. Despite safeguards, the possibility exists that regulatory noncompliance or accidental discharges could create an environmental liability. Therefore, alternative fuel operations owned or operated by Covol Fuels and its licensees could incur future liabilities arising from the discharge of pollutants into the environment or from improper waste disposal practices. In addition, the enactment of more stringent environmental regulations, or failure to maintain or comply with such regulations, could have a material adverse effect on Covol Fuels or its licensees. HTI. HTI and its subsidiaries are also subject to federal, state, and local environmental regulations. HTI and its subsidiaries use their facilities in the ordinary course of business to research, develop, process and/or recycle waste coal, oil and chemicals. As a result, petroleum and other hazardous materials have been and continue to be present on these properties. HTI and its subsidiaries hire independent contractors to transport and dispose of hazardous materials and to send hazardous wastes to federally approved off-site waste facilities. HTI and its subsidiaries believe that appropriate handling and training procedures are in effect for all properties and operations. Despite safeguards, the possibility exists that regulatory noncompliance or accidental discharges could create an environmental liability. Therefore, operations owned or operated by HTI and its subsidiaries could incur future 8 liabilities arising from the discharge of pollutants into the environment or from improper waste disposal practices. In addition, the enactment of more stringent environmental regulations, or failure to maintain or comply with such regulations, could have a material adverse effect on HTI and its subsidiaries. Headwaters is also subject to federal and state safety and health standards. Therefore, Headwaters is committed to providing effective management of worker safety and health protection. In addition, Headwaters has developed safety policies designed to raise and maintain safety awareness by management and employees. Headwaters has a positive working relationship with MSHA. Failure by Headwaters and its customers and licensees to comply with safety and health standards could have a material adverse affect on business operations. For example, a regulatory inspector could close an alternative fuel facility until the licensee meets the required standards. Number of Employees Headwaters currently employs approximately 840 employees full-time. Of these employees, approximately 60 are in corporate administration, 50 are employed by Headwaters' Covol Fuels division, 40 are employed by HTI, 500 are employed by ISG's CCP division, and 190 are employed by ISG's manufactured products division. Approximately 20 employees work under collective bargaining agreements (primarily laborers, equipment operators and truck drivers in Iowa). ITEM 2. PROPERTIES Headwaters Headwaters' principal office is located at 11778 South Election Road, Suite 210, Draper, Utah 84020, and its telephone number is (801) 984-9400. Headwaters' web site is www.hdwtrs.com. The information on Headwaters' website does not constitute a part of this document. In October 2000, Headwaters leased for a five-year term approximately 7,000 square feet of office space in Draper, Utah, which houses Headwaters' executive offices. The lease provides for a monthly rent of approximately $8,000, with certain adjustments for inflation plus expenses. By February 2003, Headwaters will have consolidated corporate and other business functions in a new location at 10653 South River Front Parkway, Suite 300, South Jordan, Utah 84095. This new lease for approximately 26,500 square feet provides for a six-year term. The monthly rent will be approximately $40,000, with certain adjustments for inflation plus expenses. ISG ISG's principal office is located at 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111, and its telephone number is (801) 236-9700. ISG's website is www.isgresources.com. The information on ISG's website does not constitute a part of this document. ISG currently leases approximately 13,400 square feet on a month-to-month basis for its executive offices in Salt Lake City, Utah. The lease provides for a monthly rent of approximately $18,000, with certain adjustments for inflation plus expenses. It is expected that ISG will terminate this lease in early 2003. ISG also leases property in three states for regional offices and laboratory facilities. In addition, ISG owns or leases approximately 20 parcels in 17 states for its fly ash storage and distribution operations. ISG also owns or leases nine properties in three states for its building products manufacturing and sales operations. HTI In 1995, HTI purchased approximately six acres in Lawrenceville, New Jersey, where its headquarters and research facilities are now located. 9 ITEM 3. LEGAL PROCEEDINGS Headwaters has some significant ongoing litigation discussed below. Headwaters intends to vigorously defend and pursue its rights in these actions. Adtech. In October 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to an alternative fuel technology invented by Davidson. (This technology is distinct from the technology developed by Headwaters.) In September 2000, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee filed by Adtech, Inc. against Davidson and Headwaters. In the action, certain purported officers and directors of Adtech alleged that the technology purchase transaction was an unauthorized corporate action and that Davidson and Headwaters conspired together to effect the transfer. The complaint asserted related causes of action and sought unspecified money damages and other relief. In August 2001, the trial court granted Headwaters' motion to dismiss the complaint. Plaintiffs appealed the case to the Sixth Circuit Court of Appeals. In June 2002, the Sixth Circuit Court of Appeals issued an order i) affirming the District Court's judgment and order of dismissal, and ii) transferring to the Federal Circuit Court of Appeals plaintiff's appeal of the District Court's order denying the motion for relief from judgment. Because resolution of the appeal is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters' liability. Boynton. This action is factually related to the Adtech matter. In the Adtech case, the alleged claims are asserted by certain purported officers and directors of Adtech, Inc. In the Boynton action, the allegations arise from the same facts, but the claims are asserted by certain purported stockholders of Adtech. In June 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee alleging, inter alia, fraud, conspiracy, constructive trust, conversion, patent infringement, and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. The complaint seeks declaratory relief and compensatory and punitive damages. Because the litigation is at an early stage and resolution is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters' liability. AGTC. In March 1996, Headwaters entered into an agreement with AGTC and its associates for certain services related to the identification and selection of alternative fuel projects. In March 2002, AGTC filed an arbitration demand claiming that it is owed a commission under the 1996 agreement for eight percent of the monetized price of the Port Hodder project. Headwaters asserts that AGTC did not perform under the agreement and that the agreement was terminated and the disputes were settled in July 1996. Headwaters has filed an answer in the arbitration, denying AGTC's claims and has asserted counterclaims against AGTC. Because the arbitration is at an early stage and resolution is uncertain, legal counsel cannot express an opinion as to the ultimate amount of recovery or liability. AJG. In December 1996, Headwaters entered into a technology license and proprietary chemical reagent sale agreement with AJG Financial Services, Inc. The agreement called for AJG to pay royalties and to purchase proprietary chemical reagent material from Headwaters. In October 2000, Headwaters filed a complaint in the Fourth District Court for the State of Utah against AJG alleging that it had failed to make payments and to perform other obligations under the agreement. Headwaters asserts claims including breach of contract, declaratory judgment, unjust enrichment, and accounting and seeks money damages as well as other relief. AJG's answer to the complaint denied Headwaters' claims and asserted counter-claims based upon allegations of misrepresentation and breach of contract. AJG seeks unspecified compensatory damages as well as punitive damages. Headwaters has denied the allegations of AJG's counter-claims. Because the litigation is at an early stage and resolution is uncertain, legal counsel cannot express an opinion as to the ultimate amount of recovery or liability. Nalco. In October 2000, Headwaters filed a complaint in the United States District Court for the District of Utah against Nalco Chemical Company ("Nalco"). Headwaters alleges that Nalco, by its sale and marketing of materials for use in creating alternative fuel, breached a non-disclosure agreement, misappropriated trade secrets, and violated patent rights of Headwaters. Headwaters seeks by its complaint injunctive relief and damages to be proven at trial. Nalco filed an answer denying the allegations in the complaint and asserting counter-claims alleging patent invalidity, antitrust violations, and interference with economic relations. Headwaters denies the counter-claims; however, if Nalco prevails on its counter-claims, the result could have a material adverse effect on 10 Headwaters' business. Because the litigation is at an early stage and resolution is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, that might be recovered. Other. Headwaters and its subsidiaries are also involved in other legal proceedings that have arisen in the normal course of business. For example, certain subsidiaries of ISG are involved in legal proceedings involving allegations of breach of warranty and sales of defective building products applied by third parties to building exteriors. Generally, ISG denies and defends such allegations or resolves such matters as appropriate. Management does not believe that the outcome of these matters will have a significant adverse effect upon the operations or the financial position of Headwaters; however, it is possible that a change in management's estimates of probable liability could occur and the change could be significant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The shares of Headwaters' common stock trade on the Nasdaq National Market under the symbol "HDWR." Options on Headwaters' common stock are traded on the Chicago Board Options Exchange under the symbol "HQK." The following table sets forth, for the periods presented, the high and low trading prices of Headwaters' common stock as reported by Nasdaq. Fiscal 2001 Low High ----------- --- ---- Quarter ended December 31, 2000 $2.13 $ 3.25 Quarter ended March 31, 2001 2.25 6.53 Quarter ended June 30, 2001 6.44 16.00 Quarter ended September 30, 2001 7.11 14.19 Fiscal 2002 ----------- Quarter ended December 31, 2001 $ 9.00 $13.10 Quarter ended March 31, 2002 11.16 15.55 Quarter ended June 30, 2002 11.37 19.15 Quarter ended September 30, 2002 11.87 16.74 As of November 30, 2002, there were approximately 410 stockholders of record of Headwaters' common stock. Headwaters has not paid dividends on its common stock to date and does not intend to pay dividends on its common stock in the foreseeable future. Pursuant to debt agreements Headwaters entered into in September 2002, Headwaters is prohibited from paying cash dividends so long as any of the long-term debt is outstanding. Headwaters intends to retain earnings to finance the development and expansion of its business. Payment of common stock dividends in the future will depend, among other things, upon Headwaters' debt covenants, its ability to generate earnings, its need for capital, its investment opportunities and its overall financial condition. Recent Sales of Unregistered Securities The following sets forth all securities issued by Headwaters within the past three years without registration under the Securities Act of 1933, as amended. No underwriters were involved in any stock issuances nor were any commissions paid in connection therewith. However, Headwaters did pay finders fees in the form of cash, stock or warrants in connection with various securities issuances. 11 Headwaters believes that the following issuances of securities were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to the exemption set forth in Section 4(2) thereof. Each security was issued subject to transfer restrictions. Each certificate for each security bears a restricted legend. Each investor made representations to Headwaters that it was accredited as that term is defined in Regulation D and that the security was acquired for investment purposes. However, Headwaters has several effective registration statements filed on Form S-3 or Form S-8. These registration statements have registered many of the securities described in this section. During November 1998, Headwaters completed a financing transaction that consisted of debt and equity including warrants to purchase shares of restricted common stock at an exercise price of $7.50 per share. The warrants' original term was set to expire on June 30, 2000. During 2000 the exercise period for the purchase of approximately 183,000 of these warrant shares was extended for approximately seven months. During January 1999, Headwaters completed a financing transaction with a major shareholder and lender to Headwaters, that consisted of the sale of 1,000 shares of a new series of non-voting, 7% dividend, convertible preferred stock, designated as Series C. Headwaters received approximately $900,000 in net proceeds from the issuance of this preferred stock. During January 2000, all of the remaining shares of Series C preferred stock were converted. Approximately 237,000 shares of common stock were issued on conversion of the preferred stock and related accrued but unpaid dividends. There are no outstanding shares of Series C preferred stock. On March 17, 1999, Headwaters completed a financing transaction with a large investment fund. The financing consisted of the issuance of $20,000,000 face value of convertible secured debt, issued at a 50% discount, and the issuance of 60,000 shares of cumulative convertible preferred stock (Series D) for $6,000,000, for total gross proceeds of $16,000,000. Warrants for the purchase of common stock were also issued as part of the financing and were valued at approximately $3,000,000. Net cash proceeds were used to retire maturing short-term debt and related accrued interest, for working capital and other general corporate purposes. This transaction is described in detail in the Form 8-K filed March 24, 1999 and in the Form 10-Q/A for the quarterly period ended March 31, 1999. Beginning in November 1999 and through March 2000, Headwaters issued approximately 2,632,000 shares of common stock on conversion of 24,369 shares of Series D preferred stock. The preferred stock was convertible at $5.00 or 90% of market, whichever was less. By May 2000, Headwaters had redeemed all of the investment fund's $20,000,000 face value convertible debt and incurred early prepayment costs of approximately $6,037,000. By March 2000, Headwaters had redeemed the investment fund's 35,631 remaining Series D preferred shares for $4,454,000 including a redemption premium of approximately $1,882,000. There are no outstanding shares of Series D preferred stock. In December 1999, Headwaters placed $1,500,000 of financing less a 10% placement fee with an investor. The debt was convertible at $0.73 per share, the market price at closing, or market price on the conversion date, whichever was less. In January 2000, Headwaters redeemed all of this convertible debt for redemption consideration of approximately $1,900,000 plus 205,435 shares of common stock. The agreement required the issuance of warrants to purchase Headwaters shares equal to 40% of the shares issuable under the debt agreement. Warrants for the purchase of approximately 923,000 shares were issued. The warrants had a three-year exercise period and an exercise price of $0.88 per share. In March 2000, Headwaters completed a private placement financing transaction by selling to 49 investors approximately 3,629,000 shares of restricted Headwaters common stock, $0.001 par value, at a price of $1.36 per share, yielding to Headwaters $4,666,000, net of $270,000 in placement costs. The investors received registration rights for the stock purchased. In April 2000, Headwaters completed a private placement financing transaction by selling to one of its directors and three officers a total of approximately 379,000 shares of restricted Headwaters common stock, $0.001 par value, at a price of $1.56 per share and warrants for the purchase of approximately 133,000 shares of common stock, for net cash proceeds to Headwaters of approximately $588,000. The warrants are exercisable through March 2005 at a price of $1.56 per share. The investors received registration rights for the stock purchased and the warrant shares. In April 2000, an investor acquired from a third party a Headwaters' 14% note due in April 2000 with an approximate $3,000,000 balance and at the same time also acquired from the third party warrants to purchase 12 100,000 shares of Headwaters' common stock. Headwaters and the investor agreed to extend for one year the repayment date for $1,000,000 of the principal amount of the note. Headwaters and the investor further agreed to the satisfaction of $2,000,000 of the note in exchange for 1,185,818 shares of Headwaters restricted common stock, $0.001 par value, and warrants to purchase 296,000 shares of Headwaters' common stock. The warrants were exercised in fiscal 2002 at a price of $2.10 per share. In July 2000, Headwaters repaid the $1,000,000 note balance which was accruing interest at 14%. A former director of Headwaters was also a manager and 2.5% owner of the investor. The director disclaims any beneficial interest in the investor's securities in Headwaters. During the fiscal year ended September 30, 2001, pursuant to the exercise of options, approximately 116,000 shares of Headwaters restricted common stock were issued. In August 2001, Headwaters acquired 100% of the common stock of HTI for total costs at closing of approximately $11,774,000, including the issuance of approximately 593,000 shares of Headwaters restricted common stock, valued at $5,485,000. In April 2002, Headwaters and the former HTI stockholders reached a final settlement of all outstanding contingent payments and Headwaters paid the former HTI stockholders additional consideration with a value totaling $3,242,000. This consideration included the issuance of approximately 178,000 shares of Headwaters restricted common stock valued at $2,823,000. Headwaters filed a registration statement on Form S-3 to register all of the restricted stock issued to the former HTI stockholders. In September 2002, Headwaters acquired 100% of the common stock of ISG. Total consideration at closing was approximately $257,856,000 and included the issuance of 2,100,000 shares of Headwaters restricted common stock valued at $32,718,000. Headwaters filed a registration statement on Form S-3 to register all of the restricted common stock issued to the former ISG stockholders. In order to obtain the cash necessary to acquire ISG and retire the ISG debt, Headwaters issued $175,000,000 of new debt consisting of $155,000,000 of senior secured debt with a five-year term and a variable interest rate and $20,000,000 of subordinated debt with an approximate five-year term and a fixed interest rate. ISG management participated in one-half, or $10,000,000, of the subordinated debt. Total cash proceeds from the issuance of new debt, net of debt discounts, was $169,950,000. Headwaters incurred approximately $6,200,000 of debt issuance costs to place the new debt, which had an initial combined effective weighted-average interest rate of approximately 9.0%. During the fiscal year ended September 30, 2002, pursuant to the exercise of options and warrants, approximately 646,000 shares of Headwaters restricted common stock were issued. Headwaters has several outstanding effective registration statements filed on Form S-3 and Form S-8. All but approximately 6,000 shares of restricted common stock issued during fiscal 2002 have been registered on one or more of these registration statements. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are derived from the consolidated financial statements of Headwaters. This information should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein. As more fully described in Note 14 to the consolidated financial statements, in 2000 Headwaters recorded approximately $16.9 million of net gains on sale of facilities and approximately $17.8 million of asset write-offs and other charges. Headwaters believes these items are not directly related to its core business and does not expect similar items in the future. As more fully described in Note 14 to the consolidated financial statements, in 2000 Headwaters recorded an extraordinary loss on early extinguishment of debt of $7.9 million. As more fully described in Note 12 to the consolidated financial statements, in 2000 and 2001, Headwaters recorded approximately $3.0 million and $7.5 million, respectively, of income tax benefit primarily related to the reduction of its deferred tax asset valuation allowance. Also, as more fully described in Note 3 to the consolidated financial statements, in August 2001, Headwaters acquired HTI, the financial statements of which are consolidated with Headwaters' financial statements using a one-month lag. Accordingly, HTI's August 2001 acquisition date balance sheet was consolidated with Headwaters' September 30, 2001 balance sheet, but no results of operations of HTI were included in Headwaters' consolidated results for fiscal 2001. HTI's August 31, 2002 balance sheet was consolidated with Headwaters' September 30, 2002 balance sheet and HTI's results of operations for the year ended August 31, 2002 were consolidated with Headwaters' 2002 results. As more fully described in Note 3 to the consolidated financial 13 statements, in September 2002, Headwaters acquired ISG. The results of ISG from September 19, 2002 (date of acquisition) through September 30, 2002 are included in Headwaters' consolidated results for fiscal 2002, but ISG's results of operations up to September 18, 2002 have not been included in Headwaters' consolidated results for any period. The selected financial data as of and for the years ended September 30, 1998 and 1999 and as of September 30, 2000 are derived from audited financial statements not included herein. The selected financial data as of September 30, 2001 and 2002 and for the years ended September 30, 2000, 2001, and 2002 were derived from the audited financial statements of Headwaters included elsewhere herein.
Year Ended September 30, ----------------------------------------------------------------- (thousands of dollars, except per-share data) 1998 1999 2000 2001 2002 - ------------------------------------------------- ------------ ------------ ------------ ------------ ------------- OPERATING DATA: Total revenue $ 2,186 $ 6,719 $27,886 $45,464 $119,345 Net income (loss) (11,308) (28,393) 3,682 21,517 24,286 Diluted net income (loss) per common share (1.17) (2.39) 0.07 0.87 0.94 As of September 30, ----------------------------------------------------------------- (thousands of dollars) 1998 1999 2000 2001 2002 - ------------------------------------------------- ------------ ------------ ------------ ------------ ------------- BALANCE SHEET DATA: Working capital (deficit) $ 6,575 $ (2,721) $ 8,393 $ 8,619 $ 15,023 Net property, plant and equipment 15,809 14,182 552 2,680 50,549 Total assets 68,061 58,095 33,441 55,375 372,857 Long-term obligations: Long-term debt and other liabilities 14,879 18,422 5,235 3,055 154,984 Unamortized portion of non-refundable license fees 7,455 6,579 7,681 5,805 5,010 Redeemable convertible preferred stock -- 4,332 -- -- -- Deferred income taxes -- -- -- -- 51,357 Total long-term obligations 23,256 30,255 12,916 8,860 211,351 Total stockholders' equity (deficit) 14,746 (1,028) 10,747 31,086 98,596
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the information set forth under the caption entitled "ITEM 6. SELECTED FINANCIAL DATA" and the consolidated financial statements and notes thereto included elsewhere herein. Headwaters' fiscal year ends on September 30 and unless otherwise noted, all future references to years shall mean Headwaters' fiscal year rather than a calendar year. Acquisitions of ISG and HTI The consolidated financial statements include the accounts of Headwaters and all of its subsidiaries, only two of which have significant operations, ISG and HTI. As more fully described in Note 3 to the consolidated financial statements, ISG was acquired on September 19, 2002 and HTI was acquired in August 2001. Accordingly, ISG's results of operations for the period from September 19, 2002 through September 30, 2002 have been consolidated with Headwaters' 2002 results and ISG's balance sheet has been consolidated with Headwaters' balance sheet as of September 30, 2002. Due to the time required to obtain accurate financial information related to HTI's foreign contracts, for financial reporting purposes HTI's financial statements are consolidated with Headwaters' financial statements using a one-month lag. Accordingly, HTI's August 2001 acquisition date balance sheet was consolidated with Headwaters' September 30, 2001 balance sheet, but no results of operations of HTI were included in the consolidated statement of income for 2001. HTI's August 31, 14 2002 balance sheet was consolidated with Headwaters' September 30, 2002 balance sheet and HTI's results of operations for the year ended August 31, 2002 were consolidated with Headwaters' 2002 results. ISG Acquisition. On September 19, 2002, Headwaters acquired 100% of the common stock of ISG, assumed or paid off all of ISG's outstanding debt and redeemed all of ISG's outstanding preferred stock. ISG is headquartered in Salt Lake City, Utah and is engaged primarily in the management of long-term contracts for coal combustion products and the distribution of related building materials and construction products throughout the United States, all through its wholly-owned subsidiary, ISG Resources, Inc. Headwaters has focused on using technology to add value to fossil fuels, particularly coal. The acquisition of ISG provides Headwaters with a significant position in the last step of the coal value chain due to its competencies in managing the products resulting from the combustion of coal. The acquisition of ISG also brings to Headwaters substantial management depth, comprehensive corporate infrastructure and critical mass in revenues and operating profit. In order to obtain the cash necessary to acquire ISG and retire ISG's outstanding debt, Headwaters issued $175.0 million of new debt consisting of $155.0 million of senior secured debt with a five-year term and a variable interest rate and $20.0 million of subordinated debt with an approximate five-year term and a fixed interest rate (see Note 8 to the consolidated financial statements). ISG management participated in one-half, or $10.0 million, of the subordinated debt. Total cash proceeds from the issuance of new debt, net of debt discounts, was $169.9 million. Headwaters incurred approximately $6.2 million of debt issuance costs to place the new debt, which had an initial combined effective weighted-average interest rate of approximately 9.0%. Total consideration paid for ISG was approximately $257.9 million, which consisted of the issuance of Headwaters' common stock, cash payments to the former ISG stockholders, cash paid to retire ISG debt, and costs directly related to the acquisition. The ISG acquisition was accounted for using the purchase method of accounting as required by Statement of Financial Accounting Standards ("SFAS") No.141, "Business Combinations." Assets acquired and liabilities assumed were recorded at their estimated fair values as of September 19, 2002. Approximately $109.2 million of the purchase price was allocated to identifiable intangible assets consisting primarily of contracts with coal-fired power generation plants. This amount is being amortized over the estimated combined useful life of 20 years. The remaining purchase price not attributable to the tangible and identifiable intangible assets (approximating $109.1 million) was allocated to goodwill. The final allocation of the purchase price, in particular the estimated fair values for certain acquired property, will likely differ from the preliminary allocation after final valuations and other procedures have been completed. HTI Acquisition. In August 2001, Headwaters completed the acquisition of 100% of the common stock of HTI, a New Jersey-based company. HTI develops and commercializes catalysts and catalytic processes for producing chemicals and converting low-value fossil fuels into high-value alternative fuels. Total consideration at closing, including the direct costs incurred by Headwaters to consummate the acquisition, was approximately $11.8 million. In accordance with the original HTI acquisition agreements, additional contingent consideration could be earned by the former HTI stockholders during calendar 2002 based on the attainment of certain operating targets and other milestones. In April 2002, Headwaters and the former HTI stockholders agreed to an amendment of the acquisition agreements and reached a final settlement of all outstanding contingent payments. Headwaters paid the former HTI stockholders additional consideration with a value totaling approximately $3.2 million. Total consideration paid for HTI was therefore approximately $15.0 million, which consisted of the issuance of Headwaters' common stock and options to acquire Headwaters common stock, cash payments to the former HTI stockholders, cash paid to retire HTI debt, and costs directly related to the acquisition. The HTI acquisition was accounted for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. Approximately $9.7 million of the purchase price was allocated to identifiable intangible assets consisting of existing patented technology with an estimated useful life of 15 years. Approximately $2.4 million of the purchase price was allocated to purchased in-process research and development, consisting primarily of efforts focused on developing catalysts and catalytic processes to lower the cost of producing alternative fuels and chemicals while improving energy efficiency and reducing environmental risks. This amount represented the estimated purchased in-process technology for projects that had not reached technological feasibility and had no alternative use as of the acquisition date, and was expensed in 2001. Approximately $4.3 million of the purchase price was allocated to goodwill. Segments. Until Headwaters acquired ISG in September 2002, Headwaters operated in and reported as a single industry segment, alternative energy. With the acquisition of ISG in September 2002, Headwaters now operates 15 in three business segments, alternative energy, CCPs, and manufactured products. These segments are managed and evaluated separately by management based on fundamental differences in their operations, products and services. The alternative energy segment includes Headwaters' traditional coal-based solid alternative fuel business and HTI's business of developing and commercializing catalysts and catalytic processes for producing chemicals and converting low-value fossil fuels into high-value alternative fuels. Revenues for this segment include primarily sales of chemical reagents and license fees. The CCP segment includes ISG's business of supplying post-combustion services and technologies to the coal-fired electric utility industry. This segment markets and manages coal combustion products such as fly ash and bottom ash, known as CCPs. ISG has long-term contracts, primarily with coal-fired electric generating utilities, pursuant to which it manages the post-combustion operations for the utilities. ISG markets these CCPs to replace manufactured or mined materials, such as portland cement, lime, agricultural gypsum, fired lightweight aggregate, granite aggregate and limestone. CCP revenues consist primarily of the sale of products, along with a small percentage of service revenue. The manufactured products segment produces and sells standard masonry and stucco construction materials and supplies, packaged products and blocks, as well as some of ISG's value-added technology products. ISG has introduced high volumes of CCPs as ingredients in the mortars, stuccos and blocks that the manufactured products segment produces. Critical Accounting Policies and Estimates Headwaters' significant accounting policies are identified and described in Note 2 to the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Headwaters continually evaluates its policies and estimation procedures. Estimates are often based on historical experience and on assumptions that are believed to be reasonable under the circumstances, but which could change in the future. Some of Headwaters' accounting policies and estimation procedures require the use of substantial judgment and actual results could differ materially from the estimates underlying the amounts reported in the consolidated financial statements. The following is a discussion of these critical accounting policies and estimates. License Fee Revenue Recognition. There are 28 alternative fuel facilities that are currently licensed to use Headwaters' patented technology and from which Headwaters earns license fees. These recurring license fees or royalty payments are recognized in the period when earned, which generally coincides with the sale of alternative fuel by Headwaters' licensees. In certain instances, Headwaters receives timely regular written reports from licensees notifying Headwaters of the amount of solid alternative fuel sold and the royalty due Headwaters under the terms of the respective license fee agreements. Moreover, in most instances, Headwaters has experienced a regular pattern of payment by the licensees of these reported amounts due. Generally, estimates of license fee revenue earned, where required, can be reliably made based upon historical experience and / or communications from licensees for whom an established pattern exists. In some cases, however, such as when a licensee is beginning to produce and sell alternative fuel or when an alternative fuel facility is sold by a licensee to another entity, and for which there is no pattern or knowledge of past or current production and sales activity, there may be more limited information upon which to determine an estimate of license fee revenue earned. In these situations, Headwaters uses such information as is available and where possible, attempts are made to substantiate the information, such as observing the levels of chemical reagents purchased by the licensee and used in the production of the solid alternative fuel. In certain limited situations, Headwaters is unable to reliably estimate the license fee revenues earned during a period, and therefore revenue recognition is delayed until a future date when sufficient information is known from which to make a reasonable estimation. Realizability of Receivables. Allowances are provided for uncollectible accounts and notes receivable when deemed necessary. Such allowances are based on an account-by-account analysis of collectibility or impairment and totaled approximately $0 at September 30, 2001 and approximately $0.4 million at September 30, 2002 for trade receivables and $0 at September 30, 2001 and 2002 for notes receivable. Headwaters performs periodic credit evaluations of its customers, but collateral is not required for trade receivables. Collateral, generally consisting of most or all assets of the debtor, is required for notes receivable. 16 With regard to Headwaters' trade receivables from the alternative energy segment, past allowances have been minimal as have any required write-offs. Trade receivables from the CCP and manufactured products segments involve substantially more customers and receivable allowances are required. Headwaters reviews the collectibility of its trade receivables as of the end of each reporting period. Losses recognized on notes receivable were $0 in 2000, approximately $3.7 million in 2001 and approximately $0.7 million in 2002. Because the notes generally relate to nonoperating activities, these losses are included in other expense in the consolidated statements of income. The losses on receivables in 2001 consisted entirely of write-offs or impairments of notes receivable from unrelated high-risk entities which Headwaters loaned funds to in late fiscal 2000 and early fiscal 2001, which amounts were determined to be uncollectible or worthless. Headwaters no longer makes these loans, and in September 2001, Headwaters sold all its remaining loans and equity investments in these entities to a limited liability corporation, in exchange for a $4,000,000 note receivable, due no later than September 2004. This note is being accounted for on the cost recovery basis. Headwaters reviews collectibility of this note receivable at the end of each reporting period. This collectibility review consists of consideration of payments of required interest and principal and the sufficiency of the collateral to support the outstanding note receivable balance. To the extent impairment is indicated, Headwaters writes down the note receivable to its estimated net realizable value at that time. An impairment loss of approximately $1.0 million was recorded in 2002 due to a decline in the value of the underlying collateral. Headwaters considers its receivable allowances adequate as of September 30, 2002; however, changes in economic conditions generally or in specific markets in which Headwaters operates could have a material effect on required reserve balances. Valuation of Long-Lived Assets, including Intangible Assets and Goodwill. Headwaters periodically evaluates the carrying value of long-lived assets, including intangible assets and goodwill, as well as the related amortization periods, to determine whether adjustments to these amounts or to the useful lives are required based on current events and circumstances. Changes in circumstances such as technological advances, changes to Headwaters' business model or changes in Headwaters capital strategy could result in the actual useful lives differing from Headwaters' current estimates. In those cases where Headwaters determines that the useful life of property, plant and equipment or intangible assets should be shortened, Headwaters would amortize the net book value in excess of salvage value over its revised remaining useful life, thereby increasing depreciation or amortization expense. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flow from that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Impairment-related losses recognized in Headwaters' consolidated statement of income for 2000 are more fully described in Note 14 to the consolidated financial statements. There were no losses recorded in 2001 or 2002. Indicators of impairment include such things as a significant adverse change in legal factors or in the general business climate or an expectation that significant assets will be sold or otherwise disposed of. Beginning in 2003, Headwaters will perform periodic impairment tests of its intangible assets, most of which were acquired in connection with the acquisitions of ISG and HTI, in accordance with the requirements of SFAS No. 142, "Accounting for Goodwill and Intangible Assets." The new rules require, among other things, that goodwill be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of the reporting unit giving rise to the goodwill. Headwaters currently believes that neither the ISG- nor HTI-related identifiable intangible assets and goodwill are impaired under either the existing rules for testing impairment, or under the new rules required by SFAS No. 142. Identified intangible assets consist primarily of ISG long-term contracts and HTI patented technology. It is possible that some of Headwaters' tangible or intangible long-lived assets or goodwill could be impaired in the future and that the resulting write-downs could be material. Legal Matters. Headwaters is involved in several legal proceedings that have arisen out of the normal course of business, all as explained in more detail in "ITEM 3. LEGAL PROCEEDINGS" and Note 15 to the consolidated financial statements. Of the five primary legal matters described in Note 15, Headwaters is a defendant in three cases, and both a plaintiff and defendant in two cases. Management in all cases intends to vigorously defend its position. Management does not currently believe that the outcome of these activities will have a significant effect upon the operations or the financial position of Headwaters; however, it is possible that a change in management's estimates of probable liability could occur and the change could be significant. In regards to all of these legal matters, legal counsel cannot express an opinion as to the ultimate amounts of recovery or liability. 17 Year Ended September 30, 2002 Compared to Year Ended September 30, 2001 The information set forth below compares Headwaters' operating results for fiscal 2002 with its operating results for fiscal 2001. Revenue. Total revenue for 2002 increased by $73.8 million or 162% to $119.3 million as compared to $45.5 million for 2001. The major components of revenue are discussed in the sections below. Chemical Reagent Sales. Chemical reagent sales during 2002 were $74.4 million with a corresponding direct cost of $50.1 million. Chemical reagent sales during 2001 were $22.4 million with a corresponding direct cost of $14.5 million. The increase in chemical reagent sales in 2002 over 2001 was due to increased alternative fuel production by Headwaters' licensees, as well as sales of chemical reagents to new customers. Currently, Headwaters expects its future chemical reagent sales revenue from all licensees and other customers to be higher than the amounts reported for 2002 due to anticipated increases in alternative fuel production by licensees and increased sales of chemical reagents to new customers. However, Headwaters does not expect the rate of growth in 2003 to be as high as it was for 2002. License Fees. During 2002, Headwaters recognized license fee revenue totaling $30.5 million, an increase of $9.7 million or 47% over $20.8 million of license fee revenue recognized during 2001. License fees in 2002 consisted of recurring license fees or royalty payments of $29.0 million and deferred revenue amortization of $1.5 million. License fees in 2001 consisted of recurring license fees of $18.8 million and deferred revenue amortization of $2.0 million. A major licensee significantly reduced its production and sale of alternative fuel in early 2001 and did not operate its four facilities for most of 2001. This licensee sold the facilities in October 2001, and Headwaters earned approximately $3.7 million more in license fees from these facilities in 2002 than in 2001. This factor, combined with increased alternative fuel sales by most other licensees, caused the increase in license fee revenue for 2002 over 2001. Headwaters currently expects license fee revenue to increase in 2003 by an amount comparable to the 2002 increase. However, these increases are expected to decline in the future as this business segment continues to mature and it is possible that unforeseen adverse events could occur in the future that would cause license fee revenue to decrease. Pursuant to the contractual terms of an agreement with a certain licensee, the cumulative net license fees generated by Headwaters, totaling approximately $6.0 million as of September 30, 2002, have been placed in escrow for the benefit of Headwaters. Headwaters currently expects the escrowed amounts to increase as additional license fees are generated and that most, if not all, of such amounts will be recognized as revenue at some future date. Certain accounting rules governing revenue recognition require that the seller's price to the buyer be "fixed or determinable" as well as reasonably certain of collection. In this situation, those rules appear to currently preclude revenue recognition. Accordingly, none of the escrowed amounts have been recognized as revenue in the consolidated statements of income. Other Revenues and Cost of Revenues. Coal combustion product sales and services and manufactured product sales and the related cost of revenue captions represent ISG's revenues and cost of revenues for the period from September 19, 2002 through September 30, 2002. Approximately $2.9 million of other revenues and $5.2 million of cost of other revenues represent HTI's revenues and cost of revenues for 2002. There were no comparable revenues and cost of revenues for ISG and HTI in 2001. Depreciation and Amortization. These costs increased by $1.4 million to $1.8 million in 2002 from $0.4 million in 2001. The increase was primarily attributable to the depreciation and amortization of the tangible and intangible assets acquired in the HTI acquisition in August 2001 ($1.0 million) and the depreciation and amortization of the tangible and intangible assets acquired in the ISG acquisition in September 2002 ($0.4 million). Depreciation and amortization expense will increase substantially in 2003 as a result of the ISG acquisition. Research and Development. Approximately $2.4 million of the HTI purchase price was allocated to purchased in-process research and development, all of which was expensed in 2001. In 2002, research and development expenses of $2.3 million represent primarily $2.1 million of costs related to HTI activities. Selling, General and Administrative Expenses. These expenses increased $5.1 million or 59% to $13.7 million for 2002 from $8.6 million for 2001. The increase in 2002 was due primarily to ISG costs of approximately $1.6 million, an increase in compensation-related costs of approximately $1.2 million, an increase in professional services expenses of approximately $1.1 million and smaller increases in most of the other expense categories. The increase in compensation-related costs related primarily to an increase in incentive-based pay as a result of 18 improved operating results. The increase in professional services expenses was due primarily to legal costs associated with legal actions Headwaters is currently pursuing. The increases in other expense categories were due primarily to the growth of Headwaters' business during 2002. Other Income and Expense. During 2002, Headwaters reported net other expenses of $0.8 million compared to net other expenses of $5.2 million during 2001. The change of $4.4 million or 85% is primarily attributable to i) an increase in interest and net investment income of $0.3 million, ii) a decrease in equity and debt investment-related losses of approximately $5.5 million, and iii) a gain on the sale of assets of approximately $1.3 million; partially offset by the write-off of deferred project / financing costs of approximately $2.6 million and an increase in interest expense of approximately $0.3 million. The increase in interest income from 2001 to 2002 primarily related to an increase in the average balance of short-term investments in 2002 over 2001, partially offset by a decrease in interest income from a $6.5 million note receivable from a licensee which was collected in October 2001. During 2000, Headwaters made several equity investments in and loans to unrelated high-risk entities and in 2001, Headwaters recorded losses totaling approximately $6.3 million related to write-offs of these investments and loans. In September 2001, Headwaters sold all of its remaining high-risk investments in exchange for a $4.0 million note receivable from a limited liability corporation. Headwaters wrote down this note receivable as of September 30, 2002 and recorded an impairment loss of approximately $1.0 million in 2002 due to a decline in the value of the underlying collateral. The $1.3 million gain on sale of assets resulted from the sale of a 50% interest in one of Headwaters' original alternative fuel facilities. Headwaters recorded approximately $2.6 million of losses related to the write-off of deferred project / financing costs in 2002 resulting from the abandonment of certain projects or the postponement or redirection of activities for which costs had previously been deferred pending the ultimate outcome of the projects and activities. Interest expense increased in 2002 due to the substantial increase in outstanding debt incurred in September 2002 to finance the acquisition of ISG. Interest expense will increase substantially in 2003 as a result of the debt incurred to facilitate the ISG acquisition. Income Taxes. In 2001, Headwaters reported a net income tax benefit of $7,049,000, consisting of the recognition of $7,470,000 of its deferred tax asset, reduced by $100,000 of federal alternative minimum tax and $321,000 of current state income tax expense. In 2002, as a result of recording the full value of its deferred tax asset in 2001, Headwaters recorded an income tax provision with an effective tax rate of approximately 40%. Year Ended September 30, 2001 Compared to Year Ended September 30, 2000 The information set forth below compares Headwaters' operating results for fiscal 2001 with its operating results for fiscal 2000. Revenue. Total revenue for 2001 increased by $17.6 million or 63% to $45.5 million as compared to $27.9 million for 2000. The major components of revenue are discussed in the sections below. Chemical Reagent Sales. Chemical reagent sales during 2001 were $22.4 million with a corresponding direct cost of $14.5 million. Chemical reagent sales during 2000 were $9.8 million with a corresponding direct cost of $6.6 million. The increase in chemical reagent sales in 2001 over 2000 was due to increased alternative fuel production by Headwaters' licensees, as well as sales of chemical reagents to new customers. There were no similar sales of chemical reagents to new customers in 2000. License Fees. During 2001, Headwaters recognized license fee revenue totaling $20.8 million, an increase of $3.5 million or 20% over $17.3 million of license fee revenue recognized during 2000. License fees in 2001 consisted of recurring license fees or royalty payments of $18.8 million and deferred revenue amortization of $2.0 million. License fees in 2000 consisted of recurring license fees of $16.5 million and deferred revenue amortization of $0.8 million. Recurring license fees in 2000 included $11.7 million related to a single licensee that owned four facilities. This licensee did not report and pay certain prior period royalty obligations to Headwaters timely, resulting in some "catch-up" revenue recognition in 2000 for royalties related to periods other than the year ended September 30, 2000. Moreover, this licensee significantly reduced its production and sale of alternative fuel in early 2001 and did not operate the four facilities for most of 2001. These two factors combined resulted in a decline in recurring license fees from the licensee of approximately $8.0 million in 2001 as compared to 2000. Due to increased alternative fuel 19 sales, there was an increase of approximately $10.2 million in recurring license fees from all other licensees in 2001 over 2000. In 2001, the largest single licensee accounted for $6.2 million of earned license fees. Depreciation and Amortization. These costs decreased by $0.8 million to $0.4 million in 2001 from $1.2 million in 2000. The decrease was primarily attributable to elimination of depreciation associated with the three facilities owned by Headwaters which were sold in 2000. Research and Development. Approximately $2.4 million of the HTI purchase price was allocated to purchased in-process research and development, all of which was expensed in 2001. Selling, General and Administrative Expenses. These expenses increased $0.6 million or 7% to $8.6 million for 2001 from $8.0 million for 2000. The increase in 2001 was due primarily to an increase in professional services expenses of approximately $1.3 million and an increase in compensation-related costs of approximately $0.5 million. These increases were partially offset by the elimination of approximately $1.1 million of costs associated with the facilities owned by Headwaters which were sold in 2000 and the wash plant located in Utah, as well as the resolution in 2001 of certain liabilities for $0.2 million less than previously recorded. The increase in professional services expenses was due primarily to legal costs associated with legal actions Headwaters is pursuing. The increase in compensation-related costs related primarily to an increase in marketing department headcount. Asset Write-offs and Other Charges. In 2000, Headwaters recorded an impairment charge of approximately $14.8 million related to assets located in Utah and Alabama. This impairment charge consisted of an approximate $12.6 million write-down to net realizable value of certain ancillary plant equipment which remained on the sites when the facilities were sold and was idled, plus an approximate $2.2 million write-off of an intangible asset which was no longer considered recoverable due to the relocation of a licensee facility. Headwaters also recorded employee severance and other non-cash charges from incremental amortization of deferred compensation from stock options (resulting from the termination of employees whose stock options became fully vested upon termination) totaling approximately $1.5 million. Other settlement charges ($1.0 million) and asset write-downs ($0.5 million) were recorded in 2000. All of these asset write-offs and other charges totaled approximately $17.8 million. There were no similar charges recorded in 2001. Other Income and Expense. During 2001, Headwaters reported net other expenses of $5.2 million compared to net other income of $14.3 million during 2000. The change of $19.5 million or 136% is primarily attributable to i) a decrease in gains on sale of facilities of $16.9 million, ii) a decrease in interest and investment income of approximately $1.1 million, iii) an increase in equity and debt investment-related losses of approximately $5.5 million, and iv) a decrease of $1.1 million from gains on other transactions, related to the satisfaction of a $0.8 million contingent contract liability and a $0.3 million gain recognized on a note receivable transaction in 2000. These changes were partially offset by a decrease of approximately $4.6 million in interest expense and an increase in the mark-to-market adjustment of the carrying value of a related party note receivable of approximately $0.5 million. In 1999, Headwaters sold a facility located in Pennsylvania on which a loss of approximately $1.8 million was recognized. Headwaters also entered into an agreement under which it operates this facility on behalf of the owner. In 2000, upon achieving specified operating performance milestones, Headwaters received additional cash payments related to the sale of this facility. These payments, net of obligations to third parties, approximated $7.4 million. Of the net amount received, Headwaters recognized $4.4 million as a gain in 2000 because there were no ongoing obligations associated with those payments. Headwaters deferred the recognition of $3.0 million, which amount was characterized in the sales agreement as prepaid royalties. This amount is being recognized as revenue on a straight-line basis through December 2007. In 2000, Headwaters sold the three remaining alternative fuel facilities it owned plus an option to acquire a licensee facility. One of these sold facilities was located in Utah, two of these facilities were located in West Virginia, and the facility under option was located in Nevada. Headwaters reported net gains on these transactions totaling approximately $12.5 million. Headwaters also entered into its standard supply agreements with the new owners of the facilities to sell proprietary chemical material used at the facilities and receives ongoing royalties based upon the sale of alternative fuel from the facilities. The decrease in interest income from 2000 to 2001 primarily related to a decrease in interest from the related party note receivable discussed below from $0.5 million in 2000 to $0 in 2001 and a decrease in the interest rate on a $6.5 million note receivable from a licensee. During 2000, Headwaters made several equity investments in and loans to unrelated high-risk entities and in 2000, Headwaters recognized approximately $0.8 million of losses related to its equity investments. During 2001, Headwaters recorded additional losses totaling approximately $6.3 20 million related to write-offs of notes receivable and losses on equity investments, for an increase of $5.5 million in the 2001 losses compared to 2000. Interest expense decreased in 2001 primarily due to the significantly lower average levels of outstanding borrowings that existed in 2001 as compared to 2000. During 1996, Headwaters sold certain construction companies and received as consideration a $5.0 million note receivable. The note was "marked to market" each period based upon the market value of Headwaters' common stock held as collateral and was reflected in the consolidated balance sheet at the underlying value of this collateral, $0.5 million at September 30, 2000. In 2001, Headwaters accepted as full satisfaction of the note receivable the shares of Headwaters' stock collateralizing the note and a new note receivable which was recorded at $0 due to substantial uncertainty of both the collectibility of the new note and the value of the new collateral. This transaction resulted in recognition of a gain in 2001 of approximately $0.6 million, representing the increase in value of the collateral from September 30, 2000 to the date the collateral was surrendered in payment of the note. The corresponding adjustment in 2000 resulted in a write-up of $0.1 million for a net increase in the adjustment of $0.5 million in 2001 compared to 2000. Income Taxes. In 2000, Headwaters reported a net income tax benefit of $2.9 million, consisting of the recognition of $3.0 million of its deferred tax asset, reduced by $0.1 million of federal alternative minimum tax. In 2001, Headwaters reported a net income tax benefit of $7.0 million, consisting of the recognition of $7.4 million of its deferred tax asset, reduced by $0.1 million of federal alternative minimum tax and $0.3 million of current state income tax expense. Headwaters' valuation allowance decreased by $14.2 million during 2001. A valuation allowance is provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized. Based primarily on results of operations in 2001 and expected future results of operations, Headwaters determined that as of September 30, 2001, it was more likely than not that its deferred tax assets would be realized and the valuation allowance was eliminated. Extraordinary Item. In 2000, Headwaters redeemed all of its remaining convertible debt. The redemption consideration and early prepayment costs included approximately $7.0 million in cash plus the issuance of approximately 0.2 million shares of common stock. The loss recognized as a result of the total redemption consideration paid plus the acceleration of amortization of the unamortized debt discount and debt issuance costs in excess of the debt carrying value totaled approximately $7.9 million. Liquidity and Capital Resources Net cash provided by operating activities during 2002 was $42.8 million compared to $19.8 million during 2001. Most of the cash flow from operating activities in both periods was attributable to net income. During 2002, investing activities consisted primarily of payments for the acquisition of ISG. Financing activities in 2002 consisted primarily of net proceeds from the issuance of long-term debt used to finance the acquisition of ISG. Operating Activities. Headwaters reported net income for 2002 of $24.3 million. Moreover, most of Headwaters' reported income tax expense of $15.9 million consisted of deferred income taxes, largely as a result of using Headwaters' net operating loss carryforwards which did not require the use of cash. For 2002, cash provided from operations was reduced by a significant increase in trade receivables approximating $7.7 million, net of ISG's trade receivables as of the date of acquisition. This increase in trade receivables is due to the significant increase in revenues. Investing and Financing Activities. Headwaters acquired ISG in September 2002. Payments to acquire ISG, net of cash acquired, were approximately $205.9 million. In order to obtain the cash necessary to acquire ISG and retire the ISG debt, Headwaters issued $175.0 million of new debt consisting of $155.0 million of senior secured debt with a five-year term and a variable interest rate and $20.0 million of subordinated debt with an approximate five-year term and a fixed interest rate (see Note 8 to the consolidated financial statements). Total cash proceeds from the issuance of new debt, net of debt discounts, was $169.9 million. Headwaters incurred approximately $6.2 million of debt issuance costs to place the new debt, which had an initial combined effective weighted-average interest rate of approximately 9.0%. In September 2001, Headwaters sold all of its remaining high-risk investments in exchange for a $4.0 million note receivable from a limited liability corporation. This note is due no later than September 2004, is collateralized by the bridge loans and equity investments sold and is being accounted for on the cost recovery method. Following an impairment loss of approximately $1.0 million recorded in 2002, this note has a carrying value of $2.7 million as of September 30, 2002. Headwaters could incur additional losses if the remaining balance 21 on the note is not repaid. At September 30, 2001, in addition to the $4.0 million note receivable, Headwaters had outstanding one other note receivable in the amount of $6.5 million. This note and the related accrued interest were collected in October 2001. Financing activities during 2002 also included proceeds from the exercise of stock options and warrants of approximately $5.4 million. Headwaters intends to expand its business through growth of existing operations and strategic acquisitions of entities that operate in adjacent industries. Any acquisitions, however, would require the approval of current debt holders. In July 2002, Headwaters filed a $250.0 million universal shelf registration statement with the SEC that can be used for the sale of common stock, preferred stock, convertible debt and other securities, should Headwaters so choose. This registration statement was declared effective by the SEC in August 2002; however, a prospectus supplement describing the terms of any securities to be issued is required to be filed before any offering would commence under the registration statement. Headwaters could use the proceeds from securities offered under the shelf registration to reduce long-term debt, or for working capital and other general corporate purposes. Headwaters currently has no plans to utilize the shelf registration. Working Capital. Headwaters' working capital increased from $8.6 million at September 30, 2001, to $15.0 million at September 30, 2002. This increase in working capital resulted primarily from increased revenue and profitability and was partially offset by the cash used to acquire ISG and an increase in the current portion of long-term debt. Headwaters expects operations to produce positive cash flows in future periods, which, combined with current working capital and the $20.0 million revolving line of credit described below, is expected to be sufficient for Headwaters' operating needs for the next 12 months. Long-term Debt. In connection with the ISG acquisition, Headwaters entered into a $175.0 million senior secured credit agreement with a syndication of lenders, under which a total of $155.0 million was borrowed on the acquisition date. The remaining $20.0 million is available for borrowing under the terms of this credit agreement. This debt was issued at a 3% discount and Headwaters received net cash proceeds of $150.3 million. The debt is secured by all assets of Headwaters, bears interest at a variable rate (approximately 5.9% at September 30, 2002), and is repayable quarterly beginning December 2002 through August 2007. Required principal repayments total $15.5 million in 2003, $31.0 million in 2004, 2005 and 2006, and $46.5 million in 2007. In certain situations, for example when Headwaters receives "excess cash flow," as defined, mandatory prepayments are required. Mandatory prepayments are calculated as a percentage ranging up to 100% of "excess cash flow," which percentage is based on Headwaters' "leverage ratio." The debt agreement also allows optional prepayments. Headwaters currently expects to make prepayments that will retire the debt prior to its scheduled maturity. The debt agreement contains restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt, investments, merger and acquisition activity, asset liens, capital expenditures in excess of $15.0 million in any fiscal year, and the payment of dividends, among others. In addition, Headwaters must maintain certain financial ratios, including leverage ratios and interest coverage, as those terms are defined in the credit agreement. As of September 30, 2002, Headwaters must maintain a total leverage ratio of 3.0:1.0 or less. The maximum ratio declines over time until June 2004, at which time the ratio must remain at 2.0:1.0 or less. There is a similar leverage ratio requirement for the senior debt alone, which at September 30, 2002 must be 2.5:1.0 or less, declining over time through June 2004, at which time it must be maintained at 1.5:1.0 or less. The interest coverage requirement at September 30, 2002 was 3.75:1.0 or more. This ratio requirement increases over time, until December 2003, at which time the ratio must be maintained at a level of 5.0:1.0 or more. Headwaters was in compliance with all debt covenants as of September 30, 2002. Under the terms of the senior secured credit agreement, Headwaters may borrow up to a total $175.0 million; provided, however, that, except for the initial $20.0 million of available revolving credit, the maximum borrowing limit is permanently reduced by the amount of any repayments of the initial $155.0 million borrowed in September 2002. Terms of any additional borrowings under the credit agreement are generally the same as described in the preceding paragraphs. Finally, the credit agreement allows for the issuance of letters of credit, provided there is capacity available under the total credit line. As of November 15, 2002, two letters of credit for a total of approximately $3.0 million have been issued with expiration dates of March 2003 and November 2003. No other borrowings have been drawn or letters of credit issued through November 15, 2002. Headwaters pays a fee of 5/8% on the unused portion of the revolving credit agreement. 22 Also in connection with the ISG acquisition, Headwaters entered into a $20.0 million subordinated loan agreement, under which senior subordinated debentures were issued at a 2% discount, with Headwaters receiving net cash proceeds of $19.6 million. ISG management participated in one-half, or $10.0 million, of the $20.0 million of debt issued. The other half was issued to a corporation. The debt is not secured, bears interest at an 18% rate, and is repayable in September 2007. It is senior to all other debt except the senior secured debt described above. The debt agreement allows for optional prepayments. Any prepayments paid to the corporation are subject to a prepayment charge which ranges from 5% of the principal prepaid in the first year to 1% of the principal prepaid in the last year of the five-year term of the debt agreement. Interest is payable quarterly, beginning October 2002 and is payable in cash at a 12% rate. At Headwaters' option, interest calculated at an additional 6% rate may be added to the principal balance in lieu of payment in cash. Headwaters currently intends to pay in cash the entire amount of interest which accrues. The loan agreement contains restrictions and covenants common to such agreements, and these are generally consistent with those described above for the senior secured debt. As of September 30, 2002, Headwaters must maintain a total leverage ratio of 3.25:1.0 or less. The maximum ratio declines over time until June 2004, at which time the ratio must remain at 2.25:1.0 or less. The interest coverage requirement at September 30, 2002 was 3.50:1.0 or more. This ratio requirement increases over time, until December 2003, at which time the ratio must be maintained at a level of 4.75:1.0 or more. Headwaters was in compliance with all debt covenants as of September 30, 2002. Income Taxes. As of September 30, 2001, Headwaters had net operating loss carryforwards ("NOLs") of approximately $24.0 million and research and development tax credit carryforwards of approximately $0.2 million for federal tax purposes. During 2002, Headwaters utilized all of these NOLs and tax credit carryforwards except for approximately $0.9 million of HTI's acquisition date NOLs that are subject to an annual limitation of approximately $0.8 million due to the change in ownership of HTI. Headwaters expects to utilize HTI's remaining NOLs in 2003 and 2004. During 2002, Headwaters made estimated payments for alternative minimum taxes and for certain state income taxes in states where NOLs are not available. Due to the passage in March 2002 of the Job Creation and Worker Assistance Act of 2002 (the "Act"), Headwaters filed for a refund of the alternative minimum taxes paid in fiscal 2001 and filed for refunds related to the carryback of HTI's 2000 and 2001 losses, which pursuant to the Act can be carried back for five years instead of the statutory two-year period. Due to NOLs for regular federal tax purposes and in many states where Headwaters had operations, the provisions of the Act allowing Headwaters' NOLs to offset 100% of the alternative minimum tax liability for fiscal 2002, and due to tax benefits from the exercise of stock options, Headwaters did not pay significant amounts of income taxes in 2002. Significant future cash needs, in addition to operational working capital requirements, are currently expected to consist primarily of (i) debt service payments on outstanding long-term debt, (ii) income taxes, and (iii) capital expenditures. Capital expenditures are currently expected to be approximately $10.0 million in 2003, with somewhat higher requirements in succeeding years. Contractual Obligations and Contingent Liabilities and Commitments Other than operating leases for certain equipment and real estate, Headwaters has no significant off-balance sheet transactions, derivatives, or similar instruments and is not a guarantor of any other entities' debt or other financial obligations. The following table presents a summary of Headwaters' contractual obligations and payments, by period as of September 30, 2002.
Cash Payments Due by Period ----------------------------------------- ----------------------------------------------------------------- (millions of dollars) Total 1 Year 2 -3 Years 4 -5 Years After 5 Years ----------------------------------------- ---------- ------------ ------------ ------------ --------------- Senior secured debt $155.0 $15.5 $62.0 $ 77.5 $ -- Senior subordinated debt 20.0 -- -- 20.0 -- Other long-term debt 0.1 0.1 -- -- -- ---------- ------------ ------------ ------------ --------------- Total long-term debt 175.1 15.6 62.0 97.5 -- Operating leases 30.7 8.9 11.7 5.8 4.3 Unconditional purchase obligations 35.7 8.1 11.0 5.9 10.7 Employment contracts, minimum royalties, and other long-term obligations 5.7 3.9 1.8 -- -- ---------- ------------ ------------ ------------ --------------- Total contractual cash obligations $247.2 $36.5 $86.5 $109.2 $15.0 ========== ============ ============ ============ ===============
23 Subsequent to September 30, 2002, Headwaters entered into a new headquarters office lease arrangement which expires in 2008. Total minimum rental payments under the new lease agreement, which are not included above, total approximately $2.6 million. Under the terms of the senior secured credit agreement, Headwaters may borrow up to a total $175.0 million; provided, however, that, except for the initial $20.0 million of available revolving credit, the maximum borrowing limit is permanently reduced by the amount of any repayments of the initial $155.0 million borrowed in September 2002. The credit agreement allows for the issuance of letters of credit, provided there is capacity available under the total credit line. As of November 15, 2002, two letters of credit for a total of approximately $3.0 million have been issued with expiration dates of March 2003 and November 2003. No other borrowings have been drawn or letters of credit issued through November 15, 2002. Headwaters is involved in several legal proceedings that have arisen out of the normal course of business, all as explained in more detail in "ITEM 3. LEGAL PROCEEDINGS" and Note 15 to the consolidated financial statements. Of the five primary legal matters described in Note 15, Headwaters is a defendant in three cases, and both a plaintiff and defendant in two cases. Management in all cases intends to vigorously defend its position. Management does not currently believe that the outcome of these activities will have a significant effect upon the operations or the financial position of Headwaters; however, it is possible that a change in management's estimates of probable liability could occur and the change could be significant. In regards to all of these legal matters, legal counsel cannot express an opinion as to the ultimate amounts of recovery or liability. Recent Accounting Pronouncements Headwaters has implemented SFAS No. 142, "Accounting for Goodwill and Intangible Assets," with the exception of certain additional disclosures which may not be early implemented. Full implementation of SFAS No. 142 will require certain additional disclosures regarding ISG's and HTI's identified intangible assets and goodwill beginning October 1, 2002. In addition, SFAS No. 142, when fully implemented in fiscal 2003, will require Headwaters to review for impairment those intangible assets and goodwill in accordance with the requirements of SFAS No. 142, instead of following the existing rules for impairment testing. The new rules require, among other things, that goodwill be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of the reporting unit giving rise to the goodwill. Headwaters currently believes that neither the ISG- nor HTI-related identifiable assets and goodwill are impaired under either the existing rules for testing impairment, or under the new rules required by SFAS No. 142. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued. SFAS No. 145, in rescinding SFAS No. 4, will require that the loss on early extinguishment of debt, classified as an extraordinary item in 2000, no longer be classified as extraordinary, but rather as other expense. SFAS No. 145 is required to be implemented by Headwaters in 2003 and management does not expect it to have a material effect on Headwaters' future financial position or results of operations. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued, and in July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued. These pronouncements must be implemented by Headwaters as of October 1, 2002 and January 1, 2003, respectively. Headwaters has reviewed these standards and all other recently issued, but not yet adopted, accounting standards in order to determine their potential effect, if any, on the future results of operations or financial position of Headwaters. Based on that review, Headwaters does not currently believe that any of these recent accounting pronouncements will have a significant effect on its current or future financial position or results of operations. Impact of Inflation During 2002, Headwaters' operations were not materially impacted by inflation. Forward-looking Statements Statements in this Annual Report on Form 10-K regarding Headwaters' expectations as to the managing and marketing of coal combustion products, operation of facilities utilizing alternative fuel technologies, the marketing of alternative fuels, the receipt of licensing fees, royalties, and product sales revenues, the development, commercialization and financing of new technologies and other strategic business opportunities and acquisitions and other information about Headwaters that is not purely historical by nature, including those statements regarding Headwaters' future business plans, the operation of facilities, the availability of tax credits, the 24 availability of feedstocks, and the marketability of the coal combustion products and alternative fuel, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Headwaters believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. In addition to matters affecting the coal combustion products and alternative fuel industries or the economy generally, factors which could cause actual results to differ from expectations stated in these forward-looking statements include, among others, the following: (1) Ability to repay our substantial debt obligations, including significant interest payments, under our senior secured credit facility and senior subordinated debentures. (2) Restrictions on our ability to operate the businesses because of covenants in the senior secured credit facility and senior subordinated debentures. (3) Satisfactory resolution of several significant disputes in litigation. (4) Increased use and market acceptance of fly ash. (5) Fluctuations in the price and sales of cement and concrete products markets in which ISG competes. (6) Clean Air Act Amendments and regulations that could adversely impact coal consumption or the quality and quantity of coal combustion products. (7) Potential property damage claims and the availability of insurance coverage for claims related to ISG's stucco and other building products. (8) Operating issues for licensed alternative fuel facilities including feedstock availability, moisture content, Btu content, correct application of chemical reagent, achieving significant chemical change, operability of equipment, production capacity, product durability, resistance to water absorption, overall costs of operations and other commercial factors surrounding the use of Covol Fuels' technologies. (9) Marketing issues relating to acceptance and regulatory permitting of alternative fuels manufactured using Covol Fuels' technologies. (10) Securing of suitable alternative fuel facility sites, including permits and raw materials, for relocation and operation of alternative fuel facilities and product sales. (11) The market acceptance of products manufactured with Headwaters' technologies in the face of competition from traditional products. (12) Dependence on licensees to successfully implement Covol Fuels' technologies and to make license and other payments to Covol Fuels. (13) Maintenance of placed-in-service and other requirements under Section 29 of the tax code by alternative fuel manufacturing facilities. (14) Changes in governmental regulations or failure to comply with existing regulations that could result in reduction or shutdown of operations of licensee alternative fuel facilities. (15) The continued availability of tax credits to licensees under the tax code and each licensee's ability to use tax credits. (16) The commercial feasibility of Covol Fuels' alternative fuel technologies upon the expiration of tax credits. (17) Ability to commercialize new technologies which have only been tested in the laboratory and not in full-scale operations. (18) Ability to commercialize the technology of HTI and to implement new business plans which are at an early stage of investigation and investment and which will require significant time, management, and capital investment. (19) Success of HTI in conducting business in China. (20) Success in the face of competition by others producing coal combustion products or alternative chemical reagent products. (21) Sufficiency of intellectual property protections. (22) Successful integration of recent acquisitions and retention of key management personnel. Risk Factors Affecting Future Results of Operations Leverage Risks We have substantial debt and have significant interest payment requirements under our senior secured credit facility and senior subordinated debentures. As of the closing of the acquisition of ISG and the related bank financing, we have approximately $175 million in debt outstanding. Subject to restrictions in our senior secured credit facility and senior 25 subordinated debentures, we may also incur significant amounts of additional debt for working capital, capital expenditures and other purposes. Our high level of combined debt could have important consequences for our company, including the following: o we may have difficulty borrowing money for working capital, capital expenditures, acquisitions or other purposes; o we will need to use a large portion of our cash flow to pay interest and the required principal payments on borrowings under our senior secured credit facility and senior subordinated debentures, which will reduce the amount of money available to finance our operations, capital expenditures and other activities; o our senior debt has a variable rate of interest, which exposes us to the risk of increased interest rates; o borrowings under our senior secured credit facility is secured by all our assets; o we may be more vulnerable to economic downturns and adverse developments in our business; o we may be less flexible in responding to changing business and economic conditions, including increased competition and demand for new products and services; and o we may not be able to implement our business plans. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond our control. There can be no assurance that our business will continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms or without substantial additional expense to us. These and other factors could have a material adverse effect on our results of operations, liquidity and financial condition. Covenant restrictions under our senior secured credit facility and senior subordinated debentures may limit our ability to operate our business. Our senior secured credit facility and senior subordinated debentures contain, among other things, covenants that may restrict our ability to finance future operations or capital needs, to acquire additional businesses or to engage in other business activities. Our senior secured credit facility and senior subordinated debentures restrict, among other things, our ability and the ability of our subsidiaries to: o borrow money; o pay dividends or make distributions; o purchase or redeem stock; o make investments and extend credit; o engage in transactions with affiliates; o engage in sale leaseback transactions; o consummate certain asset sales; o effect a consolidation or merger or sell, transfer, lease or otherwise dispose of all or substantially all of our assets; and o create liens on our assets. In addition, our senior secured credit facility and senior subordinated debentures and other material agreements require us to maintain specified financial ratios and satisfy certain financial condition tests which may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet those financial ratios and financial condition tests. We cannot assure you that we will meet those tests or that our senior lenders will waive any failure to meet those tests. A breach of any of these covenants would result in a default under our senior secured credit facility and senior subordinated debentures and other material agreements. If an event of default under our senior secured credit facility and senior subordinated debentures occurs, our lenders could elect to declare all amounts outstanding under the credit facilities, together with accrued interest, to be immediately due and payable. Such a default may, in turn, cause a default under or an acceleration of our other outstanding indebtedness and some of our material agreements. In such a case, there can be no assurance that we would be able to refinance or otherwise repay such indebtedness. 26 Litigation Risk We are involved in significant litigation. We are a party to some significant legal proceedings. These proceedings will require that we incur substantial costs, including attorneys' fees, managerial time, and other personnel resources and costs. Adverse resolution of these proceedings could have a materially negative effect on such things as (i) potential future revenues from licensees, (ii) our financial liabilities, and (iii) the strength of some aspects of our intellectual property in the alternative fuels industry. See "ITEM 3. LEGAL PROCEEDINGS" for a description of the material pending legal proceedings. Covol Fuels Risks Commercial viability of alternative fuel facilities depends on the continued existence of tax credits under Section 29 of the Internal Revenue Code. Because to date the profitability of the alternative fuel facilities that qualify for tax credits under Section 29 depends upon the economic benefits from the tax credits in addition to the profits, if any, from operations, our profits currently depend upon the existence of the tax credits under Section 29 of the Internal Revenue Code. Moreover, royalty payments under our license agreements are typically based on a percentage of tax credits or profits earned. Under current law, Section 29 expires on December 31, 2007, after which tax credits will not apply to the alternative fuel facilities. In addition, there have been legislative initiatives from time to time to consider the early repeal or modification of Section 29, although they have not been successful. To date, coal-based solid alternative fuel facilities that are not eligible for tax credits have not been built, and we believe they could not presently be operated profitably. If the tax credits are not extended, or Section 29 is repealed or adversely modified prior to the end of 2007, licensees, in order to remain competitive and commercially viable after 2007, will have to manage their costs of production and feedstock and develop the market for coal-based solid alternative fuel with adequate prices to cover the costs. Following 2007, absent an extension of tax credits, or any earlier repeal of Section 29, we will need to renegotiate our license agreements with licensees to take into account the absence of tax credits. If our licensees close their facilities after 2007, it would have a material adverse effect on our business. Ongoing financial profitability of Covol Fuels depends on operational success of licensees. Covol Fuels has licensed its coal-based solid alternative fuel technology to a limited number of licensees. Covol Fuels' profitability depends on the ability of its licensees to produce and sell alternative fuel that will generate license fees. There are 28 alternative fuel facilities that license Covol Fuels' technologies. To date, Covol Fuels has earned license fees from the owners of 18 facilities, but most of the ongoing royalties earned to date have been generated by eight facilities owned by three licensees. If any one of these licensees shuts down its facilities, operates its facilities at low production levels, or sells its facilities resulting in short-term or long-term disruption of operations, our revenues could be materially adversely affected. To successfully operate a facility, the plant owner must produce and market a high-quality coal-based solid alternative fuel. In order to do so, Covol Fuels' licensees must address all operational issues including, but not limited to, feedstock availability, cost, moisture content, Btu content, correct chemical reagent formulation and application, operability of equipment, product durability, resistance to water absorption and overall costs of operations. In some cases, licensees may be forced to relocate plants and enter into new strategic contracts to address marketing and operational issues. For example, some of the owners of facilities are moving the facilities to new sites with better sources of raw materials for operation. Licensee plant relocations disrupt production and delay generation of license fees for us. It is not certain how much time our licensees will require for the full resolution of all of these marketing and operational issues. Covol Fuels' profitable financial results have depended in part on increased production over time of coal-based solid alternative fuel by its licensees. While to date efficiencies in production and improvements in facilities equipment and processes have allowed increased production, and we believe that capacity of the facilities can continue to be increased, capacity is ultimately finite for the specific facilities and could limit growth in the future. Covol Fuels' licensees may not qualify for tax credits granted by Congress to encourage production of alternative fuels. Section 29 of the Internal Revenue Code provides a tax credit for the production and sale of qualified alternative fuel, including coal-based solid alternative fuel produced by using Covol Fuels' technologies. Covol Fuels' royalties and chemical sales revenues are ultimately derived from its licensees' ability to manufacture and 27 sell qualified fuels that generate tax credits for the facility owners. The IRS has issued at least 14 private letter rulings to licensees of Covol Fuels' technologies covering 19 alternative fuel facilities. These rulings may be modified or revoked by the Internal Revenue Service ("IRS") if the IRS adopts regulations that are different from these rulings. Also, a private letter ruling may not apply if the actual operating practice differs from the information given to the IRS for the ruling. The IRS from time to time reviews taxpayer use of the Section 29 tax credit, including whether there should be restrictions on the availability of such credits. As discussed above, ultimately it is within the power of Congress to repeal or extend Section 29. Therefore, tax credits may not be available in the future, which would materially adversely impact us. Based upon the language of Section 29 and private letter rulings issued by the IRS to Covol Fuels and its licensees, Covol Fuels and its licensees believe the coal-based solid alternative fuel facilities built and completed prior to July 1, 1998, are eligible for Section 29 tax credits. However, the ability to claim tax credits is dependent upon a number of conditions including, but not limited to, the following: o The facilities were constructed pursuant to a binding contract entered into before January 1, 1997; o All steps were taken for the facility to be considered placed in service prior to July 1, 1998; o Manufacturing procedures are applied to produce a significant chemical change and hence a "qualified fuel"; o The alternative fuel is sold to an unrelated party; and o The owner of the facility is in a tax-paying position and can therefore use the tax credits. Licensees are subject to audit by the IRS. The IRS may challenge Covol Fuels' licensees on any one of these or other conditions. Also, Covol Fuels' licensees may not be in a financial position to claim the tax credits if they are not profitable and therefore reduce the alternative fuel produced at their facility. In addition, the Section 29 credit is subject to phase-out after the unregulated oil price reaches a certain level, adjusted annually for inflation. The inability of a licensee to claim tax credits could potentially reduce our income from the licensee. Covol Fuels must be able to develop and improve our alternative fuel technologies. Covol Fuels' current business is dependent upon alternative fuel technologies. To remain competitive, we must be able to develop or refine our technologies to keep up with future alternative fuel requirements. As licensees develop and modify their operations and choices of coal feedstocks, we will need to find new methods, know-how, chemicals, and other techniques to meet licensee and customer demands, such as demands for improved efficiencies, lower costs, and improvements in alternative fuel products, including chemical change and improved physical characteristics. If we are unable to develop or refine our technologies, our revenues and business could be materially harmed. HTI Risks HTI's technologies may not be commercially developed and marketed profitably. Headwaters acquired HTI, in August 2001. As an early stage company, HTI focuses on developing and commercializing catalysts and catalytic processes for producing chemicals and converting low-value fossil fuels into high-value alternative fuels. Although HTI has developed and patented several potential processes, these processes are still in the developmental stage. Market acceptance of these processes, if at all, will depend on our ability to enter into agreements with licensees to further develop and provide adequate funding to commercialize the processes. We can give no assurances that we will be able to enter into any of these agreements or that adequate funding will be available to fully develop and successfully commercialize those processes or that they can be marketed profitably. HTI will conduct business in China. HTI has recently entered into agreements with Shenhua Group, China's largest coal company, which will license its direct coal liquefaction coal technology for use in plants in China. In addition, other HTI activities are likely to involve licensing of other technologies in China. There is the risk that foreign intellectual property laws will not protect our intellectual property rights to the same extent as under United States laws, leaving us vulnerable to competitors who may attempt to copy our products, processes or technologies. Further, the legal system of China is based on statutory law. Under this system, prior court decisions may be cited as persuasive authority but do not have binding precedential effect. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws and considerable progress has been made in the promulgation of laws 28 and regulations dealing with economic matters, such as corporate organization and governance, foreign investment, commerce, taxation and trade. As these laws, regulations and legal requirements are relatively new and because of the limited volume of published case law and judicial interpretations and the non-binding nature of prior court decisions, the interpretation and enforcement of these laws, regulations and legal requirements involve some uncertainty. These uncertainties could limit the legal protection or recourse available to us. In addition, dependence on foreign licenses and conducting foreign operations may subject us to increased risk to political change, ownership issues, or repatriation or currency exchange concerns. ISG Risks ISG's business is dependent upon increased use and market acceptance of fly ash. ISG's business strategy is to increase the use of fly ash in cement and concrete through its marketing initiatives, which emphasize the environmental, cost, and performance advantages of fly ash. If ISG's marketing initiatives are not successful in the construction industry, or if environmental regulation does not continue to emphasize the use and recycling of coal combustion products or CCPs and therefore the use of the fly ash, ISG may not be able to sustain its operations and future growth. ISG's business is dependent upon the price and sales of cement and concrete. A significant portion of ISG's business is based on the sale of cement and concrete products containing fly ash. There is currently an overcapacity of cement and concrete in the world market, causing potential price decreases. Although the markets for ISG's products are regional, ISG's business is affected by the availability of competing products. In addition, any slowing of the construction business in ISG's markets, particularly highway construction, could adversely affect ISG's sales. Clean Air Act Amendments could adversely impact coal consumption. The federal Clean Air Act of 1970 and subsequent amendments (particularly the Clean Air Act Amendments of 1990), and corresponding state laws, which regulate the emissions of materials into the air, affect the coal industry both directly and indirectly. The coal industry is directly affected by Clean Air Act permitting requirements and/or emissions control requirements, including requirements relating to particulate matter (such as, "fugitive dust"). The coal industry may also be impacted by future regulation of fine particulate matter. In July 1997, the United States Environmental Protection Agency, or EPA, adopted new, more stringent National Ambient Air Quality Standards, or NAAQS, for particulate matter and ozone. Because electric utilities emit nitrogen oxides, which are precursors to ozone, ISG's utility customers are likely to be affected when the new NAAQS are implemented by the states. State and federal regulations relating to fugitive dust and the implementation of the new NAAQS may reduce ISG's sources for its products. The extent of the potential impact of the new NAAQS on the coal industry will depend on the policies and control strategies associated with the state implementation process under the Clean Air Act. Nonetheless, the new NAAQS could have a material adverse effect on ISG's financial condition and results of operations. The Clean Air Act indirectly affects ISG's operations by limiting the air emissions of sulfur dioxide and other compounds emitted by coal-fired utility power plants. The affected utilities have been and may be able to meet these requirements by, among other things, switching to lower sulfur fuels, installing pollution control devices such as scrubbers, reducing electricity generating levels or purchasing or trading "pollution credits." The affect on ISG, of the Clean Air Act regulation of emissions cannot be completely ascertained at this time. The 1990 Clean Air Act Amendments require utilities that are currently major sources of nitrogen oxides in moderate or higher ozone non-attainment areas to install reasonably available control technology for nitrogen oxides. EPA currently plans to finalize stricter ozone NAAQS (discussed above) by 2004. EPA promulgated a rule (the "SIP call") in 1998 requiring eastern states to make substantial reductions in nitrogen oxide emissions. Under this rule, EPA expects that states will achieve these reductions by requiring power plants to make substantial reductions in their nitrogen oxide emissions. Installation of reasonably available control technology and additional control measures required under the SIP call will make it more costly to operate coal-fired utility power plants and could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. Any material reduction in coal's share of the capacity for power generation could have a material adverse effect on ISG's financial condition and results of operations. The effect that such regulation or other requirements may have on the coal industry in general and on ISG in particular cannot be predicted with certainty. No assurance can be given that the implementation of the 1990 Clean Air Act Amendments or any future regulatory provisions will not materially adversely affect ISG. 29 In addition, the 1990 Clean Air Act Amendments require a study of utility power plant emissions of certain toxic substances, including mercury, and direct EPA to regulate these substances, if warranted. EPA has submitted reports to Congress on Mercury (1997) and Utility Air Toxics (1998). On December 14, 2000, EPA announced its finding that regulation of hazardous air pollutant emissions from oil- and coal-fired electric utility steam generating units is necessary and appropriate. EPA expects to propose emission standards by December 15, 2003 and to finalize them by December 15, 2004. These regulations are likely to require reductions in mercury emissions, and such requirements, if promulgated, could result in reduced use of coal if utilities switch to other sources of fuel. The Clear Skies Initiative, announced by the Bush Administration in February 2002, seeks to develop strategies for reducing emissions of sulfur dioxide, nitrogen oxides and mercury from power plants. Because the Initiative is still in its early stages, its effect on ISG cannot be determined at this time. ISG's business is dependent upon the quality and quantity of the CCPs it uses in its products. Coal-fired boilers have been impacted by regulations under the Clean Air Act and the 1990 Clean Air Act Amendments, which established specific emissions levels for sulfur dioxide, or SOx, and nitrogen oxides, or NOx. These emissions levels have required utilities to undertake many of the following changes: change their fuel source(s), add scrubbers to capture sulfur dioxide, add new boiler burner systems to control NOx, add or modify fuel pulverizers/air handling systems to control NOx, introduce flue gas conditioning materials to control particulate emissions in conjunction with meeting sulfur dioxide emissions targets and in some very isolated cases shut down a plant. All of these changes can impact the quantity and quality of CCPs produced at a power plant. Furthermore, proposed regulations to control mercury emissions could result in implementation of additional technologies at power plants that could negatively affect fly ash quality. Inappropriate use of CCPs can result in faulty end products. Property damage claims against ISG; uncertainty of insurance coverage; litigation. ISG and its subsidiaries are involved in numerous legal proceedings, including property damage actions related to its stucco and mortar manufactured products. Currently, each of the proceedings is being defended by attorneys retained by various insurance carriers pursuant to "reservation of rights" letters. While, to date, none of these proceedings have required that ISG incur substantial costs, there is no guarantee of coverage or continuing coverage, and these and future proceedings may result in substantial costs to ISG, including attorneys' fees, managerial time, and other personnel resources and costs. Adverse resolution of these proceedings could have a materially negative effect on ISG's business, financial condition and results of operation, and its ability to meet its financial obligations. Although ISG carries general and product liability insurance, ISG cannot assure that such insurance coverage will remain available, that ISG's insurance carrier will remain viable or that the insured amounts will cover all future claims in excess of ISG's uninsured retention. Furthermore, future rate increases may make such insurance uneconomical for ISG to maintain. ISG's business could be adversely affected by fluctuations in seasonality and cyclicality. ISG's business consists of managing CCPs and other materials for utilities and other industrial facilities and marketing these materials to end users. Materials management services often include disposal operations and landfill services that are directly tied to year-round plant operations, providing relatively evenly distributed revenue generation. However, CCP sales are keyed to construction market demands that tend to generally follow national trends in construction with predictable responses to seasonal peaks. ISG's CCP sales have historically reflected these seasonal trends, with the largest percentage of total annual revenues being realized in the quarters ended June 30 and September 30. Low seasonal demand normally results in reduced shipments and revenues in the quarter ended March 31. The CCP industry is cyclical and is affected by changes in general and local economic conditions, such as building construction and highway (infrastructure repair) construction. A downturn in the economy in one or more markets served by ISG could have a material adverse effect on ISG's sales. If ISG's coal-fired electric utility industry suppliers fail to provide ISG with CCPs on a timely basis, ISG's costs could increase and our growth could be hindered. ISG currently relies on the production of CCPs by coal-fired electric utilities. ISG has occasionally experienced delays and other problems in receiving CCPs from its coal-fired electric utility suppliers and may, in the future be unable to obtain CCPs on the scale and within the time frames required by ISG to meet its customers' needs. If ISG is unable to obtain, or if it experiences a delay in the delivery of CCPs, ISG may be 30 forced to incur significant unanticipated expenses to secure alternative sources of CCPs or to otherwise maintain supply to its customers. Operational Risks We have significant competition. Coal-based solid alternative fuels made using Covol Fuels' technologies compete with other alternative fuel products, as well as traditional fuels. Competition may come in the form of the licensing of competing technologies to process coal derivatives, the marketing of competitive chemical reagents, the marketing of end products qualifying as synthetic fuel, and the development of alternative fuel projects. Covol Fuels also experiences competition from traditional coal and fuel suppliers and natural resource producers, in addition to those companies that specialize in the recycling and upgrading of industrial waste products. These companies may have greater financial, management and other resources than Covol Fuels has. Further, many industrial coal users are limited in the amount of alternative fuel product they can purchase from Covol Fuels' licensees because they have committed to purchase a substantial portion of their coal requirements through long-term contracts for standard coal. Covol Fuels may not be able to compete successfully in the future. Alternative fuel sources and the recycling of waste products are the subject of extensive research and development by our competitors. If a competitive technology is developed that greatly increases the demand for waste products or reduces the costs of alternative fuels or other resources, the economic viability of our technologies and business could be adversely affected. Generally, the markets for ISG's traditional CCPs and manufactured products are highly competitive, with many local, regional and national companies that compete for market share in these areas with similar products and with numerous other products which are substitutable. ISG competes with respect to obtaining materials management contracts with utility and other industrial companies, the marketing of CCPs and related industrial materials, and the marketing of its manufactured products. The markets for the management of CCPs, related industrial materials and manufactured products are highly fragmented. Although ISG believes it is the largest manager of CCPs in North America and the only company providing such management services on a national basis, due to the high cost of transportation relative to sales price, competition is generally regional. ISG has a presence in every region in the United States. Although ISG typically has long-term contracts with its clients, some of such contracts provide for the termination of such contract at the convenience of the utility company upon a minimum 90-day notice. Moreover, some of ISG's most significant competitors on a regional basis appear to be seeking a broader national presence. Some of these competitors have substantially greater resources than ISG, and there can be no assurance that if they were to begin to compete in the national market, or in regions where they currently do not have operations, ISG would not be adversely affected. If we fail to successfully manage or integrate acquisitions of companies or technologies, such as the acquisition of ISG, our business may be disrupted and harmed. Successful management and integration of acquisitions, such as the acquisition of ISG, are subject to a number of risks, including: o difficulties in assimilating acquired operations, technologies or products including loss of key employees; o diversion of management's attention from core business operations; o adverse effects on business relationships with suppliers and customers or those of the acquired business; o assumption of contingent liabilities; and o incurrence of potential significant write-offs. There can be no assurance that we will be successful in implementing our acquisition of ISG. Further, as part of our general business strategy, we may seek to acquire or invest in other businesses, products or technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities or otherwise offer growth opportunities. In addition to the risks outlined above, our ability to successfully implement our strategy is subject to a number of risks, including difficulties in identifying acceptable acquisition candidates, consummating acquisitions on favorable terms and obtaining adequate financing, which may adversely affect our ability to develop new products and services and to compete in our rapidly changing marketplace. In addition, if we consummate acquisitions through an exchange of our securities, our existing stockholders could suffer significant dilution. There can be no assurance that we will be successful in 31 implementing our acquisition strategy, that such strategy will improve our operating results, or that these activities will not have a significant dilutive effect on existing shareholders. Our business could be harmed if we are unable to protect our proprietary technology. We rely primarily on a combination of trade secrets, patents, copyright and trademark laws and confidentiality procedures to protect our technology. Despite these precautions, unauthorized third parties may infringe upon, copy or reverse engineer portions of our technology. We do not know if current or future patent applications will be issued with the scope of the claims sought, if at all, or whether any patents issued will be challenged or invalidated. Our business could be harmed if we infringe upon the intellectual property rights of others. We have been, and may be in the future, notified that we may be infringing intellectual property rights possessed by third parties. If any such claims are asserted against us, we may seek to enter into royalty or licensing arrangements. There is a risk in these situations that no license will be available or that a license will not be available on reasonable terms, precluding our use of the applicable technology. Alternatively, we may decide to litigate such claims or to design around the patented technology. These actions could be costly and would divert the efforts and attention of our management and technical personnel. As a result, any infringement claims by third parties or claims for indemnification by customers resulting from infringement claims, whether or not proven to be true, may materially harm our business and prospects. Headwaters' and its subsidiaries' operations must comply with government environmental regulations. Our operations are subject to federal, state and local environmental regulation. HTI's ordinary course of business involves using its facilities to perform R&D activities, process and recycle oil and to research and develop technologies involving waste coal, oil chemicals and energy technologies, including liquefaction of coal. As a result, petroleum and other hazardous materials have been and are present on HTI's properties. Regulatory noncompliance or accidental discharges, in spite of safeguards, could create an environmental liability. Therefore operations entail risk of environmental damage and we could incur liabilities in the future arising from the discharge of pollutants into the environment or from waste disposal practices. Materials sold by ISG vary in chemical composition. Although fossil fuel combustion wastes have been excluded from regulation as "hazardous wastes" under the Resource Conservation and Recovery Act ("RCRA"), the EPA has determined that regulations are warranted for coal combustion wastes disposed of in landfills or surface impoundments, or used to fill surface or underground mines. EPA is planning to publish a proposed rulemaking in March 2003. ISG manages a number of landfill and pond operations that may be affected by EPA's proposed regulations. In most of these operations permits are contractually retained by the client and the client would be liable for any costs associated with new permitting requirements. However, the effect of such regulations on ISG cannot be completely ascertained at this time. While CCPs are not "hazardous wastes" under RCRA, they may contain small concentrations of metals that are considered as "hazardous substances" under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"). Land application of CCPs is regulated by a variety of federal and state statutes, which impose testing and management requirements to ensure environmental protection. Under limited circumstances, mismanagement of CCPs can give rise to CERCLA liability. ISG is engaged in providing services at one landfill operation that is permitted and managed as a hazardous waste landfill. The client process is intended to convert aluminum potliner, a hazardous waste, into a "non-hazardous condition" through the use of its patented treatment process. ISG provides the services necessary to landfill the residues of this treatment process and operates certain in-plant equipment and systems for the client. Although environmental liabilities related to the project are assumed by the client, there can be no assurance that ISG will not be named in third party claims relating to the project. Risks Relating to Our Securities Our stock price has been and could remain volatile. The market price for Headwaters' common stock has been and may continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control: o variations in our quarterly operating results from the expectations of securities analysts or investors; o downward revisions in securities analysts' estimates or changes in general market conditions; o announcements of technological innovations or new products or services by us or our competitors; 32 o announcement by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; o additions or departures of key personnel; o investor perception of our industry or our prospects; o insider selling or buying; o regulatory developments affecting our industry; and o general technological or economic trends. In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we became involved in securities class action litigation in the future, it could result in substantial costs and diversion of our management's attention and resources and could harm our stock price, business, prospects, results of operations, and financial condition. Future sales of our common stock could adversely affect our stock price. Substantial sales of our common stock in the public market, or the perception by the market that such sales could occur, could lower our stock price or make it difficult for us to raise additional equity capital in the future. As of November 30, 2002, we had 27,377,539 shares of common stock outstanding, including the 2,100,000 shares issued to ISG's stockholders in the acquisition. In addition, as of November 30, 2002, 3,925,667 shares of Headwaters' common stock were required to be reserved for issuance under Headwaters' stock option and other benefit plans and 92,306 shares of our common stock were required to be reserved for issuance pursuant to outstanding warrants. As of November 30, 2002, options to purchase 3,456,871 shares of Headwaters' common stock were issued and outstanding under Headwaters' stock option plans at a weighted average exercise price of $9.04 per share, of which options to purchase 1,938,318 shares had vested. Warrants to purchase 92,306 shares of Headwaters common stock are outstanding and are vested. We cannot predict if future sales of our common stock, or the availability of our common stock for sale, will harm the market price for our common stock or our ability to raise capital by offering equity securities. We do not pay dividends and do not anticipate paying any dividends in the future, so any short-term return on your investment will depend on the market price of our capital stock and/or our ability to make payments on our debt securities. Headwaters has never declared or paid cash dividends on its common stock. We currently intend to retain any earnings to finance our operations and growth. The terms and conditions of our senior secured credit facility and senior subordinated debentures each restrict and limit payments or distributions in respect of our capital stock. Therefore, we do not expect to pay any dividends. Any short-term return on our investment will depend on the market price for our shares and/or our ability to make payments on our debt securities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Headwaters is exposed to financial market risks, primarily related to changes in interest rates. Headwaters does not use derivative financial instruments for speculative or trading purposes, and no significant derivative financial instruments were outstanding as of September 30, 2002 or subsequent thereto. The majority of Headwaters' short-term investments, all of which are classified as trading securities, consist of fixed-rate U.S. government securities or securities backed by the U.S. government. Changes in interest rates can affect the market value of these investments, which are carried at market value in the consolidated balance sheets. The periodic adjustments to reflect changes in market value are included in interest and net investment income in the consolidated statements of operations. Based on the current amount of short-term investments and expected near-term changes in the amount of short-term investments, Headwaters does not expect any material near-term investment losses to result from changes in interest rates. As described in more detail in Note 8 to the consolidated financial statements, Headwaters has outstanding $155.0 million of variable-rate long-term debt as of September 30, 2002. The interest rate of this debt as of September 30, 2002 is approximately 5.9%, which rate is first subject to change in April 2003. At that time, Headwaters can lock in a rate for one, two, three, or six months. A change in the interest rate of 1% would change 33 interest expense by less than $1.5 million per year, considering principal repayments that are required beginning December 2002. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary financial data required by this Item 8 are set forth in Item 15 of this Form 10-K. All information that has been omitted is either inapplicable or not required. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE As described in more detail in the following paragraphs, Headwaters dismissed Arthur Andersen LLP ("AA") as its independent accountants on May 10, 2002 and appointed PricewaterhouseCoopers LLP ("PwC"). On October 14, 2002, Headwaters dismissed PwC and appointed Ernst & Young LLP ("E&Y"). On September 19, 2002, Headwaters acquired 100% of the common stock of ISG. E&Y has audited ISG since its inception. ISG's revenues currently comprise approximately 65% of the consolidated revenues of the combined entity and ISG operates in 35 states and Canada. In addition, approximately 85% of Headwaters' current employees came from the ISG acquisition. On October 14, 2002, Headwaters decided to retain E&Y as its independent accountants for the new combined company and accordingly dismissed PwC. The Registrant's Audit Committee participated in and approved the decision to change independent accountants. Headwaters has not consulted with E&Y on any application of accounting principles or any other matter during the two fiscal years ended September 30, 2001 or subsequent thereto. The reports of PwC on the financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for the two most recent fiscal years and through October 14, 2002, there have been no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PwC would have caused them to make reference thereto in their reports on the financial statements for such years. During the two most recent fiscal years and through October 14, 2002, there have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). The Registrant requested that PwC furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of such letter is filed as Exhibit 16 to this Form 10-K. Due to events involving Headwaters' former auditors, AA, on May 10, 2002 Headwaters Incorporated dismissed AA as its independent accountants. The Registrant's Audit Committee participated in and approved the decision to change independent accountants. The reports of AA on the financial statements for the two fiscal years audited by them (fiscal 2000 and fiscal 2001) contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with its audits for those two fiscal years and through May 10, 2002, there were no disagreements with AA on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of AA would have caused them to make reference thereto in their reports on the financial statements for such years. During fiscal 2000 and fiscal 2001 and through May 10, 2002, there were no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). The Registrant requested that AA furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of such letter is filed as Exhibit 16.1 to this Form 10-K. 34 On May 10, 2002, the audit committee appointed PwC as Headwaters' independent accountants. Headwaters has not consulted with PwC on any application of accounting principles or any other matter during the two fiscal years ended September 30, 2001 or subsequent thereto, except for consultations in the capacity as Headwaters' independent accountants up to July 19, 2000. There were no disagreements with accountants on accounting or financial statement disclosure subsequent to the appointment of AA on July 19, 2000. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information to be set forth under the captions "Executive Officers" and "Proposal No. 1: Election of Directors" in Headwaters' Proxy Statement to be filed in January 2003 for the Annual Meeting of Stockholders to be held in 2003 (the "Proxy Statement"), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information to be set forth under the caption "Executive Compensation and Related Information" in the Proxy Statement is incorporated herein by reference; provided, however, that Headwaters specifically excludes from such incorporation by reference any information set forth under the captions "Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Graph" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners and management to be set forth under the caption "Security Ownership of Directors, Nominees and Principal Stockholders" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information to be set forth under the caption "Transactions with Related Parties" in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. CONTROLS AND PROCEDURES Disclosure controls are procedures that are designed with an objective of ensuring that information required to be disclosed in Headwaters' periodic reports filed with the SEC, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified by the SEC. Disclosure controls are also designed with an objective of ensuring that such information is accumulated and communicated to Headwaters' management, including the CEO and CFO, in order to allow timely consideration regarding required disclosures. The evaluation of Headwaters' disclosure controls by the CEO and CFO included a review of the controls' objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Annual Report. Headwaters' management, including the CEO and CFO, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk 35 that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on their review and evaluation as of a date within 90 days of the filing of this Form 10-K, and subject to the inherent limitations all as described above, Headwaters' Chief Executive Officer and Chief Financial Officer have concluded that Headwaters' disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective. They are not aware of any significant changes in Headwaters' disclosure controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements Consolidated Financial Statements of Headwaters Incorporated Page Report of Independent Auditors for 2002 F-1 Report of Independent Accountants for 2000 and 2001 F-2 Consolidated Balance Sheets as of September 30, 2001 and 2002 F-3 Consolidated Statements of Income for the years ended September 30, 2000, 2001 and 2002 F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 2000 and 2001 F-6 Consolidated Statement of Changes in Stockholders' Equity and Comprehensive Income for the year ended September 30, 2002 F-8 Consolidated Statements of Cash Flows for the years ended September 30, 2000, 2001 and 2002 F-9 Notes to Consolidated Financial Statements F-11 2. Financial Statement Schedules All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Listing of Exhibits Certain other instruments which would otherwise be required to be listed below have not been so listed because such instruments do not authorize securities in an amount which exceeds 10% of the total assets of Headwaters and its subsidiaries on a consolidated basis and Headwaters agrees to furnish a copy of any such instrument to the Commission upon request. For convenience, the name Headwaters is used throughout this listing although in some cases the name Covol was used in the original instrument.
Exhibit No. Description Location - ----------- ----------- -------- 3.1.9 Restated Certificate of Incorporation of Headwaters dated August 14, 2001 (8) 3.2.4 Restated By-Laws of Headwaters * 10.11.3 Second Amended and Restated Sublicense and Binder Purchase and Sale Agreement * dated December 4, 2001, among Central City Synfuel, LLC, Cobon Energy, LLC, and Headwaters 10.45** License and Binder Purchase Agreement, dated December 14, 1997, between (2) Appalachian Synfuel, LLC and Headwaters 10.50.1** Form of Amended and Restated License and Binder Purchase Agreement dated February (3) 3, 1998, between PC Virginia Synthetic Fuel #1, PC West Virginia Synthetic Fuel #1, PC West Virginia Synthetic Fuel #2, PC West Virginia Synthetic Fuel #3 and Headwaters 36 10.50.1.1*** Form of First Amendment to Amended and Restated License and Binder Purchase (6) Agreement, dated March 31, 1999, between PC Virginia Synthetic Fuel #1; PC West Virginia Synthetic Fuel #1; PC West Virginia Synthetic Fuel #2; PC West Virginia Synthetic Fuel #3 and Headwaters 10.54 Employment Agreement effective May 1, 1998 with Steven G. Stewart (4) 10.60 Employment Agreement dated October 25, 2002 with Kirk A. Benson * 10.60.1 ISG Employment Agreement dated October 1, 2001 with R. Steve Creamer * 10.60.2 ISG Employment Agreement dated October 1, 2001 with J.I. Everest, II * 10.60.3 ISG Employment Agreement dated October 1, 2001 with Raul Deju * 10.65.3*** Amended and Restated License and Binder Purchase Agreement dated July 1, 2002 * between Headwaters and Premier Elkhorn Coal Company 10.65.4*** Amended and Restated License and Binder Purchase Agreement dated July 1, 2002 * between Headwaters and Clintwood Elkhorn Mining Company 10.67.2*** Amended and Restated Proprietary Reagent Supply and License Agreement dated June * 6, 2002 between DTE Smith Branch, LLC and Headwaters 10.69*** Settlement Agreement and Mutual Release dated May 25, 2000 among Headwaters and (5) Birmingham Syn Fuel, L.L.C., PacifiCorp Syn Fuel, L.L.C., and PacifiCorp Financial Services, Inc. 10.69.3*** License and Binder Purchase Agreement dated May 25, 2000 between Birmingham Syn (5) Fuel, L.L.C. and Headwaters 10.69.4*** License and Binder Purchase Agreement dated May 25, 2000 between PacifiCorp Syn (5) Fuel, L.L.C. and Headwaters (related to the Brookwood facility) 10.69.5*** License and Binder Purchase Agreement dated May 25, 2000 between PacifiCorp Syn (5) Fuel, L.L.C. and Headwaters (related to the Pumpkin Center #1 facility) 10.69.6*** License and Binder Purchase Agreement dated May 25, 2000 between PacifiCorp Syn (5) Fuel, L.L.C. and Headwaters (related to the Pumpkin Center #2 facility) 10.70*** Settlement Agreement and Release dated June 26, 2000 among Headwaters, Utah (5) Synfuel #1, Ltd., Coaltech No. 1, L.P., AJG Financial Services, Inc. and Square D Company 10.72 Agreement and Plan of Reorganization between Headwaters and Hydrocarbon (7) Technologies, Inc. dated May 2, 2001 10.72.1 Share Exchange Agreement between Headwaters and Hydrocarbon Technologies, Inc. (7) dated May 2, 2001 10.72.2 Amendment No. 1 to Agreement and Plan of Reorganization between Headwaters and (8) Hydrocarbon Technologies, Inc. dated August 21, 2001 10.72.3 Amendment No. 1 to Share Exchange Agreement between Headwaters and Hydrocarbon (8) Technologies, Inc. dated August 21, 2001 10.73 Contribution and Subscription Agreement among Headwaters and Avintaquin Capital, (9) LLC dated September 24, 2001 10.73.1 Promissory Note from Avintaquin Capital, LLC in favor of Headwaters dated (9) September 24, 2001 10.74 Asset Purchase Agreement between Headwaters and Red Hawk Energy, LLC dated (11) December 28, 2001 10.75 Agreement and Plan of Merger between Headwaters and Industrial Services Group, (13) Inc. dated July 15, 2002 10.75.1 Form of Registration Rights Agreement between Headwaters and the Stockholders of (13) Industrial Services Group, dated as of September 19, 2002 10.75.2 First Amendment to Agreement and Plan of Merger and Equityholder Agreements among (14) Headwaters, Industrial Services Group, Inc. and Equityholders of Industrial Services Group, Inc. dated September 19, 2002 10.76 Senior Credit Agreement for $175,000,000 among Headwaters and various lenders (14) dated September 19, 2002 10.77 Loan Agreement for $20,000,000 between Headwaters and Allied Capital Corporation (14) dated September 19, 2002 10.77.1 Participation Agreement among Allied Capital Corporation, Headwaters and other (14) Participants dated September 19, 2002 10.78*** ISG Replacement Agreement for Management of Ash and Other Byproducts dated * September 2002 10.79*** ISG Agreement for Fly Ash dated May 22, 2001 * 12 Computation of ratio of earnings to fixed charges * 16 Letter regarding change in certifying accountant (15) 16.1 Letter regarding change in certifying accountant (Originally designated as (12) Exhibit No. 16) 21.1 List of Subsidiaries of Headwaters * 23 Consent of Ernst & Young LLP * 37 23.1 Consent of PricewaterhouseCoopers LLP * 99.1 Amended 2000 Employee Stock Purchase Plan (originally designated as Exhibit No. (10) 99.2) 99.2 1995 Stock Option Plan (originally designated as Exhibit No. 10.5) (1) 99.2.1 First Amendment to the 1995 Stock Option Plan (originally designated as Exhibit (1) 10.5.1) 99.2.2 1996 Stock Option Agreement * 99.2.3 1998 Stock Option Agreement * 99.2.4 2001 Stock Option Agreement * 99.2.5 2002 Stock Option Agreement * 99.3 Headwaters Incentive Bonus Plan dated May 25, 2000 (6) 99.4 Amended Headwaters 2002 Stock Incentive Plan * 99.5 Section 906 Certification of Chief Executive Officer * 99.6 Section 906 Certification of Chief Financial Officer * _______________________ * Filed herewith. ** Confidential treatment has been granted to certain portions of this exhibit, which portions have been deleted and filed separately with the Securities and Exchange Commission. *** This exhibit contains confidential material that has been omitted pursuant to a Confidential Treatment Request. The omitted information has been filed separately with the Securities and Exchange Commission. Unless another exhibit number is indicated as the exhibit number for the exhibit as "originally filed," the exhibit number in the filing in which any exhibit was originally filed and to which reference is made hereby is the same as the exhibit number assigned herein to the exhibit. (1) Incorporated by reference to the indicated exhibit filed with Headwaters' Registration Statement on Form 10, filed February 26, 1996. (2) Incorporated by reference to the indicated exhibit filed with Headwaters' Annual Report on Form 10-K for the fiscal year ended September 30, 1997. (3) Incorporated by reference to the indicated exhibit filed with Headwaters' Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 1998. (4) Incorporated by reference to the indicated exhibit filed with Headwaters' Annual Report on Form 10-K, for the fiscal year ended September 30, 1998. (5) Incorporated by reference to the indicated exhibit filed with Headwaters' Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. (6) Incorporated by reference to the indicated exhibit filed with Headwaters' Annual Report on Form 10-K for the fiscal year ended September 30, 2000. (7) Incorporated by reference to the indicated exhibit filed with Headwaters' Quarterly Report on Form 10-Q, for the quarter ended June 30, 2001. (8) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for events dated August 14, 2001 and August 28, 2001, filed September 12, 2001. (9) Incorporated by reference to the indicated exhibit filed with Headwaters' Annual Report on Form 10-K, for the fiscal year ended September 30, 2001. (10) Incorporated by reference to the indicated exhibit filed with Headwaters' Quarterly Report on Form 10-Q, for the quarter ended December 31, 2001. (11) Incorporated by reference to the indicated exhibit filed with Headwaters' Quarterly Report on Form 10-Q, for the quarter ended March 31, 2002. (12) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for the event dated May 10, 2002, filed May 10, 2002. (13) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for the event dated July 15, 2002, filed July 18, 2002. (14) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for the event dated September 19, 2002, filed October 4, 2002. (15) Incorporated by reference to the indicated exhibit filed with Headwaters' Current Report on Form 8-K, for the event dated October 14, 2002, filed October 18, 2002.
38 Reports on Form 8-K The following reports on Form 8-K were filed during the quarter ended September 30, 2002: o Form 8-K filed on July 18, 2002 for event dated July 15, 2002 (Probable Acquisition of Industrial Services Group, Inc. ("ISG")). The following financial statements of ISG and unaudited pro forma financial information were filed with this Form 8-K: Audited Financial Statements of ISG: ------------------------------------ Report of Independent Auditors Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements Unaudited Financial Statements of ISG: -------------------------------------- Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001 Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2002 and 2001 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 Notes to Condensed Consolidated Financial Statements Unaudited Pro Forma Financial Information for Headwaters Incorporated: ---------------------------------------------------------------------- Introduction to Pro Forma Financial Information Pro Forma Condensed Combined Balance Sheet as of March 31, 2002 Pro Forma Condensed Combined Statement of Income for the Year Ended September 30, 2001 Pro Forma Condensed Combined Statement of Income for the Six Months Ended March 31, 2002 Notes to Pro Forma Condensed Combined Financial Information o Form 8-K filed on July 22, 2002 for events dated August 28, 2001 and July 15, 2002 (Probable Acquisition of ISG and Acquisition of Hydrocarbon Technologies, Inc.). The following unaudited pro forma financial information was filed with this Form 8-K: Introduction to Pro Forma Financial Information Pro Forma Condensed Combined Statement of Income for the Year Ended September 30, 2001 Notes to Pro Forma Condensed Combined Statement of Income In addition to the Forms 8-K filed during the quarter ended September 30, 2002, Headwaters filed the following Forms 8-K subsequent to September 30, 2002: o Form 8-K filed on October 4, 2002 for event dated September 19, 2002 (Acquisition of ISG). The following financial statements of ISG and unaudited pro forma financial information were filed with this Form 8-K: Unaudited Financial Statements of ISG: -------------------------------------- Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2002 and 2001 39 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 Notes to Condensed Consolidated Financial Statements Unaudited Pro Forma Financial Information for Headwaters Incorporated: -------------------------------------------------------- Introduction to Pro Forma Financial Information Pro Forma Condensed Combined Balance Sheet as of June 30, 2002 Pro Forma Condensed Combined Statement of Income for the Year Ended September 30, 2001 Pro Forma Condensed Combined Statement of Income for the Nine Months Ended June 30, 2002 Notes to Pro Forma Condensed Combined Financial Information o Form 8-K filed on October 18, 2002 for event dated October 14, 2002 (Change in Registrant's Certifying Accountant). o Form 8-K filed on October 22, 2002 for event dated October 22, 2002 (Updated List of Risk Factors for Outstanding Effective Forms S-3 and S-8). Exhibits The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15 (a) 3 above. Financial Statement Schedules The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15 (a) 2 above. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HEADWATERS INCORPORATED By: /s/ Kirk A. Benson ------------------------------ Kirk A. Benson Chief Executive Officer and Principal Executive Officer By: /s/ Steven G. Stewart ------------------------------ Steven G. Stewart Chief Financial Officer and Principal Financial Officer Date: December 23, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Kirk A. Benson Chief Executive Officer December 23, 2002 - ------------------------- (Principal Executive Officer) Kirk A. Benson and Director /s/ Steven G. Stewart Chief Financial Officer December 23, 2002 - ------------------------- (Principal Financial and Steven G. Stewart Accounting Officer) /s/ James A. Herickhoff Director December 23, 2002 - ------------------------- James A. Herickhoff /s/ Raymond J. Weller Director December 23, 2002 - ------------------------- Raymond J. Weller /s/ Ronald S. Tanner Director December 23, 2002 - ------------------------- Ronald S. Tanner /s/ E. J. "Jake" Garn Director December 23, 2002 - ------------------------- E. J. "Jake" Garn /s/ Alfred G. Comolli Director December 23, 2002 - -------------------------- Alfred G. Comolli /s/ L.K. (Theo) Lee Director December 23, 2002 - -------------------------- L.K. (Theo) Lee 41 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kirk A. Benson, certify that: 1. I have reviewed this Annual Report on Form 10-K of Headwaters Incorporated; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of Headwaters as of, and for, the periods presented in this Annual Report; 4. Headwaters' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Headwaters and have: a) designed such disclosure controls and procedures to ensure that material information relating to Headwaters, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of Headwaters' disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Headwaters' other certifying officer and I have disclosed, based on our most recent evaluation, to Headwaters' auditors and the audit committee of Headwaters' board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect Headwaters' ability to record, process, summarize and report financial data and have identified for Headwaters' auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in Headwaters' internal controls; and 6. Headwaters' other certifying officer and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 23, 2002 /s/ Kirk A. Benson ---------------------------- Kirk A. Benson Chief Executive Officer 42 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven G. Stewart, certify that: 1. I have reviewed this Annual Report on Form 10-K of Headwaters Incorporated; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of Headwaters as of, and for, the periods presented in this Annual Report; 4. Headwaters' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Headwaters and have: (a) designed such disclosure controls and procedures to ensure that material information relating to Headwaters, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; (b) evaluated the effectiveness of Headwaters' disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and (c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Headwaters' other certifying officer and I have disclosed, based on our most recent evaluation, to Headwaters' auditors and the audit committee of Headwaters' board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect Headwaters' ability to record, process, summarize and report financial data and have identified for Headwaters' auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in Headwaters' internal controls; and 6. Headwaters' other certifying officer and I have indicated in this Annual Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: December 23, 2002 /s/ Steven G. Stewart ---------------------------- Steven G. Stewart Chief Financial Officer 43 Report of Independent Auditors for 2002 The Board of Directors and Stockholders Headwaters Incorporated We have audited the accompanying consolidated balance sheet of Headwaters Incorporated as of September 30, 2002, and the related consolidated statements of income, changes in stockholders' equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Headwaters Incorporated at September 30, 2002, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Salt Lake City, Utah November 15, 2002 F-1 Report of Independent Accountants To the Board of Directors and Stockholders of Headwaters Incorporated: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, changes in stockholders' equity, and cash flows present fairly, in all material respects, the financial position of Headwaters Incorporated and its subsidiaries at September 30, 2001, and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah July 15, 2002 F-2
HEADWATERS INCORPORATED CONSOLIDATED BALANCE SHEETS As of September 30, (thousands of dollars) 2001 2002 - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 999 $ 7,284 Short-term investments 6,048 5,907 Trade receivables, net 8,887 50,331 Inventories 592 8,442 Short-term notes and accrued interest receivable 6,857 377 Deferred income taxes 120 1,814 Other current assets 545 3,778 ------------------------------- Total current assets 24,048 77,933 ------------------------------- Property, plant and equipment, net 2,680 50,549 ------------------------------- Other assets: Notes and accrued interest receivable 4,000 4,593 Intangible assets, net 10,752 118,918 Goodwill -- 113,367 Debt issue costs and other assets 805 7,497 Deferred income taxes 13,090 -- ------------------------------- Total other assets 28,647 244,375 ------------------------------- Total assets $ 55,375 $ 372,857 ============================== See accompanying notes. F-3 HEADWATERS INCORPORATED CONSOLIDATED BALANCE SHEETS, continued As of September 30, (thousands of dollars and shares) 2001 2002 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,203 $ 20,773 Accrued personnel costs 2,777 7,293 Other accrued liabilities 4,987 14,888 Current portion of long-term debt 4,356 15,578 Current portion of unamortized non-refundable license fees 1,106 4,378 ------------------------------- Total current liabilities 15,429 62,910 ------------------------------- Long-term liabilities: Long-term debt 149 154,552 Deferred income taxes -- 51,357 Unamortized non-refundable license fees 5,805 5,010 Other long-term liabilities 2,906 432 ------------------------------- Total long-term liabilities 8,860 211,351 ------------------------------- Total liabilities 24,289 274,261 ------------------------------- Commitments and contingencies Stockholders' equity: Common stock, $0.001 par value; authorized 50,000 shares; issued and outstanding: 23,807 shares at September 30, 2001 (including 548 shares held in treasury) and 27,327 shares at September 30, 2002 (including 526 shares held in treasury) 24 27 Capital in excess of par value 83,226 126,265 Accumulated deficit (48,704) (24,418) Treasury stock, at cost (3,038) (3,013) Other (422) (265) ------------------------------- Total stockholders' equity 31,086 98,596 ------------------------------- Total liabilities and stockholders' equity $ 55,375 $ 372,857 =============================== See accompanying notes. F-4
HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME Year ended September 30, (thousands of dollars, except per-share data) 2000 2001 2002 - ----------------------------------------------------------------------------------------------------------------------------- Revenue: Chemical reagent sales $ 9,757 $ 22,407 $ 74,419 License fees 17,315 20,765 30,456 Coal combustion product sales and services -- -- 6,818 Manufactured product sales -- -- 1,774 Other revenues 814 2,292 5,878 ------------------------------------------------------- Total revenue 27,886 45,464 119,345 ------------------------------------------------------- Operating costs and expenses: Cost of chemical reagents 6,617 14,524 50,134 Cost of coal combustion products and services -- -- 3,764 Cost of manufactured products -- -- 1,388 Cost of other revenues -- -- 5,244 Depreciation and amortization 1,176 355 1,760 Research and development -- 2,400 2,322 Selling, general and administrative 8,006 8,554 13,699 Asset write-offs and other charges 17,758 -- -- ------------------------------------------------------- Total operating costs and expenses 33,557 25,833 78,311 ------------------------------------------------------- Operating income (loss) (5,671) 19,631 41,034 ------------------------------------------------------- Other income (expense): Interest and net investment income 1,775 726 1,000 Interest expense (4,814) (224) (553) Losses on notes receivable and equity investments (746) (6,265) (743) Net gains on sale of facilities 16,870 -- -- Other, net 1,228 600 (502) ------------------------------------------------------- Total other income (expense), net 14,313 (5,163) (798) ------------------------------------------------------- Income before income taxes and extraordinary item 8,642 14,468 40,236 Income tax benefit (provision) 2,900 7,049 (15,950) ------------------------------------------------------- Income before extraordinary item 11,542 21,517 24,286 Extraordinary loss on early extinguishment of debt (7,860) -- -- ------------------------------------------------------- Net income $ 3,682 $ 21,517 $ 24,286 ======================================================= Basic net income per common share $ 0.07 $ 0.94 $ 1.00 ======================================================= Diluted net income per common share $ 0.07 $ 0.87 $ 0.94 ======================================================= See accompanying notes.
HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Other ----------------------------- Notes and interest receivable -related parties, from issuance of, Convertible Common Deferred or Preferred Stock Common Stock Capital in stock compensation collateralized (thousands of --------------- ---------------- excess of par Accumulated held in from stock by, common dollars and shares) Shares Amount Shares Amount value deficit treasury options stock - ------------------------------- ------- ------ ------ ------ ------------- ------------ ----------- ------------- -------------- Balances as of September 30, 1999 17 $1 12,766 $13 $78,457 $(71,713) $ -- $(1,222) $(6,564) Preferred stock cash dividends (297) Reclassification of redeemable convertible preferred stock to convertible preferred stock 38 -- 2,710 Common stock issued on conversion of convertible preferred stock and in payment of dividends (2) -- 2,812 3 1,631 (11) Redemption of convertible preferred stock (36) -- (2,572) (1,882) Common stock issued for cash 4,008 4 5,250 Common stock issued on conversion of debt 3,726 3 2,961 Common stock issued in connection with redemption of debt 214 -- 256 Common stock issued in connection with cash and cashless exercises of warrants and options 985 1 658 Value of common stock warrants and options issued in connection with convertible debt financing and debt extension -- -- 538 Purchase and cancellation of warrants (149) Cancellation of related party notes receivable and common stock collateralizing the notes (812) (1) (5,944) 6,164 Write-up of related party note receivable (66) Purchase of 586 shares of treasury stock, at cost (1,897) 14 shares of treasury stock transferred to employee stock purchase plan, at cost 26 Cancellation of 358 shares of treasury stock (358) -- (1,137) 1,137 Amortization of deferred compensation from stock options 707 Net income for the year ended September 30, 2000 3,682 -- -- ------ --- ------- -------- -------- ------- ------- Balances as of September 30, 2000 17 $1 23,341 $23 $82,659 $(70,221) $ (734) $ (515) $ (466) -- -- ------ --- ------- -------- -------- ------- ------- See accompanying notes. F-6
HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, continued Other ----------------------------- Notes and interest receivable -related parties, from issuance of, Convertible Common Deferred or Preferred Stock Common Stock Capital in stock compensation collateralized (thousands of --------------- ---------------- excess of par Accumulated held in from stock by, common dollars and shares) Shares Amount Shares Amount value deficit treasury options stock - ------------------------------- ------- ------ ------ ------ ------------- ------------ ----------- ------------- -------------- Balances as of September 30, 2000 17 $1 23,341 $23 $82,659 $(70,221) $ (734) $(515) $ (466) Common stock issued on conversion of convertible preferred stock (17) (1) 443 -- -- Preferred stock cash dividends (695) Exercise of stock options and warrants 860 1 1,925 Common stock issued in connection with purchase of Hydrocarbon Technologies, Inc., net of estimated registration costs 593 1 5,434 Common stock options issued in connection with purchase of Hydrocarbon Technologies, Inc. 1,325 Tax benefit from exercise of stock options 1,690 Write-up of related party note receivable to collateral value (541) Cancellation of related party note receivable and transfer of collateral shares to treasury stock (1,007) 1,007 Purchase of 1,648 shares of treasury stock, at cost (10,510) 34 shares of treasury stock transferred to employee stock purchase plan, at cost 101 Cancellation of 1,430 shares of treasury stock (1,430) (1) (9,112) 9,112 Amortization of deferred compensation from stock options 93 Net income for the year ended September 30, 2001 21,517 -------------------------------------------------------------------------------------------------- Balances as of September 30, 2001 -- $-- 23,807 $24 $83,226 $(48,704) $(3,038) $(422) $ -- -------------------------------------------------------------------------------------------------- See accompanying notes. F-7
HEADWATERS INCORPORATED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Other ------------------------------ Convertible Common Deferred Accumulated Preferred Stock Common Stock Capital in stock compensation foreign currency (thousands of --------------- ---------------- excess of par Accumulated held in from stock translation dollars and shares) Shares Amount Shares Amount value deficit treasury options adjustment - ------------------------------- ------- ------ ------ ------ ------------- ------------ ----------- ------------- -------------- Balances as of September 30, 2001 -- $-- 23,807 $24 $ 83,226 $(48,704) $(3,038) $(422) $ -- Exercise of stock options and warrants 1,315 1 5,383 Tax benefit from exercise of stock options 2,990 Common stock issued in connection with acquisition of Hydrocarbon Technologies, Inc. 178 -- 2,823 Common stock issued in connection with acquisition of Industrial Services Group, Inc. 2,100 2 32,716 Purchase of 83 shares of treasury stock, at cost (1,188) 32 shares of treasury stock transferred to employee stock purchase plan, at cost 214 126 Cancellation of 73 shares of treasury stock (73) -- (1,087) 1,087 Amortization of deferred compensation from stock options 93 Net income for the year ended September 30, 2002 24,286 Other comprehensive income - foreign currency translation adjustment (total comprehensive income is $24,350) 64 ----------------------------------------------------------------------------------------------- Balances as of September 30, 2002 -- $-- 27,327 $27 $126,265 $(24,418) $(3,013) $(329) $ 64 =============================================================================================== See accompanying notes. F-8
HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended September 30, (thousands of dollars) 2000 2001 2002 - -------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 3,682 $ 21,517 $ 24,286 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Deferred income taxes (3,000) (9,160) 11,540 Income tax benefit from exercise of stock options -- 1,690 2,990 Depreciation and amortization 1,176 355 1,760 Amortization of non-refundable license fees (802) (2,015) (1,471) Interest expense related to amortization of debt discount and debt issuance costs 3,034 79 136 Net gain on sale of facilities, property, plant and equipment (16,894) (42) (1,249) Write-down of notes receivable and related accrued interest -- 3,200 986 Losses on equity investments, write-offs and provisions for unrealizable investments 746 3,018 -- Acquired in-process research and development -- 2,400 -- Write-up of related party note receivable (66) (541) -- Gains on other transactions (1,079) -- -- Non-cash portion of asset write-offs and other charges 16,037 -- -- Extraordinary loss on early extinguishment of debt 7,860 -- -- Other changes in operating assets and liabilities, net of effect of acquisitions of Industrial Services Group, Inc. and Hydrocarbon Technologies, Inc.: Short-term trading investments (6,973) 925 141 Receivables (3,968) (987) (7,742) Other current assets 161 26 351 Accounts payable and accrued liabilities (1,804) 958 7,193 Unamortized non-refundable license fees 1,587 (1,587) 3,982 Other, net (62) (27) (126) ------------------------------------------ Net cash provided by (used in) operating activities (365) 19,809 42,777 ------------------------------------------ Cash flows from investing activities: Payments for acquisition of Industrial Services Group, Inc., net of cash acquired -- -- (205,900) Payments for acquisition of Hydrocarbon Technologies, Inc., net of cash acquired -- (4,845) (419) Collections on notes receivable -- -- 6,912 Purchase of property, plant and equipment (403) (170) (796) Net proceeds from disposition of facilities, property, plant and equipment 42,334 168 115 Investments in and loans to non-affiliated companies (4,005) (4,636) (294) Net decrease (increase) in other assets 834 (180) (40) ------------------------------------------ Net cash provided by (used in) investing activities 38,760 (9,663) (200,422) ------------------------------------------ Cash flows from financing activities: Net proceeds from issuance of long-term debt and warrants 6,980 8,991 165,806 Payments on long-term debt, including redemption premiums (43,995) (9,941) (6,412) Proceeds from exercise of options and warrants 659 1,926 5,384 Purchase of common stock for the treasury, net of employee stock purchases (1,871) (10,409) (848) Preferred stock dividends (297) (695) -- Preferred stock redemptions (4,454) -- -- Net proceeds from issuance of common stock and warrants 5,254 -- -- Other, net (149) (2) -- ------------------------------------------ Net cash provided by (used in) financing activities (37,873) (10,130) 163,930 ------------------------------------------ Net increase in cash and cash equivalents 522 16 6,285 Cash and cash equivalents, beginning of year 461 983 999 ------------------------------------------ Cash and cash equivalents, end of year $ 983 $ 999 $ 7,284 ======================================== See accompanying notes. F-9 HEADWATERS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued Year ended September 30, (thousands of dollars) 2000 2001 2002 - -------------------------------------------------------------------------------------------------------------------------------- Supplemental schedule of non-cash investing and financing activities: Common stock issued in connection with acquisition of Industrial Services Group, Inc. $ -- $ -- $ 32,718 Common stock issued in connection with acquisition of Hydrocarbon Technologies, Inc. -- 5,435 2,823 Common stock options issued in connection with acquisition of Hydrocarbon Technologies, Inc. -- 1,325 -- Cancellation of treasury stock (1,137) (9,112) (1,087) Exchange of equity investments in and loans to non-affiliated companies for long-term note receivable from non-affiliate -- 4,000 -- Common stock issued on conversion of convertible preferred stock and in payment of dividends 1,634 3,100 -- Cancellation of related party note receivable and transfer of collateral shares to treasury stock -- 1,007 -- Cancellation of notes receivable - related parties and common stock collateralizing the notes 6,164 -- -- Common stock issued on conversion of convertible debt, debt and related accrued interest 2,964 -- -- Reclassification of redeemable convertible preferred stock to convertible preferred stock 2,710 -- -- Supplemental disclosure of cash flow information: Cash paid for interest $ 10,458 $ 269 $ 39 Cash paid for income taxes -- 283 322 See accompanying notes. F-10
HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ___________ 1. Organization and Description of Business Headwaters Incorporated was incorporated in Delaware. Headwaters owns 100% of Industrial Services Group, Inc. ("ISG"), a Utah-based company formed in 1997 and acquired by Headwaters in September 2002 (see Note 3). Headwaters also owns 100% of Hydrocarbon Technologies, Inc. ("HTI"), a New Jersey company formed in 1995 and acquired by Headwaters in August 2001. Headwaters' fiscal year ends on September 30 and unless otherwise noted, all future references to years refer to Headwaters' fiscal year rather than a calendar year. Headwaters develops and deploys alternative fuel- and energy-related technologies and services that maximize the value of fossil fuels while creating new energy technologies for the future. Through its proprietary Covol Fuels process, Headwaters adds value to the production of coal-based solid alternative fuels primarily for use in electric power generation plants. Currently, Headwaters has licensed its technology to the owners of 28 alternative fuel facilities which are operating at various levels of production in ten states. ISG is the nation's largest provider of coal combustion products ("CCPs") management and marketing services to the electric power industry, serving more than 100 coal-fired electric power generation plants nationwide. Through its distribution network of over 130 locations, ISG is the leading provider of high quality fly ash to the building products and ready mixed concrete industries in the United States. ISG's manufactured products division develops, manufactures and distributes value-added fly ash-based concrete, stucco, mortar and block products. ISG also develops and deploys technologies for maintaining and improving fly ash quality. HTI develops and commercializes catalyst and nano-catalyst technologies to convert coal and heavy oils into environment-friendly, higher-value liquid fuels. Headwaters intends to expand its business through growth of existing operations and strategic acquisitions of entities that operate in adjacent industries. 2. Summary of Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Headwaters and all of its subsidiaries, only two of which have significant operations, ISG and HTI. All significant intercompany transactions and accounts are eliminated in consolidation. ISG was acquired on September 19, 2002 and accordingly, ISG's results of operations for the period from September 19, 2002 through September 30, 2002 have been consolidated with Headwaters' 2002 results. Due to the time required to obtain accurate financial information related to HTI's foreign contracts, for financial reporting purposes HTI's financial statements are consolidated with Headwaters' financial statements using a one-month lag. Accordingly, HTI's August 2001 acquisition date balance sheet was consolidated with Headwaters' September 30, 2001 balance sheet, but no results of operations of HTI were included in the consolidated statement of income for 2001. HTI's August 31, 2002 balance sheet was consolidated with Headwaters' September 30, 2002 balance sheet and HTI's results of operations for the year ended August 31, 2002 were consolidated with Headwaters' 2002 results. Segment Reporting, Major Customers and Concentrations of Risk - Until Headwaters acquired ISG in September 2002, Headwaters operated in and reported as a single industry segment, alternative energy. With the acquisition of ISG in September 2002, Headwaters now operates in three business segments, alternative energy, CCPs, and manufactured products. Additional information about these segments is presented in Note 4. The following table presents revenues for all customers that accounted for over 10% of total revenue during 2000, 2001 or 2002. All of these revenues are attributable to the alternative energy segment, and most of the named customers are energy companies.
(thousands of dollars) 2000 2001 2002 -------------------------------------------------------------------------------------------- TECO Coal Corporation affiliates Less than 10% $16,044 $20,292 DTE Energy Services, Inc. affiliates Less than 10% 5,111 19,660 Marriott International, Inc. affiliates Less than 10% Less than 10% 19,105 AIG Financial Products Corp. affiliates Less than 10% Less than 10% 16,900 PacifiCorp affiliates $15,511 4,978 Less than 10% Pace Carbon Fuels, L.L.C. affiliates Less than 10% 4,675 Less than 10% Fluor Corporation affiliate 3,138 Less than 10% Less than 10%
F-11 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ At September 30, 2002, Headwaters had trade receivable balances totaling approximately $8,584,000 from the four most significant customers. Substantially all of Headwaters' revenues were generated from sales in the United States. Headwaters purchases all of the chemical reagent that is sold to licensees and other customers from a single large international chemical company. Management believes that if necessary, the chemical reagent could be obtained from other suppliers. Headwaters has no other significant unusual credit risks or concentrations. Revenue Recognition - Alternative Energy Segment. There are 28 alternative fuel facilities that currently utilize Headwaters' patented technology and from which Headwaters earns license fees and/or profits from the sale of chemical reagents. Non-refundable advance license fees and royalty payments have been received from certain licensees under various terms and conditions. These non-refundable license fees and royalties have been deferred and are being recognized on a straight-line basis over the period covered by the related license and royalty agreements, generally through calendar 2007. Recurring license fees or royalty payments are recognized in the period when earned, which generally coincides with the sale of alternative fuel by Headwaters' licensees. In certain instances, Headwaters is required to pay to third parties a portion of license fees received or cash proceeds from the sale of chemical reagents. In such cases, Headwaters records the net proceeds as revenue. Revenues from the sale of chemical reagents are recognized upon delivery of product to the licensee or non-licensee customer. HTI's revenue consists primarily of contract services for businesses and U.S. government agencies and is included in the caption "Other revenues" in the consolidated statements of income. HTI's costs related to service revenue are included in "Cost of other revenues." In accounting for long-term contracts, HTI primarily uses the percentage of completion method of accounting, on the basis of the relationship between effort expended and total estimated effort for the contract. If estimates of costs to complete a contract indicate a loss, a provision is made for the total anticipated loss. CCP and Manufactured Products Segments. Revenue from the sale of CCPs and manufactured products is recognized upon passage of title to the customer, which generally coincides with physical delivery and acceptance. CCP revenues generally include transportation charges associated with delivering the material. Service revenues include revenues earned under long-term contracts to dispose of residual materials created by coal-fired power generation and revenues earned in connection with certain construction-related projects that are incidental to ISG's primary business. Service revenues under long-term contracts are recognized concurrently with the removal of the material and are typically based on the number of tons of material removed at an established price per ton. Contracts generally range from five to fifteen years, with most contracts being renewed upon expiration. Construction-related projects are generally billed on a time and materials basis; therefore, the revenues and related costs are recognized when the time is incurred and the materials are used. The cost of CCPs sold primarily represents amounts paid to utility companies to purchase product together with storage and transportation costs to deliver the product to the customer. Cost of services sold includes landfill fees and transportation charges to deliver the product to the landfill. Cash and Cash Equivalents - Headwaters considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Certain cash and cash equivalents are deposited with financial institutions and at times such amounts may exceed insured depository limits. Short-term Investments - Short-term investments consist primarily of mortgage- and other asset-backed securities, corporate bonds, U.S. government securities, and equity securities. By policy, Headwaters invests primarily in U.S. government securities or securities backed by the U.S. government. All investments are defined as trading securities and are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Unrealized gains and losses are included in earnings. Approximately $16,000 of investment losses in 2001 and approximately $285,000 of investment gains in 2002 related to securities held at September 30, 2001 and 2002, respectively. Receivables - Allowances are provided for uncollectible accounts when deemed necessary. Such allowances are based on an account-by-account analysis of collectibility or impairment and totaled $0 at September 30, 2001 and approximately $412,000 at September 30, 2002 for trade receivables and $0 at September 30, 2001 and 2002 for notes receivable. F-12 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ Headwaters performs periodic credit evaluations of its customers, but collateral is not required for trade receivables. Collateral, generally consisting of most or all assets of the debtor, is required for notes receivable. Losses recognized on notes receivable were $0 in 2000, approximately $3,658,000 in 2001 and approximately $743,000 in 2002. Because the notes generally relate to nonoperating activities, these losses are included in other expense in the consolidated statements of income. Inventories - Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). Inventories consisted of the following at September 30: (thousands of dollars) 2001 2002 ---------------------------------------------------------------------- Raw materials $ -- $1,198 Finished goods 592 7,244 ---------------------- $592 $8,442 ====================== Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Major improvements are capitalized; maintenance, repairs and minor improvements are charged to expense as incurred. Assets are depreciated using the straight-line method over their estimated useful lives, limited to the lease terms for improvements to leased assets. Upon the sale or retirement of property, plant and equipment, any gain or loss on disposition is reflected in results of operations, and the related asset cost and accumulated depreciation are removed from the respective accounts. Intangible Assets and Goodwill - Intangible assets consist primarily of identifiable intangible assets obtained in connection with the acquisitions of ISG (long-term contracts and patents) and HTI (existing patented technology). These intangible assets are being amortized on the straight-line method over their remaining estimated useful lives as of the respective acquisition dates. Goodwill consists of the excess of the purchase price for ISG and HTI over the fair value of identified assets acquired, net of liabilities assumed. Goodwill is not amortized, but is periodically tested for impairment. Headwaters has implemented Statement of Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Intangible Assets," with the exception of certain additional disclosures which may not be early implemented. Full implementation of SFAS No. 142 will require certain additional disclosures regarding ISG's and HTI's identified intangible assets and goodwill beginning October 1, 2002. In addition, SFAS No. 142, when fully implemented in fiscal 2003, will require Headwaters to review for impairment those intangible assets and goodwill in accordance with the requirements of SFAS No. 142, instead of following the existing rules for impairment testing. The new rules require, among other things, that goodwill be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of the reporting unit giving rise to the goodwill. Headwaters currently believes that neither the ISG- nor HTI-related identifiable assets and goodwill are impaired under either the existing rules for testing impairment, or under the new rules required by SFAS No. 142. Valuation of Long-Lived Assets - Headwaters periodically evaluates the carrying value of long-lived assets, including intangible assets and goodwill, as well as the related amortization periods, to determine whether adjustments to these amounts or to the useful lives are required based on current events and circumstances. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flow from that asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Impairment-related losses recognized in Headwaters' consolidated statement of income for 2000 are more fully described in Note 14. There were no losses recorded in 2001 or 2002. Debt Issue Costs - Debt issue costs represent direct costs incurred related to the issuance of the long-term debt used to acquire ISG. These costs are amortized to interest expense over the lives of the respective debt issues using the effective interest method. Equity Investments - In 2000 and 2001, Headwaters recognized approximately $100,000 and $2,607,000, respectively, of losses related to its equity in investments accounted for using the equity method. These losses are included in other expense in the consolidated statements of income. Headwaters had no equity investments at September 30, 2001 or 2002. F-13 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ Research and Product Development Costs - Research and product development costs are expensed as incurred. Income Taxes - Headwaters accounts for income taxes using the asset and liability approach. Headwaters recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized. Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary. Headwaters files a consolidated tax return with its subsidiaries. Common Stock, Options and Warrants - Common stock issued for services is accounted for using the fair value of the shares of common stock, determined at the time the services are provided and the liability is incurred. As described in Note 11, Headwaters continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for options granted to employees and directors. The measurement date used to value non-employee option grants is generally the date at which the recipient's performance is complete. Such options, as well as warrants issued in connection with debt and equity financings, including repricings and extensions of option and warrant expiration dates, are valued using the Black-Scholes model. If modifications to existing options or warrants relating to debt securities occur, the incremental value of the modified options or warrants is capitalized and amortized to interest expense over the remaining life of the related debt. Income Per Share Calculation - Income per share has been computed based on the weighted-average number of common shares outstanding. Diluted income per share computations reflect the increase in weighted-average common shares outstanding that would result from the assumed exercise of outstanding stock options and warrants, calculated using the treasury stock method, and the assumed conversion of convertible securities, using the if-converted method, where such options, warrants, and convertible securities are dilutive. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. Reclassifications - Certain prior year amounts have been reclassified to conform with the current year's presentation. The reclassifications had no effect on net income or total assets. Recent Accounting Pronouncements - The implications of full implementation of SFAS No. 142, "Accounting for Goodwill and Intangible Assets," is described above. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued. SFAS No. 145, in rescinding SFAS No. 4, will require that the loss on early extinguishment of debt, classified as an extraordinary item in 2000, no longer be classified as extraordinary, but rather as other expense. SFAS No. 145 is required to be implemented by Headwaters in 2003 and management does not expect it to have a material effect on Headwaters' future financial position or results of operations. In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was issued, and in July 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued. These pronouncements must be implemented by Headwaters as of October 1, 2002 and January 1, 2003, respectively. Headwaters has reviewed these standards and all other recently issued, but not yet adopted, accounting standards in order to determine their potential effect, if any, on the future results of operations or financial position of Headwaters. Based on that review, Headwaters does not currently believe that any of these recent accounting pronouncements will have a significant effect on its current or future financial position or results of operations. F-14 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ 3. Acquisitions of ISG and HTI ISG Acquisition - On September 19, 2002, Headwaters acquired 100% of the common stock of ISG, assumed or paid off all of ISG's outstanding debt and redeemed all of ISG's outstanding preferred stock. ISG is headquartered in Salt Lake City, Utah and is engaged primarily in the management of long-term contracts for coal combustion products and the distribution of related building materials and construction products throughout the United States, all through its wholly-owned subsidiary, ISG Resources, Inc. Headwaters has focused on using technology to add value to fossil fuels, particularly coal. The acquisition of ISG provides Headwaters with a significant position in the last step of the coal value chain due to its competencies in managing the products resulting from the combustion of coal. The acquisition of ISG also brings to Headwaters substantial management depth, comprehensive corporate infrastucture and critical mass in revenues and operating profit. In order to obtain the cash necessary to acquire ISG and retire the ISG debt, Headwaters issued $175,000,000 of new debt consisting of $155,000,000 of senior secured debt with a five-year term and a variable interest rate and $20,000,000 of subordinated debt with an approximate five-year term and a fixed interest rate (see Note 8). ISG management participated in one-half, or $10,000,000, of the subordinated debt. Total cash proceeds from the issuance of new debt, net of debt discounts, was $169,950,000. Headwaters incurred approximately $6,200,000 of debt issuance costs to place the new debt, which had an initial combined effective weighted-average interest rate of approximately 9.0%. The following table sets forth the total consideration paid for ISG:
(thousands of dollars and shares, except per-share amount) ---------------------------------------------------------------------------------------- Fair value of Headwaters stock (2,100 shares at $15.58 per share) $ 32,718 Cash paid to ISG stockholders 32,700 Cash paid to retire ISG debt and related accrued interest 184,638 Costs directly related to acquisition 7,800 ------------ Total consideration $257,856 ============
The value of Headwaters' 2,100,000 shares of common stock issued was determined using the average market price of Headwaters' stock over a five-day period, consisting of the day the terms of acquisition were agreed to and announced and two days prior to and two days subsequent to that day. This average price was $15.58 per share. The following table sets forth a preliminary allocation of the total estimated consideration to the tangible and intangible assets acquired and liabilities assumed:
(thousands of dollars) ---------------------------------------------------------------------------------------- Cash $ 19,238 Trade receivables 33,820 Inventory and other assets 11,794 Net property, plant and equipment 47,682 Intangible assets acquired: Contracts 106,400 Patents 2,764 Goodwill 109,109 Accounts payable and accrued liabilities (25,518) Net deferred income tax liabilities (47,433) ------------ Net assets acquired $257,856 ============
The ISG acquisition was accounted for using the purchase method of accounting as required by SFAS No.141, "Business Combinations." Assets acquired and liabilities assumed were recorded at their estimated fair values as of September 19, 2002. Approximately $109,164,000 of the purchase price was allocated to identifiable intangible assets consisting primarily of contracts with coal-fired power generation plants. This amount is being amortized over the F-15 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ estimated combined useful life of 20 years. The remaining purchase price not attributable to the tangible and identifiable intangible assets was allocated to goodwill, none of which is expected to be tax deductible. All of the intangible assets and all of the goodwill were preliminarily allocated to the CCP segment. The final allocation of the purchase price, including the estimated fair values for certain acquired property, will likely differ from that reflected above after final valuations and other procedures have been completed. The following unaudited pro forma financial information for 2001 and 2002 assumes the ISG acquisition occurred as of the beginning of the respective years. The pro forma combined results for 2001 combine Headwaters' historical results for the year ended September 30, 2001 with ISG's historical results for the year ended December 31, 2001, after giving effect to certain adjustments, including interest expense and the amortization of intangible assets. The pro forma combined results for 2002 combine Headwaters' historical results for the year ended September 30, 2002 with ISG's historical results for the twelve months ended September 30, 2002, after giving effect to necessary adjustments. Accordingly, ISG's historical results for the three-month period from October 1, 2001 to December 31, 2001 are included in both the pro forma combined results for the year ended September 30, 2001 and the pro forma combined results for the year ended September 30, 2002. ISG's revenues and net loss for the three-month period ended December 31, 2001 which were included in both of these periods were $51,221,000 and $(2,208,000), respectively. Due to the provisions of SFAS No. 142 which require that amortization of goodwill be discontinued, amortization of the new goodwill has not been reflected in the pro forma information for any period presented. Also, the goodwill amortization recorded in ISG's historical results of operations has been eliminated. Accordingly, there is no goodwill amortization reflected in the pro forma information for any period presented. In early calendar 2002, ISG recorded a non-recurring extraordinary gain on extinguishment of debt in the amount of approximately $22,558,000. This amount is not included in the pro forma information below.
Unaudited Pro Forma Results --------------------------- (thousands of dollars, except per-share data) 2001 2002 -------------------------------------------------------------------------------------------- Total revenue $261,695 $335,515 Net income (excluding ISG's extraordinary gain in 2002) 22,094 26,679 Basic net income per common share 0.88 1.01 Diluted net income per common share 0.83 0.96
The pro forma results have been prepared for illustrative purposes only. Such information does not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the dates indicated, nor is it indicative of the results that may be expected in future periods. HTI Acquisition - In August 2001, Headwaters completed the acquisition of 100% of the common stock of HTI, a New Jersey-based company. HTI develops and commercializes catalysts and catalytic processes for producing chemicals and converting low-value fossil fuels into high-value alternative fuels. Total consideration at closing, including the direct costs incurred by Headwaters to consummate the acquisition, was approximately $11,774,000. In accordance with the original HTI acquisition agreements, additional contingent consideration could be earned by the former HTI stockholders during calendar 2002 based on the attainment of certain operating targets and other milestones. In April 2002, Headwaters and the former HTI stockholders agreed to an amendment of the acquisition agreements and reached a final settlement of all outstanding contingent payments. Headwaters paid the former HTI stockholders additional consideration with a value totaling approximately $3,242,000. F-16 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ The following table sets forth the total consideration paid in 2001 and 2002:
(thousands of dollars and shares, except per-share amounts) ----------------------------------------------------------------------------------------------------- Fair value of Headwaters stock issued in 2001 (593 shares at $9.25 per share) $ 5,485 Fair value of Headwaters stock issued in 2002 (178 shares at $15.87 per share) 2,823 Fair value of options to purchase 144 shares of Headwaters' common stock issued in exchange for 152 outstanding vested HTI options 1,325 Cash paid to HTI stockholders 1,814 Cash paid to retire HTI note payable to a bank, plus pre-acquisition loans by Headwaters to HTI 2,560 Costs directly related to acquisition 1,009 ------------ Total consideration $15,016 ============
The value of the 593,000 shares of Headwaters common stock issued to the former HTI stockholders was determined using the average market price of Headwaters' stock over a three-day period, consisting of the day the terms of acquisition were agreed to and one day prior to and one day subsequent to that day ($9.25). The value of the 178,000 shares of common stock issued to the former HTI stockholders was determined using the average market price of Headwaters' stock over a three-day period, consisting of the day the settlement was reached and one day prior to and one day subsequent to that day ($15.87). For purposes of computing the estimated fair value of the Headwaters stock options issued in exchange for outstanding HTI options, the Black-Scholes model was used with the following assumptions: expected stock price volatility of 90%, risk free interest rates of 3.5% to 4.0%, weighted average expected option lives of one to three years, no dividend yield, and a fair value of Headwaters' stock of $9.25 per share. In March 2002, in connection with the preparation of Headwaters' and HTI's consolidated income tax returns for the year ended September 30, 2001, Headwaters finalized its analysis of HTI's differences between book and tax reporting and HTI's net operating loss carryforwards as of the acquisition date. Based on this analysis, Headwaters finalized the HTI purchase price allocation. The following table sets forth the final allocation to the tangible and intangible assets acquired and liabilities assumed, of the total consideration paid. (thousands of dollars) ---------------------------------------------------------- ------------ Tangible assets acquired, net of liabilities assumed $ 1,388 Intangible assets acquired: Existing patented technology 9,700 Acquired in-process research and development 2,400 Goodwill 4,258 Net deferred income tax liabilities (2,730) ------------ Net assets acquired $15,016 ============ The HTI acquisition was accounted for using the purchase method of accounting. Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. Approximately $9,700,000 of the purchase price was allocated to identifiable intangible assets consisting of existing patented technology with an estimated useful life of 15 years. Approximately $2,400,000 of the purchase price was allocated to purchased in-process research and development, consisting primarily of efforts focused on developing catalysts and catalytic processes to lower the cost of producing alternative fuels and chemicals while improving energy efficiency and reducing environmental risks. This amount represented the estimated purchased in-process technology for projects that had not reached technological feasibility and had no alternative use as of the acquisition date, and was expensed in 2001. 4. Segment Reporting Until Headwaters acquired ISG in September 2002, Headwaters operated in and reported as a single industry segment, alternative energy. With the acquisition of ISG in September 2002, Headwaters now operates in three business segments, F-17 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ alternative energy, CCPs, and manufactured products. These segments are managed and evaluated separately by management based on fundamental differences in their operations, products and services. The alternative energy segment includes Headwaters' traditional coal-based solid alternative fuel business and HTI's business of developing and commercializing catalysts and catalytic processes for producing chemicals and converting low-value fossil fuels into high-value alternative fuels. Revenues for this segment include primarily sales of chemical reagents and license fees. The CCP segment includes ISG's business of supplying post-combustion services and technologies to the coal-fired electric utility industry. This segment markets and manages coal combustion products such as fly ash and bottom ash, known as CCPs. ISG has long-term contracts, primarily with coal-fired electric generating utilities, pursuant to which it manages the post-combustion operations for the utilities. ISG markets these CCPs to replace manufactured or mined materials, such as portland cement, lime, agricultural gypsum, fired lightweight aggregate, granite aggregate and limestone. CCP revenues consist primarily of the sale of products, along with a small percentage of service revenue. The manufactured products segment produces and sells standard masonry and stucco construction materials and supplies, packaged products and blocks, as well as some of ISG's value-added technology products. ISG has introduced high volumes of CCPs as ingredients in the mortars, stuccos and blocks that the manufactured products segment produces. The following segment information for 2002 has been prepared in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The accounting policies of the segments are the same as those described in Note 2. Performance of the segments is evaluated based on i) operating profit, and ii) operating profit before interest, taxes, depreciation and amortization, and other income/expense items ("EBITDA"). Intersegment sales are immaterial. Amounts included in the "Corporate" column represent costs not specifically attributable to any segment and include general corporate overheads, research and development expenses and other administrative departmental costs. Segment assets reflect those specifically attributable to individual segments and primarily include accounts receivable, inventory, property, plant and equipment, intangible assets and goodwill. Other assets are included in the "Corporate" column.
(thousands of dollars) Alternative Manufactured Energy CCP Products Corporate Totals ------------------------------------------- ------------ ------------ -------------- ------------- ------------ Segment revenue $110,753 $6,818 $1,774 $ -- $119,345 ============ ============ ============== ============= ============ EBITDA $51,877 $1,952 $150 $(11,185) $42,794 Depreciation and amortization (1,132) (380) (32) (216) (1,760) ------------ ------------ -------------- ------------- ------------ Operating income $50,745 $1,572 $118 $(11,401) 41,034 ============ ============ ============== ============= Net interest income 447 Other income (expense), net (1,245) Income tax provision (15,950) ------------ Net income $24,286 ============ Capital expenditures $546 $236 $-- $14 $796 ============ ============ ============== ============= ============ Segment assets $33,413 $286,002 $21,869 $31,573 $372,857 ============ ============ ============== ============= ============
F-18 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ 5. Notes Receivable
Notes receivable consisted of the following at September 30: (thousands of dollars) 2001 2002 ---------------------------------------------------------------------------------------------------------- Short-term Notes and Accrued Interest Receivable: Facility-dependent note receivable from a corporation and related accrued interest, collected in October 2001 $6,598 $ -- Other 259 377 ------------------------- Total short-term notes and accrued interest receivable $6,857 $377 ========================= Long-term Notes and Accrued Interest Receivable: Note receivable from a limited liability corporation, bearing interest at LIBOR plus 0.9% (2.7% at September 30, 2002) payable quarterly, with principal due no later than September 2004. This note is collateralized by certain bridge loans and equity investments sold by Headwaters to this entity in September 2001. Following payment of the note principal, Headwaters has the right to receive the first $1,000 plus 20% of any additional cash received by the limited liability corporation related to the assets sold by Headwaters. This note is being accounted for on the cost recovery basis. An impairment loss of approximately $986 was recorded in 2002 due to a decline in the value of the underlying collateral. $4,000 $2,700 Unsecured note receivable arising from the sale of assets to a limited liability corporation with an effective 6.35% interest rate (which exceeds the stated rate). Principal, along with accrued interest, is due in four $500 installments from December 2003 through December 2006. Headwaters recorded a gain of approximately $1,342 on this sale. -- 1,893 ------------------------- Total long-term notes and accrued interest receivable $4,000 $4,593 =========================
6. Property, Plant and Equipment Property, plant and equipment consisted of the following at September 30:
(thousands of dollars) Estimated useful lives 2001 2002 ---------------------------------------------------------------------------------------------------- Land and improvements 30 years $ 379 $ 9,227 Buildings and improvements 5 - 40 years 624 10,488 Equipment and vehicles 3 - 30 years 1,885 28,171 Construction in progress -- 3,523 ------------------------- 2,888 51,409 Less accumulated depreciation (208) (860) ------------------------- Net property, plant and equipment $2,680 $50,549 =========================
Depreciation expense was approximately $784,000 in 2000, $93,000 in 2001 and $669,000 in 2002. As described in more detail in Note 14, Headwaters recorded approximately $12,615,000 of expense related to impaired assets during 2000. F-19 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ 7. Intangible Assets Intangible assets consisted of the following at September 30:
(thousands of dollars) Estimated useful lives 2001 2002 ----------------------------------------------------------------------------------------------------- ISG contracts 20 years $ -- $106,400 HTI patented technology 15 years 9,700 9,700 ISG patents 71/2years -- 2,764 Other 9 - 10 years 1,522 1,522 ------------------------- 11,222 120,386 Less accumulated amortization (470) (1,468) ------------------------- $10,752 $118,918 =========================
Amortization expense was approximately $237,000 in 2000, $168,000 in 2001 and $998,000 in 2002. As described in more detail in Note 14, Headwaters wrote off approximately $2,189,000 of intangible assets during 2000. 8. Liabilities Other Accrued Liabilities - Other accrued liabilities consisted of the following at September 30:
(thousands of dollars) 2001 2002 ----------------------------------------------------------------------------- ------------- ----------- Chemical reagent costs not yet invoiced $ 877 $ 2,957 Royalties due to third parties 725 1,608 Health insurance -- 1,481 Income taxes 239 1,244 Costs related to ISG acquisition -- 1,201 Commitment to a feedstock supplier for a licensee's alternative fuel facility 576 576 Costs related to HTI acquisition 777 -- Other 1,793 5,821 ------------------------- $4,987 $14,888 ========================= Long-term Debt - Long-term debt consisted of the following at September 30: (thousands of dollars) 2001 2002 ------------------------------------------------------------------------------------------------------- Senior secured debt with a face amount totaling $155,000 $ -- $150,378 Senior subordinated debentures with a face amount totaling $20,000 -- 19,603 Short-term borrowings from an investment company, repaid in 2002 (see Note 9) 4,095 -- Other 410 149 ------------------------- 4,505 170,130 Less: current portion (4,356) (15,578) ------------------------- Total long-term debt $ 149 $154,552 =========================
Senior Secured Credit Agreement - In connection with the ISG acquisition, Headwaters entered into a $175,000,000 senior secured credit agreement with a syndication of lenders, under which a total of $155,000,000 was borrowed on the acquisition date. The remaining $20,000,000 is available for borrowing under the terms of this credit agreement. This debt was issued at a 3% discount and Headwaters received net cash proceeds of $150,350,000. The original issue discount is being accreted using the effective interest method and the accretion is recorded as interest expense. The debt is secured by all assets of Headwaters, bears interest at a variable rate (approximately 5.9% at September 30, 2002), and is repayable quarterly beginning December 2002 through August 2007. Required principal repayments total $15,500,000 in 2003, $31,000,000 in 2004, 2005 and 2006, and $46,500,000 in 2007. In certain situations, for example when Headwaters F-20 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ receives "excess cash flow," as defined, mandatory prepayments are required. Mandatory prepayments are calculated as a percentage ranging up to 100% of "excess cash flow," which percentage is based on Headwaters' "leverage ratio." The debt agreement also allows optional prepayments. The debt agreement contains restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt, investments, merger and acquisition activity, asset liens, capital expenditures in excess of $15,000,000 in any fiscal year, and the payment of dividends, among others. In addition, Headwaters must maintain certain financial ratios, including leverage ratios and interest coverage, as those terms are defined in the credit agreement. As of September 30, 2002, Headwaters must maintain a total leverage ratio of 3.0:1.0 or less. The maximum ratio declines over time until June 2004, at which time the ratio must remain at 2.0:1.0 or less. There is a similar leverage ratio requirement for the senior debt alone, which at September 30, 2002 must be 2.5:1.0 or less, declining over time through June 2004, at which time it must be maintained at 1.5:1.0 or less. The interest coverage requirement at September 30, 2002 was 3.75:1.0 or more. This ratio requirement increases over time, until December 2003, at which time the ratio must be maintained at a level of 5.0:1.0 or more. Headwaters was in compliance with all debt covenants as of September 30, 2002. Under the terms of the senior secured credit agreement, Headwaters may borrow up to a total $175,000,000; provided, however, that, except for the initial $20,000,000 of available revolving credit, the maximum borrowing limit is permanently reduced by the amount of any repayments of the initial $155,000,000 borrowed in September 2002. Terms of any additional borrowings under the credit agreement are generally the same as described in the preceding paragraphs. Finally, the credit agreement allows for the issuance of letters of credit, provided there is capacity available under the total credit line. As of November 15, 2002, two letters of credit for a total of $2,970,000 have been issued with expiration dates of March 2003 and November 2003. No other borrowings have been drawn or letters of credit issued through November 15, 2002. Headwaters pays a fee of 5/8% on the unused portion of the revolving credit agreement. Senior Subordinated Debentures - Also in connection with the ISG acquisition, Headwaters entered into a $20,000,000 subordinated loan agreement, under which senior subordinated debentures were issued at a 2% discount, with Headwaters receiving net cash proceeds of $19,600,000. The original issue discount is being accreted using the effective interest method and the accretion is recorded as interest expense. ISG management participated in one-half, or $10,000,000, of the $20,000,000 of debt issued. The other half was issued to a corporation. The debt is not secured, bears interest at an 18% rate, and is repayable in September 2007. It is senior to all other debt except the senior secured debt described above. The debt agreement allows for optional prepayments. Any prepayments paid to the corporation are subject to a prepayment charge which ranges from 5% of the principal prepaid in the first year to 1% of the principal prepaid in the last year of the five-year term of the debt agreement. Interest is payable quarterly, beginning October 2002 and is payable in cash at a 12% rate. At Headwaters' option, interest calculated at an additional 6% rate may be added to the principal balance in lieu of payment in cash. Headwaters currently intends to pay in cash the entire amount of interest which accrues. The loan agreement contains restrictions and covenants common to such agreements, and these are generally consistent with those described above for the senior secured debt. As of September 30, 2002, Headwaters must maintain a total leverage ratio of 3.25:1.0 or less. The maximum ratio declines over time until June 2004, at which time the ratio must remain at 2.25:1.0 or less. The interest coverage requirement at September 30, 2002 was 3.50:1.0 or more. This ratio requirement increases over time, until December 2003, at which time the ratio must be maintained at a level of 4.75:1.0 or more. Headwaters was in compliance with all debt covenants as of September 30, 2002. F-21 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ Interest Rates and Debt Maturities - The weighted-average interest rate on long-term debt was approximately 4.7% at September 30, 2001 and approximately 7.3% at September 30, 2002. Future maturities of long-term debt as of September 30, 2002 are as follows: (thousands Year ending September 30, of dollars) ----------------------------------- ------------- 2003 $ 15,578 2004 31,030 2005 31,012 2006 31,013 2007 66,516 ------------- Total cash payments 175,149 Unamortized debt discount (5,019) ------------- Net carrying value $170,130 ============= Interest Costs - During 2000, Headwaters incurred total interest costs of approximately $4,814,000, including approximately $3,034,000 of non-cash interest expense resulting from amortization of debt discount and debt issuance costs. During 2001, Headwaters incurred total interest costs of approximately $224,000, including approximately $79,000 of non-cash interest expense. During 2002, Headwaters incurred total interest costs of approximately $553,000, including approximately $136,000 of non-cash interest expense. No interest costs were capitalized in any of these years. 9. Financing and Other Equity Transactions In addition to the financing transactions related to the ISG and HTI acquisitions described in Notes 3 and 8, Headwaters entered into the following transactions from 2000 through 2002. Short-term Borrowings with an Investment Company - Headwaters has an arrangement with an investment company under which Headwaters could borrow up to 90% of the value of the portfolio of Headwaters' short-term investments with the investment company (see Note 8). Maximum borrowings under this arrangement during 2001 were approximately $4,095,000, which amount was outstanding at September 30, 2001. Maximum borrowings under this arrangement during 2002 were approximately $5,095,000, but there have been no borrowings since the quarter ended December 31, 2001. In connection with the issuance of long-term debt in September 2002, Headwaters agreed not to borrow under this arrangement. Convertible Debt - In 2000, Headwaters issued convertible secured debt and warrants to purchase approximately 1,172,000 shares of common stock, in two unrelated transactions, for total net proceeds of approximately $2,800,000. The warrants had exercise prices ranging from $0.88 to $3.60 per share, with expiration dates ranging from September 2002 to December 2002 and were assigned a value of approximately $562,000. This debt, along with the convertible debt issued to one of the same debt holders in September 1999, was convertible into common stock at market rates. During 2000, convertible debt with a face amount of approximately $1,280,000 and a carrying value of approximately $970,000 was converted into approximately 2,540,000 shares of common stock. In January 2000, Headwaters redeemed all of its remaining convertible debt. In 2000, the holder of a $4,000,000 note payable converted $2,000,000 of principal into approximately 1,186,000 shares of common stock and warrants for the purchase of approximately 296,000 shares of common stock. The warrants were exercisable through April 2005 at a price of $2.10 per share and were exercised in 2002. Headwaters repaid the remaining $2,000,000 of principal in 2000. Convertible Preferred Stock - During 2000, 200 shares of Series C preferred stock, along with related accumulated but undeclared dividends, were converted into approximately 180,000 shares of common stock; and 24,369 shares of Series D convertible preferred stock were converted into approximately 2,632,000 shares of common stock. Also in 2000, Headwaters redeemed the remaining outstanding 35,631 shares of Series D preferred stock. The total amount paid to redeem the preferred stock was approximately $4,454,000, including a redemption premium of approximately F-22 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ $1,882,000, which was charged directly to stockholders' equity. In 2001, all of the outstanding shares of preferred stock, consisting of 3,000 shares of Series A and 14,310 shares of Series B, were converted into a total of approximately 443,000 shares of common stock, representing a conversion price of $7.00 per common share. Headwaters paid the accrued but undeclared dividends of approximately $695,000 in cash rather than allowing conversion into common stock at a price below market. Common Stock - In 2000, Headwaters issued approximately 3,629,000 shares of common stock in a private placement for cash proceeds of approximately $4,666,000, net of costs of approximately $270,000. In another transaction, Headwaters issued approximately 379,000 shares of common stock and warrants for the purchase of approximately 133,000 shares of common stock to certain officers and directors for net cash proceeds of approximately $588,000. The warrants are exercisable through March 2005 at a price of $1.56 per share. Treasury Stock - Beginning in 2000, Headwaters acquired shares of its common stock in connection with the stock repurchase program announced in May 2000 and expanded in June 2001. The program, as revised, authorizes Headwaters to purchase stock in the open market or through negotiated block transactions up to an aggregate of 20% of the outstanding common stock, or $15,000,000, whichever is greater. All treasury stock transactions are disclosed in the statements of changes in stockholders' equity. Notes and Interest Receivable - Related Parties, Collateralized by Common Stock - In January 2001, Headwaters accepted from a stockholder as full satisfaction of a 6%, collateral-based $5,000,000 note receivable, i) 150,000 shares of Headwaters stock and options to acquire 25,000 shares of Headwaters common stock for $1.50 per share that collateralized the note, both of which were cancelled, and ii) a new 6% collateralized promissory note receivable in the principal amount of $1,750,000. Prior to this transaction, the original note receivable was being carried at the value of the underlying collateral ($466,000 at September 30, 2000). Headwaters recognized a gain of approximately $541,000 representing the increase in value of that collateral from September 30, 2000 to the date the collateral was surrendered by the stockholder in payment of the note. Headwaters recorded the new note receivable at $0 due to substantial uncertainty of both the collectibility of the new note and the value of the new collateral. In October 2001, a $750,000 payment was received on the new promissory note, which amount, along with certain other assets, was accepted as full satisfaction of the new promissory note. The $750,000 gain on this transaction was recognized in 2002 and recorded as other income. Due to substantial uncertainty regarding both value and realization, Headwaters recorded the other assets obtained in that transaction at $0. Interest income of $515,000 was recognized in 2000 based on cash payments received on the note. No interest income was recognized in 2001. In 2000, Headwaters entered into termination agreements with certain then current and former officers and employees having notes and interest payable to Headwaters totaling approximately $6,164,000. The agreements called for the cancellation of the outstanding balances under the notes, including interest, in exchange for the surrender and cancellation of the outstanding shares of common stock collateralizing the notes. These transactions resulted in the cancellation of approximately 812,000 shares of common stock and the recognition of a loss of approximately $219,000, which amount represents the interest recognized on the notes in prior periods. SEC Registration Statement - In July 2002, Headwaters filed a $250,000,000 universal shelf registration statement with the SEC that can be used for the sale of common stock, preferred stock, convertible debt and other securities, should Headwaters so choose. This registration statement was declared effective by the SEC in August 2002; however, a prospectus supplement describing the terms of any securities to be issued is required to be filed before any offering would commence under the registration statement. Headwaters could use the proceeds from securities offered under the shelf registration to reduce long-term debt, or for working capital and other general corporate purposes. 10. Fair Value of Financial Instruments Headwaters' financial instruments consist primarily of cash and cash equivalents, short-term investments, trade and notes receivable, accounts payable and long-term debt. All of these financial instruments except certain long-term debt as of September 30, 2002 are either carried at fair value as of the balance sheet date or are of a short-term nature. Accordingly, F-23 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ the carrying values for these financial instruments as reflected in the consolidated balance sheets for 2001 and 2002 closely approximated their fair values. Substantially all of Headwaters' long-term debt as of September 30, 2002 consists of debt issued in connection with the ISG acquisition in September 2002. As described in Note 8, approximately 90% of the outstanding debt balance carries a variable interest rate and approximately 10% of the outstanding debt balance carries a fixed rate. Due to the short period of time which has elapsed between issuance of this debt and Headwaters' fiscal year end, the face amount of all outstanding debt is deemed to approximate fair value as of September 30, 2002. As reflected in Note 8, the total carrying amount of the debt issued in September 2002 was approximately $169,981,000 as of September 30, 2002. The combined face amount, and therefore the approximate fair value as of September 30, 2002, of this debt totaled $175,000,000. 11. Stockholders' Equity Preferred Stock - Headwaters has 10,000,000 shares of authorized preferred stock, none of which was issued or outstanding as of September 30, 2001 or 2002. Stock Options - As of September 30, 2002, Headwaters had two stock option plans (the "Option Plans") under which 2,900,000 shares of common stock were reserved for ultimate issuance. As of September 30, 2002, options for approximately 214,000 shares of common stock could be granted under the Plans. A committee of Headwaters' Board of Directors (the "Committee"), or in its absence the Board, administers and interprets the Option Plans. This Committee is authorized to grant options and other awards both under the Option Plans and outside the Option Plans to eligible employees, officers, directors, and consultants of Headwaters. One of the Option Plans provides for the granting of both incentive stock options and non-statutory stock options; the other Option Plan provides only for the granting of non-statutory stock options. Terms of options granted under the Option Plans, including vesting requirements, are determined by the Committee. Options granted under the Option Plans vest over periods ranging up to ten years, expire ten years from the date of grant and are not transferable other than by will or by the laws of descent and distribution. Incentive stock option grants must meet the requirements of the Internal Revenue Code. Headwaters has elected to continue to apply APB 25 in accounting for options granted to employees and directors and does not currently plan to change to the fair value method. The alternative fair value method of accounting prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), requires the use of option valuation models that were not developed for use in valuing employee stock options, as discussed below. Under APB 25, no compensation expense is recognized for stock option grants to employees, officers and directors when the exercise price of stock options equals or exceeds the market price of Headwaters' common stock on the date of grant. In years prior to 1998, certain options were granted with terms considered compensatory. In such instances, the related compensation cost is amortized to expense over the applicable vesting period on a straight-line basis. Amortized compensation expense related to compensatory options granted in prior years was approximately $707,000, $93,000 and $93,000 for 2000, 2001 and 2002, respectively. If Headwaters had elected to account for options granted based on their fair value, as prescribed by SFAS 123, net income and income per share would have been changed to the pro forma amounts shown in the table below:
(thousands of dollars, except per-share data) 2000 2001 2002 ---------------------------------------------------------------- ------------ ------------- ------------ Net income (loss) attributable to common stockholders - reported $1,364 $21,404 $24,286 - pro forma (350) 18,944 20,692 Basic income (loss) per share - reported 0.07 0.94 1.00 - pro forma (0.02) 0.83 0.85 Diluted income (loss) per share - reported 0.07 0.87 0.94 - pro forma (0.02) 0.77 0.80
F-24 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ The fair value of each stock option grant was determined using the Black-Scholes option pricing model and the following assumptions: expected stock price volatility of 50% to 90%, risk-free interest rates ranging from 1.7% to 6.3%, weighted average expected option lives of 4 to 5 years, and no dividend yield. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price volatility. Because Headwaters' stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of stock options. The following table is a summary of activity for all of Headwaters' stock options, including options not granted under the Option Plans, for the years ended September 30:
2000 2001 2002 ----------------------- ---------------------- ----------------------- Weighted- Weighted- Weighted- average average average Exercise Exercise Exercise (thousands of shares) Shares Price Shares Price Shares Price ---------------------------------------- ----------- ----------- ---------- ----------- ----------- ----------- Outstanding at beginning of year 2,971 $ 6.18 3,822 $5.16 3,283 $ 5.80 Granted 1,112 3.31 251 9.15 611 13.38 Granted in exchange for HTI options -- -- 144 0.07 -- -- Exercised (42) 1.50 (822) 2.42 (852) 5.02 Canceled (219) 10.37 (112) 8.42 (52) 6.60 ----------- ----------- ---------- ----------- ----------- ----------- Outstanding at end of the year 3,822 $ 5.16 3,283 $5.80 2,990 $ 7.56 =========== =========== ========== =========== =========== =========== Exercisable at end of year 2,201 $5.29 2,171 $5.70 1,898 $6.08 =========== =========== ========== =========== =========== =========== Weighted-average fair value of options granted during the year below market none $9.18 none Weighted-average fair value of options granted during the year at market $1.09 $5.20 $7.35 Weighted-average fair value of options granted during the year above market $1.19 none none The following table summarizes information about all stock options outstanding at September 30, 2002: (thousands of shares) Outstanding Options Exercisable Options --------------------- ------------------------------------------------- --------------------------- Number Number Weighted-average Weighted- Exercisable Weighted- Outstanding at Remaining average at average Range of Exercise September 30, Contractual Life Exercise September 30, Exercise Prices 2002 in Years Price 2002 Price --------------------- ----------------- ----------------- ------------- -------------- ------------ $0.01 to $3.00 752 3.4 $ 1.75 589 $ 1.69 $4.00 to $5.88 831 4.9 4.74 719 4.75 $8.25 to $12.97 986 7.0 11.73 551 11.98 $13.56 to $13.85 421 9.3 13.73 39 13.56 ----------------- -------------- 2,990 1,898 ================= ==============
In October 2002, the number of shares that can be granted under one of the Option Plans was increased by 350,000 shares. Subsequently, in November 2002, Headwaters granted to employees non-statutory options to purchase approximately 500,000 shares of common stock. These options have an exercise price of $16.97, which was equal to the fair market value of Headwaters' common stock on the date of grant. F-25 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ Common Stock Warrants - As of September 30, 2002, there were warrants outstanding for the purchase of approximately 179,000 shares of common stock at prices ranging from $1.32 to $1.56 per share and with expiration dates ranging from October 2002 to March 2005. All of these warrants were issued in connection with private placements of common and preferred stock or debt during 1999 and 2000. Stockholder Approval of Options and Warrants - The following table presents information related to stockholder approval of options and warrants, as of September 30, 2002.
(thousands of shares) -------------------------------------------------------------------------------------------------------------------- Weighted-average Shares remaining available Shares to be issued exercise price of for future issuance under upon exercise of outstanding options and existing equity Plan Category options and warrants warrants compensation plans -------------------------------------------------------------------------------------------------------------------- Option plan approved by stockholders 1,981 $7.58 46 Option plans and warrants not approved by stockholders 1,188 6.59 168 --------------------------------------------------------------------------------- Total 3,169 $7.21 214 =================================================================================
As discussed above, Headwaters has two primary stock option plans under which options have been granted. Headwaters has also issued several options outside of any plan, as well as warrants, in connection with various debt and equity financing transactions. One of the two primary stock option plans has been approved by stockholders; the other stock option plan has not been approved by stockholders. The amounts included in the caption "not approved by stockholders" in the above table represent amounts applicable under i) the stock option plan not approved by stockholders, ii) all stock options granted outside of any stock option plan, and iii) all outstanding warrants. 12. Income Taxes In 2000, Headwaters reported a net income tax benefit of $2,900,000, consisting of the recognition of $3,000,000 of its deferred tax asset, reduced by $100,000 of federal alternative minimum tax. In 2001, Headwaters reported a net income tax benefit of $7,049,000, consisting of the recognition of $7,470,000 of its deferred tax asset, reduced by $100,000 of federal alternative minimum tax and $321,000 of current state income tax expense. In 2002, as a result of recording the full value of its deferred tax asset in 2001, Headwaters recorded an income tax provision with an effective tax rate of approximately 40%. The income tax provision (benefit) consisted of the following at September 30:
(thousands of dollars) 2000 2001 2002 --------------------------------------------------------------------------------------------------- Current tax provision: Federal $ 100 $ 100 $ 3,490 State -- 321 920 ----------------------------------------- Total current tax provision 100 421 4,410 Deferred tax provision (benefit): Federal (3,040) (7,870) 9,720 State 40 400 1,820 ----------------------------------------- Total deferred tax provision (benefit) (3,000) (7,470) 11,540 ----------------------------------------- Total income tax provision (benefit) $(2,900) $(7,049) $15,950 =========================================
As of September 30, 2001, Headwaters had net operating loss carryforwards ("NOLs") of approximately $24,000,000 and research and development tax credit carryforwards of approximately $220,000 for federal tax purposes. During 2002, Headwaters utilized all of these NOLs and tax credit carryforwards except for approximately $935,000 of HTI's acquisition date NOLs that are subject to an annual limitation of approximately $800,000 due to the change in ownership of HTI. Headwaters expects to utilize HTI's remaining NOLs in 2003 and 2004. F-26 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ The provision (benefit) for income taxes differs from the statutory federal income tax rate due to the following:
(thousands of dollars) 2000 2001 2002 --------------------------------------------------------------------------------------------------- Tax provision at 35% statutory rate $ 274 $ 5,064 $14,083 State income taxes, net of federal tax effect 25 470 1,780 Change in valuation allowance (10,400) (14,200) -- Alternative minimum tax 100 100 -- Acquired in-process research and development -- 918 -- Other, primarily redetermination of prior years' tax estimates 7,101 599 87 ----------------------------------------- Income tax provision (benefit) $ (2,900) $ (7,049) $15,950 ========================================= The components of Headwaters' deferred income tax assets and liabilities were as follows as of September 30: (thousands of dollars ) 2001 2002 --------------------------------------------------------------------------------------------------- Deferred tax assets: Unamortized non-refundable license fees $ 2,640 $ 2,491 Estimated liabilities 410 2,103 Net operating loss carryforwards 9,120 411 Write-down of related party note receivable 720 383 Research and development tax credit carryforwards 220 -- Other, net 100 -- --------------------------- Total deferred tax assets 13,210 5,388 --------------------------- Deferred tax liabilities: Intangible assets -- (45,128) Property, plant and equipment -- (7,401) Other, net (50) (2,402) --------------------------- Total deferred tax liabilities (50) (54,931) --------------------------- Net deferred tax asset (liability) $13,160 $(49,543) ===========================
The valuation allowance decreased by $10,400,000 and $14,200,000 during 2000 and 2001, respectively. A valuation allowance is provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized. Based primarily on results of operations in 2001 and expected future results of operations, Headwaters determined that as of September 30, 2001, it was more likely than not that its deferred tax assets would be fully realized and accordingly, the remaining valuation allowance was eliminated. 13. Basic and Diluted Income Per Share The following table sets forth the computation of basic and diluted income per share.
(thousands of dollars and shares, except per-share data) 2000 2001 2002 ------------------------------------------------------------------------------------------------------- Numerator: Income before extraordinary item $11,542 $21,517 $24,286 Extraordinary item (7,860) -- -- --------------------------------------- Net income 3,682 21,517 24,286 Undeclared preferred stock dividends and redemption premium (2,260) (113) -- Imputed preferred stock dividends (58) -- -- --------------------------------------- Numerator for basic earnings per share -- net income attributable to common stockholders 1,364 21,404 24,286 Effect of dilutive securities - preferred stock dividends 119 113 -- --------------------------------------- Numerator for diluted earnings per share - net income attributable to common stockholders after assumed conversions $ 1,483 $21,517 $24,286 ======================================= F-27 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ Denominator: Denominator for basic earnings per share - weighted-average shares outstanding 19,468 22,787 24,234 Effect of dilutive securities: Shares issuable upon exercise of options and warrants 391 1,582 1,491 Shares issuable upon conversion of preferred stock 2,113 268 -- --------------------------------------- Total dilutive potential shares 2,504 1,850 1,491 --------------------------------------- Denominator for diluted earnings per share - weighted-average shares outstanding after assumed exercises and conversions 21,972 24,637 25,725 ======================================= Basic earnings per share: Income before extraordinary item $0.47 $0.94 $1.00 Extraordinary item (0.40) -- -- --------------------------------------- Net income per common share $0.07 $0.94 $1.00 ======================================= Diluted earnings per share: Income before extraordinary item $0.43 $0.87 $0.94 Extraordinary item (0.36) -- -- --------------------------------------- Net income per common share $0.07 $0.87 $0.94 =======================================
During the periods presented, Headwaters' potentially dilutive securities consisted of options and warrants for the purchase of common stock, convertible debt and convertible preferred stock. For 2000, some options and warrants and certain convertible preferred stock were dilutive, but all other potentially dilutive securities were anti-dilutive and were not considered in the calculation. For 2001, most options and warrants and all of the then outstanding preferred stock were dilutive and were considered in the calculation. For 2002, most options and warrants were dilutive and were considered in the calculation. Anti-dilutive securities not considered in the diluted earnings per share calculation totaled approximately 7,000,000 shares in 2000, approximately 1,375,000 shares in 2001, and approximately 210,000 shares in 2002. Imputed preferred stock dividends were calculated based upon the amount by which the price of Headwaters' common stock exceeded the conversion price at the date convertible preferred shares were issued. 14. Unusual and Extraordinary Items Sale of Facilities - Headwaters' business plan through 2000 called for the construction and sale of alternative fuel manufacturing facilities and the licensing of Headwaters' technology to facility purchasers to generate ongoing royalties. In 1999, Headwaters sold a facility and remained contingently liable for $800,000 of the facility debt. This amount was recognized as income in 2001 due to the elimination of the contingency. In 2000, upon achieving specified operating performance milestones, Headwaters received additional cash payments related to the sale of this facility. The cash proceeds from these payments, net of obligations to third parties, approximated $7,377,000. Of the net amount received, Headwaters recognized $4,400,000 as a gain because there were no ongoing obligations associated with those payments. Headwaters deferred the recognition of $2,977,000, which amount was characterized as prepaid royalties in the agreement. This amount is being recognized as revenue on a straight-line basis through December 2007. Also, in 2000, Headwaters sold the three remaining alternative fuel facilities it owned plus an option to acquire a licensee facility. Headwaters reported net gains on these transactions totaling approximately $12,470,000. All of the gains on sale of facilities are included in other income in the consolidated statement of income. Gains on Other Transactions - During 2000, Headwaters recorded other income of approximately $1,079,000 related to the satisfaction of a contingent contract liability ($755,000) and the gain recognized on a note receivable transaction. 2000 Asset Write-offs and Other Charges - In 2000, Headwaters recorded an impairment charge of approximately $14,804,000 related to assets located in Utah and Alabama. This impairment charge consisted of an approximate F-28 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ $12,615,000 write-down to net realizable value of certain plant and equipment which remained on the sites and was idled when alternative fuel facilities were sold, plus an approximate $2,189,000 write-off of an intangible asset which was no longer considered recoverable due to the relocation of a licensee facility. Headwaters also recorded employee severance and other non-cash charges from incremental amortization of deferred compensation from stock options (resulting from the termination of employees whose stock options became fully vested upon termination) totaling approximately $1,443,000. Other settlement charges ($979,000) and asset write-downs ($532,000) were recorded in 2000. All of these asset write-offs and other charges totaled approximately $17,758,000. Of this amount, approximately $16,037,000 represented non-cash expenses. Extraordinary Loss - In 2000, Headwaters redeemed all of its remaining convertible debt. The redemption consideration and early prepayment costs included approximately $7,037,000 in cash plus the issuance of approximately 214,000 shares of common stock. The loss recognized as a result of the total redemption consideration paid plus the acceleration of amortization of the unamortized debt discount and debt issuance costs in excess of the debt carrying value totaled approximately $7,860,000. This loss is reflected as an extraordinary item in the consolidated statement of income. 15. Commitments and Contingencies Commitments and contingencies as of September 30, 2002 not disclosed elsewhere are as follows: Leases - Rental expense was approximately $255,000 in 2000, $204,000 in 2001 and $720,000 in 2002. Headwaters has noncancellable operating leases for certain facilities and equipment. Most of these leases have renewal terms and expire in various years through 2016. As of September 30, 2002, minimum rental payments due under these leases are as follows: Year ending September 30: (thousands of dollars) ---------------------------- -------------------- 2003 $ 8,927 2004 6,900 2005 4,777 2006 3,229 2007 2,589 Thereafter 4,337 -------------------- $30,759 ==================== Subsequent to September 30, 2002, Headwaters entered into a new headquarters office lease arrangement which expires in 2008. Total minimum rental payments under the new lease agreement, which are not included above, total approximately $2,572,000. Sale, Purchase and Royalty Commitments - Certain of ISG's contracts with its customers and suppliers require ISG to make minimum sales and purchases. At September 30, 2002, these minimum requirements are as follows: (thousands of dollars) -------------------------------- Minimum Year ending September 30: Minimum Sales Purchases ---------------------------- ---------------- --------------- 2003 $ 521 $ 8,116 2004 599 7,033 2005 615 3,960 2006 515 2,998 2007 375 2,930 Thereafter 813 10,656 ---------------- --------------- $3,438 $35,693 ================ =============== F-29 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ ISG also has minimum royalty commitments on certain net sales for calendar 2002 and 2003. Remaining minimum royalty commitments through December 31, 2003 total approximately $832,000. Employee Benefit Plans - In 2000, Headwaters' Board of Directors approved three employee benefit plans, the Headwaters Incorporated 401(k) Profit Sharing Plan, the 2000 Employee Stock Purchase Plan, and the Headwaters Incorporated Incentive Bonus Plan. Substantially all employees of Headwaters are eligible to participate in the 401(k) and Stock Purchase Plans after meeting certain age and length of employment requirements. All employees, except those directly involved in the operations of alternative fuel facilities owned by a licensee, are eligible to participate in the Incentive Bonus Plan. As of September 30, 2002, these plans were not effective for ISG employees; however, it is expected that during 2003, ISG's employees will begin to be covered under these plans. 401(k) Plan. Under the terms of the 401(k) Plan, eligible employees may elect to make tax-deferred contributions of up to 15% of their compensation, subject to statutory limitations. Headwaters matches employee contributions up to a specified maximum rate and these matching contributions vest over a three-year period. Headwaters is not required to be profitable in order to make matching contributions. Stock Purchase Plan. The 2000 Employee Stock Purchase Plan provides eligible employees with an opportunity to increase their proprietary interest in the success of Headwaters by purchasing stock in Headwaters on favorable terms and to pay for such purchases through payroll deductions. A total of 500,000 shares of common stock are reserved for issuance under the Plan, with approximately 420,000 shares available for future issuance as of September 30, 2002. Under the Plan, employees purchase shares of stock directly from Headwaters, which shares are made available primarily from treasury shares repurchased on the open market or from authorized but unissued shares, if necessary. The Plan is intended to comply with Section 423 of the Internal Revenue Code, but is not subject to the requirements of ERISA. Employees purchase stock through payroll deductions of 1% to 10% of cash compensation, subject to certain limitations. The stock is purchased in a series of quarterly offerings. The cost per share to the employee is 85% of the lesser of the fair market value at the beginning of the offering period or the end of the offering period. Incentive Bonus Plan. The Incentive Bonus Plan, approved annually by the Compensation Committee of the Board of Directors, provides for annual cash bonuses to be paid if Headwaters accomplishes certain financial goals and if employees meet individual goals. A participant's cash bonus is based on Headwaters' success in meeting or exceeding specified financial performance targets established by the Compensation Committee of the Board of Directors, the employee's base pay, and individual performance during the year. Headwaters' financial goals are based upon an economic value added concept ("EVA") which purports to more closely align with a company's share price performance than other measurements of performance. ISG Benefit Plans. Eligible employees of ISG may participate in ISG's 401(k) Plan. ISG matches employee contributions up to a specified maximum rate and these matching contributions vest after three years. ISG is not required to be profitable in order to make matching contributions. ISG also has certain incentive bonus plans and sales commission plans that cover certain management and sales personnel that are generally effective for calendar 2002. Payments under the incentive bonus plans are generally dependent on exceeding specified EBITDA targets, and payments under the sales commission plans are generally based on a percentage of revenues billed. Total expense for all benefit plans of Headwaters and ISG was approximately $1,768,000 in 2000, $2,082,000 in 2001 and $3,300,000 in 2002. Medical Insurance - ISG has established a self-insured medical insurance plan for its employees with stop-loss coverage for amounts in excess of $75,000 per individual and approximately $5,100,000 in the aggregate for the current plan year ending December 31, 2002. ISG has contracted with a third-party administrator to assist in the payment and administration of claims. Insurance claims are recognized as expenses when incurred, including an estimate of costs incurred but not reported at the balance sheet date. As of September 30, 2002, approximately $1,481,000 has been accrued for this liability. F-30 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ Legal or Contractual Matters - Adtech. In October 1998, Headwaters entered into a technology purchase agreement with James G. Davidson and Adtech, Inc. The transaction transferred certain patent and royalty rights to Headwaters related to an alternative fuel technology invented by Davidson. (This technology is distinct from the technology developed by Headwaters.) In September 2000, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee filed by Adtech, Inc. against Davidson and Headwaters. In the action, certain purported officers and directors of Adtech alleged that the technology purchase transaction was an unauthorized corporate action and that Davidson and Headwaters conspired together to effect the transfer. The complaint asserted related causes of action and sought unspecified money damages and other relief. In August 2001, the trial court granted Headwaters' motion to dismiss the complaint. Plaintiffs appealed the case to the Sixth Circuit Court of Appeals. In June 2002, the Sixth Circuit Court of Appeals issued an order i) affirming the District Court's judgment and order of dismissal, and ii) transferring to the Federal Circuit Court of Appeals plaintiff's appeal of the District Court's order denying the motion for relief from judgment. Because resolution of the appeal is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters' liability. Boynton. This action is factually related to the Adtech matter. In the Adtech case, the alleged claims are asserted by certain purported officers and directors of Adtech, Inc. In the Boynton action, the allegations arise from the same facts, but the claims are asserted by certain purported stockholders of Adtech. In June 2002, Headwaters received a summons and complaint from the United States District Court for the Western District of Tennessee alleging, inter alia, fraud, conspiracy, constructive trust, conversion, patent infringement, and interference with contract arising out of the 1998 technology purchase agreement entered into between Davidson and Adtech on the one hand, and Headwaters on the other. The complaint seeks declaratory relief and compensatory and punitive damages. Because the litigation is at an early stage and resolution is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, of Headwaters' liability. AGTC. In March 1996, Headwaters entered into an agreement with AGTC and its associates for certain services related to the identification and selection of alternative fuel projects. In March 2002, AGTC filed an arbitration demand claiming that it is owed a commission under the 1996 agreement for eight percent of the monetized price of the Port Hodder project. Headwaters asserts that AGTC did not perform under the agreement and that the agreement was terminated and the disputes were settled in July 1996. Headwaters has filed an answer in the arbitration, denying AGTC's claims and has asserted counterclaims against AGTC. Because the arbitration is at an early stage and resolution is uncertain, legal counsel cannot express an opinion as to the ultimate amount of recovery or liability. AJG. In December 1996, Headwaters entered into a technology license and proprietary chemical reagent sale agreement with AJG Financial Services, Inc. The agreement called for AJG to pay royalties and to purchase proprietary chemical reagent material from Headwaters. In October 2000, Headwaters filed a complaint in the Fourth District Court for the State of Utah against AJG alleging that it had failed to make payments and to perform other obligations under the agreement. Headwaters asserts claims including breach of contract, declaratory judgment, unjust enrichment, and accounting and seeks money damages as well as other relief. AJG's answer to the complaint denied Headwaters' claims and asserted counter-claims based upon allegations of misrepresentation and breach of contract. AJG seeks unspecified compensatory damages as well as punitive damages. Headwaters has denied the allegations of AJG's counter-claims. Because the litigation is at an early stage and resolution is uncertain, legal counsel cannot express an opinion as to the ultimate amount of recovery or liability. Nalco. In October 2000, Headwaters filed a complaint in the United States District Court for the District of Utah against Nalco Chemical Company ("Nalco"). Headwaters alleges that Nalco, by its sale and marketing of materials for use in creating alternative fuel, breached a non-disclosure agreement, misappropriated trade secrets, and violated patent rights of Headwaters. Headwaters seeks by its complaint injunctive relief and damages to be proven at trial. Nalco filed an answer denying the allegations in the complaint and asserting counter-claims alleging patent invalidity, antitrust violations, and interference with economic relations. Headwaters denies the counter-claims; however, if Nalco prevails on its counter-claims, the result could have a material adverse effect on Headwaters' business. Because the litigation is at an early stage and resolution is uncertain, legal counsel cannot express an opinion as to the ultimate amount, if any, that might be recovered. F-31 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ License Fees. Pursuant to the contractual terms of an agreement with a certain licensee, the cumulative net license fees generated by Headwaters, totaling approximately $6,000,000 as of September 30, 2002, have been placed in escrow for the benefit of Headwaters. Headwaters currently expects the escrowed amounts to increase as additional license fees are generated and that most, if not all, of such amounts will be recognized as revenue at some future date. Certain accounting rules governing revenue recognition require that the seller's price to the buyer be "fixed or determinable" as well as reasonably certain of collection. In this situation, those rules appear to currently preclude revenue recognition. Accordingly, none of the escrowed amounts have been recognized as revenue in the consolidated statements of income. Other. Headwaters and its subsidiaries are also involved in other legal proceedings that have arisen in the normal course of business. For example, certain subsidiaries of ISG are involved in legal proceedings involving allegations of breach of warranty and sales of defective building products applied by third parties to building exteriors. Generally, ISG denies and defends such allegations or resolves such matters as appropriate. Management does not believe that the outcome of these matters will have a significant adverse effect upon the operations or the financial position of Headwaters; however, it is possible that a change in management's estimates of probable liability could occur and the change could be significant. Employment Agreements - Headwaters and its subsidiaries have entered into employment agreements with its Chief Executive Officer and 15 other officers and employees. The agreements have original terms ranging from two to five years and are generally renewable by Headwaters, usually for one-year terms. They provide for annual salaries currently ranging from approximately $75,000 to $400,000 annually per person. The annual commitment under all agreements combined is currently approximately $2,990,000. All agreements provide for termination benefits, ranging from at least six months' salary, up to a maximum period equal to the remaining term of the agreement. 16. Related Party Transactions In addition to related party transactions disclosed elsewhere, Headwaters purchases certain insurance benefits for its employees from various companies for which a director of Headwaters acts as a broker or agent. Gross payments to those insurance companies totaled approximately $361,000 in 2000, $381,000 in 2001 and $532,000 in 2002. 17. Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 2001 and 2002 is as follows:
2001 ---------------------------------------------------------------- First Second Third Fourth (thousands of dollars, except per-share data) Quarter Quarter Quarter Quarter (1) Full Year ---------------------------------------------- ----------- ------------ ------------ ------------- ------------ Net revenue $12,316 $9,754 $10,699 $12,695 $45,464 Gross profit 7,590 6,245 6,600 7,434 27,869 Net income (1) 5,406 4,576 4,956 6,579 21,517 Basic net income per common share 0.23 0.20 0.22 0.29 0.94 Diluted net income per common share 0.22 0.19 0.20 0.26 0.87 2002 ---------------------------------------------------------------- First Second Third Fourth (thousands of dollars, except per-share data) Quarter Quarter Quarter Quarter (2) Full Year ---------------------------------------------- ----------- ------------ ------------ ------------- ------------ Net revenue $18,422 $25,256 $31,968 $43,699 $119,345 Gross profit 10,253 11,544 15,703 20,895 58,395 Net income (2) 4,727 5,459 6,736 7,364 24,286 Basic net income per common share 0.20 0.23 0.27 0.30 1.00 Diluted net income per common share 0.19 0.21 0.26 0.28 0.94
(1) In the fourth quarter of 2001, Headwaters recognized approximately $7,470,000 of its deferred tax asset (see Note 12), recorded losses totaling approximately $3,812,000 related to write-offs of notes receivable and losses on equity F-32 HEADWATERS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued ___________ investments (see Note 2), and recorded $2,400,000 of expense related to in-process research and development purchased in the HTI acquisition (see Note 3). (2) In the fourth quarter of 2002, Headwaters recorded approximately $2,568,000 of losses related to the write-off of deferred project / financing costs incurred in 2002 because management decided not to pursue the proposed projects / financings. Also, Headwaters recorded an impairment loss of approximately $986,000 related to a note receivable (see Note 5). F-33 EX-3.2.4 3 ex324k093002.txt Exhibit 3.2.4 HEADWATERS INCORPORATED BYLAWS ARTICLE ONE OFFICES Section 1. Registered Office. The registered office of HEADWATERS INCORPORATED, a Delaware corporation (the "Corporation"), shall be located in the City of Wilmington, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at such other places, either within or without the State of Delaware, as the Board of Directors of the Corporation (the "Board of Directors") may from time to time determine or as the business of the Corporation may require. ARTICLE TWO MEETINGS OF STOCKHOLDERS Section 1. Place. All annual meetings of stockholders shall be held at such place, within or without the State of Delaware, as may be designated by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Special meetings of stockholders may be held at such place, within or without the State of Delaware, and at such time as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Time of Annual Meeting. Annual meetings of stockholders shall be held on such date and at such time fixed, from time to time, by the Board of Directors, provided, that there shall be an annual meeting held every calendar year at which the stockholders shall elect a board of directors and transact such other business as may properly be brought before the meeting. Section 3. Call of Special Meetings. Special meetings of the stockholders may be called by the President, the Board of Directors or by the Secretary on the written request of the holders of not less than a majority of all shares entitled to vote at the meeting. Section 4. Conduct of Meetings. The Chairman of the Board (or in his absence, the President or such other designee of the Chairman of the Board) shall preside at the annual and special meetings of stockholders and shall be given full discretion in establishing the rules and procedures to be followed in conducting the meetings, except as otherwise provided by law or in these Bylaws. 1 Section 5. Notice and Waiver of Notice. Written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the day of the meeting, either personally or by first-class mail, by or at the direction of the President, the Secretary, or the officer or person calling the meeting, to each stockholder of record entitled to vote at such meeting. If the notice is mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. If a meeting is adjourned to another time and/or place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the Board of Directors, after adjournment, fixes a new record date for the adjourned meeting or if the adjournment is for more than 30 days. Notice need not be given to any stockholder who submits a written waiver of notice by him before or after the time stated therein. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when a stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. Section 6. Business of Special Meeting. Business transacted at any special meeting shall be confined to the purposes stated in the notice thereof. Section 7. Quorum. The holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of stockholders except as otherwise provided in the Corporation's certificate of incorporation (the "Certificate of Incorporation"). If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that might have been transacted at the meeting as originally notified and called. The stockholders present at a duly organized meeting may continue to transact business notwithstanding the withdrawal of some stockholders prior to adjournment, but in no event shall a quorum consist of the holders of less than one-third (1/3) of the shares entitled to vote and thus represented at such meeting. Section 8. Required Vote. The vote of the holders of a majority of the shares entitled to vote and represented at a meeting at which a quorum is present shall be the act of the Corporation's stockholders unless the question is one upon which by express provision of the statutes or the Certificate of Incorporation a different vote is required, in which case such provision shall govern and control the decision of such question. The vote required for the election of the Directors shall be by plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Section 9. Voting of Shares. Each outstanding share, regardless of class, shall be entitled to vote on each matter submitted to a vote at a meeting of stockholders, except to the extent that the voting rights of the shares of 2 any class are limited or denied by the Certificate of Incorporation or the General Corporation Law of Delaware. Section 10, Proxies. A stockholder may vote in person or by proxy executed in writing by the stockholder or by his duly authorized attorney-in-fact. No proxy shall be voted or acted upon after three (3) years from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable, and unless otherwise made irrevocable by law. Section 11. Stockholder List. The officer or agent having charge of the Corporation's stock transfer books shall make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of, and the number and class and series, if any, of shares held by each. Such list, for a period of ten (10) days prior to such meeting, shall be subject to inspection by any stockholder at any time during the usual business hours at the place where the meeting is to be held. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the stockholders entitled to examine such list or transfer book or to vote at any such meeting of stockholders. Section 12. Action Without Meeting. Any action required by the statutes to be taken at a meeting of stockholders, or any action that may be taken at a meeting of the stockholders, may be taken without a meeting or notice if a consent, or consents, in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at meeting at which all shares entitled to vote thereon were present and voted with respect to the subject matter thereof, and such consent shall be delivered to the Corporation by delivery to its registered office, its principal place of business, or an officer or agent of the Corporation, having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or certified mail, return receipt requested. Such consent shall have the same force and effect as a vote of stockholders taken at such a meeting. Section 13. Fixing Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purposes, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders, such date in any case to be not more than sixty (60) days, and, in case of a meeting of stockholders, not less than ten (10) days, prior to the date on which the particular action requiring such determination of stockholders is to be taken. If no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which the notice of the meeting is mailed or the date on which the resolutions of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of stockholders. 3 When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section, such determination shall apply to any adjournment thereof, except where the Board of Directors fixes a new record date for the adjourned meeting. Section 14. Inspectors and Judges. The Board of Directors in advance of any meeting may, but need not, appoint one or more inspectors of election or judges of the vote, as the case may be, to act at the meeting or any adjournment thereof. If any inspector or inspectors, or judge or judges, are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors or judges. In case any person who may be appointed as an inspector or judge fails to appear or act, the vacancy may be filled by the Board of Directors in advance of the meeting, or at the meeting by the person presiding thereat. The inspectors or judges, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots and consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate votes, ballots and consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing of any challenge, question or matter determined by him or them, and execute a certificate of any fact found by him or them. ARTICLE THREE DIRECTORS Section 1. Number, Election and Term. The number of directors of the Corporation shall be fixed from time to time, within the limits specified by the Certificate of Incorporation, by resolution of the Board of Directors; provided, however, no director's term shall be shortened by reason of a resolution reducing the number of directors. Directors need not be residents of the State of Delaware, stockholders of the Corporation or citizens of the United States. Unless provided otherwise by law, any director may be removed at any time, with or without cause, at a special meeting of the stockholders for that purpose. Members of the initial Board of Directors shall hold office until the first annual meeting of stockholders and until their successors shall have been elected and qualified. Following the first annual meeting of stockholders, the Board of Directors may be divided into three classes, Class I, Class II and Class III, each class to be as nearly equal in number as possible, the term of office of directors of the first class to expire at the first annual meeting of stockholders after their election, that of the second class to expire at the second annual meeting after their election, and that of the third class to expire at the third annual meeting after their election. At each annual meeting following such classification and division of the members of the Board of Directors, a number of directors equal to the number of directorships in the class whose term expires at the time of such meeting shall be elected to hold office until the third succeeding annual meeting of stockholders of the Corporation. Irrespective of Article 3, Section 2, any director of any class elected to fill a vacancy resulting from an increase in such class hold office for a term that shall coincide with the remaining term of the class. Each director shall hold office for the class term for which he is elected and until his successor shall be elected and qualified. Notwithstanding anything herein to the contrary, any director may be removed from office at any 4 time by the vote or written consent of stockholders representing not less than two-thirds of the issued and outstanding stock entitled to vote. The Board of Directors shall have no less than five members and no more than nine members. Notwithstanding anything herein to the contrary, the size of the Board of Directors may not be increased without the vote or written consent of stockholder representing not less than two-thirds of the issued and outstanding stock entitled to vote. Section 2. Vacancies. A director may resign at any time by giving written notice to the Board of Directors or the Chairman of the Board. Such resignation shall take effect at the date of receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any vacancy occurring in the Board of Directors and any directorship to be filled by reason of an increase in the size of the Board of Directors shall be filled by the affirmative vote of a majority of the current directors though less than a quorum of the Board of Directors, or may be filled by an election at an annual or special meeting of the stockholders called for that purpose. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, or until the next election of one or more directors by stockholders if the vacancy is caused by an increase in the number of directors. Section 3. Powers. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised and done by the stockholders. Section 4. Place of Meetings. Meetings of the Board of Directors, regular or special, may be held either within or without the State of Delaware. Section 5. Annual Meetings. The first meeting of each newly elected Board of Directors shall be held, without call or notice, immediately following each annual meeting of stockholders. Section 6. Regular Meetings. Regular meetings of the Board of Directors may also be held without notice at such time and at such place as shall from time to time be determined by the Board of Directors. Section 7. Special Meetings and Notice. Special meetings of the Board of Directors may be called by the President and shall be called by the Secretary on the written request of any two directors. Written notice of special meetings of the Board of Directors shall be given to each director at least twenty-four (24) hours before the meeting. Except as required by statute, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Notices to directors shall be in writing and delivered personally or mailed to the directors at their addresses appearing on the books of the Corporation. Notice by mail shall be deemed to be given at the time when the same shall be received. Notice to directors may also be given by telegram, and shall be deemed delivered when the same shall be deposited at a telegraph office for transmission and all appropriate fees therefor have been paid. Whenever any 5 notice is required to be given to any director, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8. Quorum and Required Vote. A majority of the directors shall constitute a quorum for the transaction of business and the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater number is required by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted that might have been transacted at the meeting as originally notified and called. Section 9. Action Without Meeting. Any action required or permitted to be taken at a meeting of the Board of Directors or committee thereof may be taken without a meeting if a consent in writing, setting forth the action taken, is signed by all of the members of the Board of Directors or the committee, as the case may be, and such consent shall have the same force and effect as a unanimous vote at a meeting. Section 10. Telephone Meetings. Directors and committee members may participate in and hold a meeting by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meetings shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground the meeting is not lawfully called or convened. Section 11. Committees. The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate from among its members an executive committee and one or more other committees, each of which, to the extent provided in such resolution, shall have and may exercise all of the authority of the Board of Directors in the business and affairs of the Corporation except where the action of the full Board of Directors is required by statute. Vacancies in the membership of a committee shall be filled by the Board of Directors at a regular or special meeting of the Board of Directors. The executive committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. The designation of any such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. Section 12. Compensation of Directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 6 Section 13. Chairman of the Board. The Board of Directors may, in its discretion, choose a chairman of the board who shall preside at meetings of the stockholders and of the directors and shall be an ex officio member of all standing committees. The Chairman of the Board shall have such other powers and shall perform such other duties as shall be designated by the Board of Directors. The Chairman of the Board shall be a member of the Board of Directors but no other officers of the Corporation need be a director. The Chairman of the Board shall serve until his successor is chosen and qualified, but he may be removed at any time by the affirmative vote of a majority of the Board of Directors. ARTICLE FOUR OFFICERS Section 1. Positions. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary and a Treasurer, and if elected by the Board of Directors by resolution, a Chairman and/or Vice Chairman of the Board. Any two or more offices may be held by the same person. Section 2. Election of Specified Officers by Board. The Board of Directors at its first meeting after each annual meeting of stockholders shall elect a President, one or more Vice President, a Secretary, and a Treasurer. Section 3. Election or Appointment of Other Officers. Such other officers and assistant officers and agents as may be deemed necessary may be elected or appointed by the Board of Directors, or, unless otherwise specified herein, appointed by the President of the Corporation. The Board of Directors shall be advised of appointments by the President at or before the next scheduled Board of Directors meeting. Section 4. Salaries. The salaries of all officers of the Corporation to be elected by the Board of Directors pursuant to Article Four, Section 2 hereof shall be fixed from time to time by the Board of Directors or pursuant to its discretion. The salaries of all other elected or appointed officers of the Corporation shall be fixed from time to time by the President of the Corporation or pursuant to his direction. Section 5. Term. The officers of the Corporation shall hold office until their successors are chosen and qualified. Any officer or agent elected or appointed by the Board of Directors or the President of the Corporation may be removed, with or without cause, by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officers or agents appointed by the President of the Corporation pursuant to Section 3 of this Article Four may also be removed from such officer positions by the President, with or without cause. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors, or, in the case of an officer appointed by the President of the Corporation, by the President or the Board of Directors. 7 Section 6. President. The President shall be the Chief Executive Officer of the Corporation, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board or in the event the Board of Directors shall not have designated a Chairman of the Board, the President shall preside at meetings of the stockholders and the Board of Directors. Section 7. Vice Presidents. The Vice Presidents in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President. They shall perform such other duties and have such other powers as the Board of Directors shall prescribe or as the President may from time to time delegate. Section 8. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the stockholders and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board of Directors, affix the same to any instrument requiring it. Section 9. Treasurer. The Treasurer shall have the custody of corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursement, and shall render to the President and the Board of Directors at its regular meetings or when the Board of Directors so requires an account of all his transactions as treasurer and of the financial condition of the Corporation. ARTICLE FIVE CERTIFICATES FOR SHARES Section 1. Issue of Certificates. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates (and upon request every holder of uncertificated shares) shall be entitled to have a certificate signed by, or in the name of the Corporation by the chairman or vice-chairman of the Board of Directors, or the President or Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, representing the number of shares registered in certificate form. 8 Section 2. Legends for Preferences and Restrictions on Transfer. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided by law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. A written restriction on the transfer or registration of transfer of a security of the Corporation, if permitted by law as noted conspicuously on the certificate representing the security may be enforced against the holder of the restricted security or any successor or transferee of the holder including an executor, administrator, trustee, guardian or other fiduciary entrusted with like responsibility for the person or estate of the holder. Unless noted conspicuously on the certificate representing the security, a restriction, even though permitted by law, is ineffective except against a person with actual knowledge of the restriction. If the Corporation issues any shares that are not registered under the Securities Act of 1933, as amended, and registered or qualified under the applicable state securities laws, the transfer of any such shares shall be restricted substantially in accordance with the following legend: "THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AT HOLDER'S EXPENSE, AN OPINION (SATISFACTORY TO THE CORPORATION) OF COUNSEL (SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT REQUIRED." Facsimile Signatures. Any and all signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of the issue. Section 3. Lost Certificates. The Corporation may issue a new certificate of stock in place of any certificate therefore issued by it, alleged to have been lost, stolen, or destroyed, and the Corporation may require the owner of the lost, stolen, or destroyed certificate, or his legal representative to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4. Transfer of Shares. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 9 Section 5. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive rights of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. ARTICLE SIX GENERAL PROVISIONS Section 1. Dividends. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in cash, property, or its own shares pursuant to law and subject to the provisions of the Certificate of Incorporation. Section 2. Reserves. The Board of Directors may by resolution create a reserve or reserves out of earned surplus for any proper purpose or purposes, and may abolish any such reserve in the same manner. Section 3. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 4. Fiscal Year. The fiscal year of the Corporation shall end on December 31 of each year, unless otherwise fixed by resolution of the Board of Directors. Section 5. Seal. The corporate seal shall have inscribed thereon the name and state of incorporation of the Corporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE SEVEN AMENDMENTS OF BYLAWS These Bylaws may be altered, amended or repealed or new Bylaws may be adopted at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting. 10 EX-10.11.3 4 ex10113k093002.txt AMENDED BINDER PURCHASE AND SALE AGREEMENT Exhibit 10.11.3 Confidential - Final Execution Copy SECOND AMENDED AND RESTATED SUBLICENSE AGREEMENT AND BINDER PURCHASE AND SALE AGREEMENT This SECOND AMENDED AND RESTATED Sublicense Agreement and Binder Purchase and Sale Agreement (this "Agreement"), dated and effective as of the 4th day of December, 2001, between CENTRAL CITY SYNFUEL, LLC, a Delaware limited liability company ("Central City"), COBON ENERGY, LLC, a Utah limited liability company ("CoBon"), and HEADWATERS INCORPORATED f/k/a COVOL TECHNOLOGIES, INC., a Delaware corporation ("Covol"), recites and provides as follows: RECITALS A. Covol developed and owns proprietary Coal Technology (as hereinafter defined) and Binder (as hereinafter defined). B. Pursuant to Covol's desire to have the Coal Technology and Binder commercially exploited, Covol and CoBon entered into that certain License Agreement dated September 10, 1996, as amended by that April 7, 1997 Letter Agreement, as further amended by that November 11, 1999 Letter Agreement, and as further amended by that Licensor's Consent to Sub-Sublicense, Estoppel Certificate and Agreement dated December 14, 1999 (as amended, the "License Agreement"). A copy of the License Agreement is attached hereto as Exhibit A. C. CoBon and Somerset Synfuels No. 1, L.L.C., a Utah limited liability company ("Somerset"), entered into that Sublicense Agreement dated June 24, 1998, as amended by that Sublicensor's Consent to Sub-Sublicense, Estoppel Certificate and Agreement dated December 14, 1999 (as amended, the "Original Sublicense Agreement"). D. Pursuant to that Termination and Assignment Agreement dated June 19, 2000 between Covol, CoBon, Central City and Somerset, Somerset assigned its rights and delegated its obligations under the Original Sublicense Agreement to Central City. E. Pursuant to an Amended and Restated Sublicense Agreement and Binder Purchase and Sale Agreement dated June 19, 2000 (the "First Amended and Restated Sublicense Agreement and Binder Purchase and Sale Agreement"), Central City and CoBon amended and restated the terms of the Original Sublicense Agreement in their entirety, and Covol and Central City entered into an agreement for the purchase and sale of Binder. 1 F. In connection with an amendment being made as of the date hereof (the "Second Amendment to the Purchase Agreement") to the Purchase and Sale Agreement dated December 14, 1999 between Beta Synfuels, L.P. and Somerset Synfuel No. 1, L.L.C., as amended by that First Amendment to Purchase and Sale Agreement dated June 19, 2000, Central City and CoBon now desire to further amend and restate the terms of the First Amended and Restated Sublicense Agreement and Binder Purchase Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1. "Coal Technology" means Covol's proprietary method of reclaiming and utilizing discarded and newly formed coal fines and other by-products of coal mining to produce a solid proprietary product in the form of briquettes, extrusions, pellets or otherwise. The definition of "Coal Technology" also includes Covol's proprietary inventions (patented and unpatented), trade secrets, know-how, working prototypes, manufacturing information, improvements and other intellectual property relating to Covol's proprietary method of reclaiming discarded coal fines and other by-products of coal mining to produce Covol's solid proprietary product. Some of Covol's inventions relating to the "Coal Technology" (as well as other technologies which are not the subject of this Agreement) are disclosed, described and claimed in United States Patent No. 5,453,103, which issued on the 26th day of September, 1995 (the "`103 Patent"). Some of Covol's inventions relating to the "Coal Technology" (as well as other technologies which are not the subject of this Agreement) are disclosed, described and claimed in the United States Patent No. 5,599,361 issued on the 4th day of February, 1997 (the "361 Patent"). In Article III of the License Agreement, CoBon received an exclusive license with respect to "Coal Technology." The definition of "Coal Technology" also includes the binding technology and patented process for manufacturing a solid synthetic fuel that qualifies and is eligible for Internal Revenue Code Section 29 tax credits. When used at a qualified facility in conjunction with Covol's patented manufacturing process, the binding technology produces a Qualified Fuel from coal fines in the context of a full scale or less demanding manufacturing application. Consistent with the requirements of Internal Revenue Code Section 29, the "Coal Technology" employs a unique substrate to chemically change and bond the coal fines, thereby creating a Qualified Fuel. The detectable bonding between the coal fines is the result of the binder's ability to create an actual chemical change to the coal fines and is more than a simple physical mixture of polymer, coal fines and other additives. 2 The definition of "Coal Technology" does not cover any other technology or application of technology, including but not limited to Covol's proprietary "Coke Breeze Technology," "Revert Technology" and "Iron Recovery Technology". 1.2 "Binder" means Covol's unique substrates that chemically change and bond coal fines, and which have been patented by Covol. 1.3 "Qualified Fuels" means solid synthetic fuel produced at the Facility that qualifies and is eligible for Internal Revenue Code Section 29 tax credits. ARTICLE 2 GRANT OF LICENSE TO USE COAL TECHNOLOGY 2.1. Sublicense. CoBon hereby grants to Central City a non-exclusive license of CoBon's rights to the Coal Technology, including, but not limited to, the inventions disclosed and claimed in the `103 Patent and the `361 Patent, in connection with Central City's development, use, production, manufacturing, marketing and sale of solid synthetic fuel, Qualified Fuel and related products (as well as applicable tax credits generated thereby), its development and construction of manufacturing, briquetting or extruding facilities, plants and operations, and its formation of necessary corporations, companies, partnerships, ventures or other legal entities preparatory or incident thereto (the "Sublicense"). The Sublicense to use the Coal Technology and Binder in the production of solid synthetic fuel and/or Qualified Fuel shall be for an unlimited annual aggregate capacity during the term hereof. The Sublicense shall be available for use by Central City in connection with its development of a portable plant(s), including, without limitation, a facility and site located at 615 Cook Road, Central City, Pennsylvania (the "Facility"). This Sublicense shall also be available for use by Central City in connection with its development of additional sites, subject to the written approval of CoBon, which approval will not be unreasonably withheld. Central City shall not use any technology other than the Coal Technology for the production of Qualified Fuel at the Facility, except as provided in Section 5.1. 2.2. Retained Ownership. Covol shall retain all right, title, interest and ownership in and to the Coal Technology, including all inventions described and claimed in the `103 Patent and the `361 Patent, all present and future United States and foreign patent applications covering all or any part of the Coal Technology, and any improvement, all present and future United States and foreign patents that may subsequently issue covering all or any part of the Coal Technology, and any improvements, and related trade secrets, know-how, manufacturing information, and other intellectual property. 2.3. Authority to Sublicense. Covol has developed and believes it exclusively owns the Coal Technology and believes it will exclusively own any associated patent rights which may accrue during the Term of this Agreement. CoBon hereby certifies that it has the right to grant to Central City this Sublicense to use the Coal Technology pursuant to the terms and conditions of CoBon's License Agreement with Covol. Covol hereby certifies that under the License Agreement CoBon has the right to grant to Central City this Sublicense. 3 2.4. Trademark Sublicense. To the extent necessary to carry out the intent of this Agreement, Covol granted CoBon a non-exclusive license to use the trademarks and trade names used by Covol in connection with the Coal Technology ("Trademark License"). CoBon hereby grants to Central City a non-exclusive license to use the trademarks and trade names used by Covol in connection with the Coal Technology. The authorized use by Central City of any of the trademarks sublicensed hereby shall be in accordance with Covol's written standards which shall govern the manner of use and the nature and quality of the products in connection with which they may be used. CoBon will furnish to Central City a copy of any such applicable standards upon receipt thereof by CoBon. 2.5. Compliance Certification. At Central City's request, CoBon shall use its best efforts to coordinate and schedule Covol (at least annually) to conduct periodic field audits for the purpose of certifying, in writing, Central City's proper use of the Coal Technology and Binder for Section 29 tax credit qualification. Pursuant to the audit fee schedule, attached as Exhibit B hereto, Central City shall reimburse Covol for its reasonable costs in performing the audits. Central City shall also reimburse CoBon for its reasonable costs and for the reasonable value of its time in performing its obligations, if any, under this Section 2.5. ARTICLE 3 REPRESENTATIONS AND WARRANTIES 3.1. Covol Representations and Warranties. Covol hereby represents and warrants to CoBon and Central City as follows: A. The execution, delivery and performance by Covol of this Agreement will not constitute a default under any instrument binding upon Covol including, without limitation, the License Agreement, any agreement it has with Dow (hereinafter defined) pertaining to the production or use of Binder, and any other agreement pertaining or relating to the Coal Technology. B. No proceedings by or against Covol have been threatened or commenced in bankruptcy or for reorganization, liquidation, or for readjustment of debts under the Bankruptcy Code or any other law, whether state or federal, nor has Covol made an assignment for the benefit of creditors, admitted in writing its inability to pay debts generally as they become due, or filed or had filed against it any action seeking an order appointing a trustee or receiver of all or a substantial part of the property of Covol. C. No judicial or nonjudicial proceeding has been filed or is pending for the dissolution of Covol pursuant to a resolution of the board of directors or otherwise pursuant to any applicable state law. 4 D. There are no judicial or governmental judgments, orders, injunctions, decrees, or arbitration awards outstanding against Covol, and there are no judicial or governmental actions, suits, or proceedings or any arbitrations or mediations, pending or overtly threatened by written communications against Covol or any of the property owned by Covol that would affect (1) Covol's ability to perform under the License Agreement, this Agreement, or (2) any licensee's or sublicensee's use of the Coal Technology. E. Covol agrees, notwithstanding any language in the License Agreement or any other agreement to which it is a party, that the representations of Covol contained in this Agreement may be relied upon by Central City and CoBon. F. Except for this Agreement, the License Agreement is the sole agreement pertaining to CoBon's use and application of the Coal Technology in connection with the development and operation of the Facility. The License Agreement attached hereto as Exhibit A is a true and correct copy of thereof. The License Agreement is in full force and effect. As of the date of execution hereof, the representations made by Covol in the License Agreement are true, accurate and complete. G. Covol has not given notice of any default under the License Agreement to CoBon and has no knowledge of any event or condition which with the passage of time or the giving of notice or both would be a default under the License Agreement. H. In accordance with the terms of the License Agreement, CoBon has the authority and right to use the Coal Technology in the production of Qualified Fuels, and the right to sublicense the Coal Technology. I. Covol has heretofore granted or hereby grants its unconditional consent to CoBon's grant to Central City of a sublicense to use the Coal Technology pursuant to the terms of this Agreement in connection with the development and operation of the Facility. J. Notwithstanding anything contained in the License Agreement, Central City has, subject to its compliance with the terms of this Agreement, the unconditional right to utilize the Coal Technology. K. Covol acknowledges and agrees that it will provide certain services to Central City, as a sub-licensee of CoBon, all as specified in the License Agreement and this Agreement. L. The Binder employs a unique substrate that when applied using the Coal Technology changes chemical bonds of coal fines. M. Proper use of the Coal Technology, including use at an adequate, qualified facility, including without limitation the facility, and the proper application of Binder to adequate coal fines, will enable Central City to produce a product that is reasonably expected to create Qualified Fuels. 5 3.2. CoBon Representations and Warranties. CoBon hereby represents and warrants to Central City and Covol as follows: A. The execution, delivery and performance by CoBon of this Agreement will not constitute a default under any instrument binding upon CoBon including, without limitation, the License Agreement and any other agreement pertaining or relating to the Coal Technology. B. No proceedings by or against CoBon have been threatened or commenced in bankruptcy or for reorganization, liquidation, or for readjustment of debts under the Bankruptcy Code or any other law, whether state or federal, nor has CoBon made an assignment for the benefit of creditors, admitted in writing inability to pay debts generally as they become due, or filed or had filed against it any action seeking an order appointing a trustee or receiver of all or a substantial part of the property of CoBon. C. No judicial or nonjudicial proceeding has been filed or is pending for the dissolution of CoBon pursuant to a resolution of the members or otherwise pursuant to any applicable state law. D. There are no judicial or governmental judgments, orders, injunctions, decrees, or arbitration awards outstanding against CoBon, and there are no judicial or governmental actions, suits, or proceedings or any arbitrations or mediations, pending or overtly threatened by written communications against CoBon or any of the property owned by CoBon that would affect (1) CoBon's ability to perform under the License or this Agreement, or (2) any sublicensee's right to use the Coal Technology. E. CoBon agrees, notwithstanding any language in the License Agreement, this Agreement, or any other agreement to which CoBon is a party, that the representations of CoBon contained in this Agreement may be relied upon by Central City and Covol. F. Except for this Agreement, the License Agreement is the sole agreement pertaining to CoBon's use and application of the Coal Technology in connection with the development and operation of the Facility. The License Agreement attached hereto as Exhibit A is a true and correct copy of thereof. The License Agreement is in full force and effect. As of the date of execution hereof, the representations made by CoBon in the License Agreement are true, accurate and complete. To the extent that the representations contained herein are inconsistent with the representations contained in the License Agreement, the representations contained herein shall control. G. CoBon has not given notice of any default under the License Agreement to Covol and has no knowledge of any event or condition which with the passage of time or the giving of notice or both would be a default under the License Agreement. 6 H. In accordance with the terms of the License Agreement, CoBon has the authority and right to use the Coal Technology in the production of Qualified Fuels, and the right to sublicense the Coal Technology. I. CoBon has not encumbered or granted to any third party any interest in or lien upon its rights to use the Coal Technology or any of its rights or interests in the License Agreement in connection with the development and operation of the Facility. J. Notwithstanding anything contained in the License Agreement, Central City has, subject to its compliance with the terms of the this Agreement, the unconditional right to utilize the Coal Technology, except that Central City shall not have the right to utilize the Coal Technology in the State of Alabama. 3.3. Central City Representations and Warranties. A. The execution, delivery and performance by Central City of this Agreement will not constitute a default under any instrument binding upon Central City. B. No proceedings by or against Central City have been threatened or commenced in bankruptcy or for reorganization, liquidation, or for readjustment of debts under the Bankruptcy Code or any other law, whether state or federal, nor has Central City made an assignment for the benefit of creditors, admitted in writing inability to pay debts generally as they become due, or filed or had filed against it any action seeking an order appointing a trustee or receiver of all or a substantial part of the property of Central City. C. No judicial or nonjudicial proceeding has been filed or is pending for the dissolution of Central City pursuant to a resolution of the members or otherwise pursuant to any applicable state law. D. There are no judicial or governmental judgments, orders, injunctions, decrees, or arbitration awards outstanding against Central City, and there are no judicial or governmental actions, suits, or proceedings or any arbitrations or mediations, pending or overtly threatened by written communications against Central City or any of the property owned by Central City that would affect Central City's ability to perform under this Agreement. E. Central City agrees, notwithstanding any language in this Agreement, or any other agreement to which Central City is a party, that the representations of Central City contained in this Agreement may be relied upon by Covol and CoBon. 7 ARTICLE 4 ROYALTIES, FEES AND PAYMENT 4.1. Royalties, Fees and Payments. Central City shall pay, as consideration for its use of the Coal Technology, an Initial Royalty Fee (as hereinafter defined) and an Earned Royalty Fee (as hereinafter defined). 4.2. Initial Royalty Fee. A. Initial Royalty Fee. The term "Initial Royalty Fee" shall mean a sum equal to the product of (a) $**** per ton of Qualified Fuels, multiplied by (b) the first 650,000 tons of Qualified Fuels produced at the Facility; provided, however, that the Initial Royalty Fee shall not exceed $****. B. Payment of Initial Royalty Fee. The Initial Royalty Fee shall be payable as follows: 1. Covol Initial Royalty Fee. Central City shall pay to CoBon, as CoBon's payment to Covol pursuant to the License Agreement, a sum equal to the product of (A) $**** per ton of Qualified Fuels, multiplied by (B) the tons of Qualified Fuels actually produced at the Facility from 12:00 a.m. on December 14, 1999, through the earlier to occur of (i) 11:59 p.m. of the last day of the month in which an IRS Ruling (as defined below) is received by or on behalf of Central City (the "IRS Ruling Month"), or (ii) the date on which the Facility produces the 650,000th ton of Qualified Fuels, assuming that December 14, 1999 was the date that the Facility commenced the production of Qualified Fuels (the "Maximum Tonnage Date"). Notwithstanding the foregoing provisions of this paragraph, to the extent that Central City has paid any of the fees described in the immediately foregoing sentence with respect to Qualified Fuels produced at the Facility from December 14, 1999 until the date hereof, Central City shall not be obligated to pay such fees to CoBon. The term "IRS Ruling" shall mean a private letter ruling from the IRS with respect to the availability of tax credits under Section 29 of the Internal Revenue Code (the "Code") for the Qualified Fuel produced by the Facility (the "Tax Credits"). 2. CoBon Initial Royalty Fee. Central City shall pay to CoBon a sum equal to the product of (A) $**** per ton of Qualified Fuels, multiplied by (B) the tons of Qualified Fuels actually produced at the Facility from 12:00 a.m. on December 14, 1999 through the earlier to occur of (i) 11:59 p.m. of the last day of the IRS Ruling Month, or (ii) the Maximum Tonnage Date. Payment of the CoBon Initial Royalty Fee shall accrue and be deferred until an IRS Ruling. CoBon's Initial Royalty Fee shall be payable as follows: (a) Favorable Ruling. If the IRS Ruling received by Central City is favorable (a "Favorable Ruling"), as determined by Central City in its sole discretion, then, within thirty (30) days after the end of the IRS Ruling Month: 8 (1) if the end of the IRS Ruling Month is subsequent to the Maximum Tonnage Date, Central City shall pay to CoBon the sum of $**** (which is the product of $**** per ton of Qualified Fuels multiplied by 650,000 tons of Qualified Fuels); or (2) if the end of the IRS Ruling Month is prior to the Maximum Tonnage Date, Central City shall pay CoBon a sum equal to the product of (A) $**** per ton of Qualified Fuels, multiplied by (B) the tons of Qualified Fuels actually produced at the Facility from 12:00 a.m. on December 14, 1999 through 11:59 p.m. of the last day of the IRS Ruling Month. (b) Unfavorable Ruling; Cessation of Production. If the IRS Ruling received by Central City is unfavorable or, for any reason, other than the failure of Central City to diligently seek a ruling, no IRS Ruling is received on or prior to June 7, 2002, as determined by Central City in its sole discretion (collectively, an "Unfavorable Ruling"), and the Facility ceases production of Qualified Fuel as a result of such Unfavorable Ruling, then Central City shall not be required to pay to CoBon any of the Initial Royalty Fee as required pursuant to Section 4.2(B)(1) and Section 4.2(B)(2) and any such payments made pursuant to those referenced sections shall immediately cease. However, if notwithstanding the Unfavorable Ruling, Central City, in its sole discretion, seeks to obtain the benefit of the Tax Credits, if any, acquired prior to such cessation of production, Central City shall pay CoBon, within thirty (30) days of the time that Central City reasonably determines that such Tax Credits are not subject to challenge or reversal, a sum equal to product of (A) $**** per ton of Qualified Fuels, multiplied by (B) the tons of Qualified Fuels actually produced at the Facility from 12:00 a.m. on December 14, 1999 through the earlier to occur of (i) the Maximum Tonnage Date, or (ii) 11:59 p.m. of the last day of the IRS Ruling Month, for which Tax Credits were allowed. (c) Unfavorable Ruling; Notice; Agreement to Negotiate. If an Unfavorable Ruling is received or deemed received then Central City shall promptly give notice thereof to CoBon and thereafter Central City and CoBon may enter into negotiations to determine the terms and conditions on which Central City may continue the use of the Coal Technology without triggering the provisions of Section 4.2(B)(2)(d); provided, however, that neither Central City nor CoBon shall be obligated to modify the terms and conditions on which Central City may continue the use of the Coal Technology. (d) Unfavorable Ruling; Continuation of Production. If an Unfavorable Ruling is received or deemed received and the Facility does not cease production of Qualified Fuel, then a lump sum payment shall be made in accordance with either Section 4.2(B)(2)(a)(1) or Section 4.2(B)(2)(a)(2), as applicable. C. Payment of Initial Royalty Fees Prior to Maximum Tonnage Date but after IRS Ruling. If either an Unfavorable Ruling or a Favorable Ruling is received prior to the Maximum Tonnage Date and Central City continues production of Qualified Fuel, then Central City shall pay CoBon, in accordance with the terms hereof and subject to Section 4.2(A), $**** per ton of Qualified Fuel actually produced at the Facility from 12:00 a.m. on the first day following the end of the IRS Ruling Month through the earlier to occur of (i) the Maximum Tonnage Date, or (ii) the date upon which Central City terminates production at the Facility, such payments to be made in arrears within fifteen (15) days following the end of each calendar month, based on production during such previous calendar month. 4.3. Earned Royalty Fee. A. Earned Royalty Fee. The earned royalty fee (the "Earned Royalty Fee") shall be in an amount equal to the sum of (x) the product of (1) $**** per ton of Qualified Fuel, multiplied by (2) the tons of Qualified Fuels produced at the Facility in excess of 250,000 tons, up to 650,000 tons, during any calendar year, plus (y) the product of (1) $**** per ton of Qualified Fuel multiplied by (2) the tons of Qualified Fuel produced at the Facility in excess of 650,000 tons, during any calendar year. The Earned Royalty Fee shall be payable as provided in this Agreement notwithstanding any use by Central City of an alternative binder under Section 5.1. Central City and CoBon agree that production of Qualified Fuels commenced on December 14, 1999. Payment of the Earned Royalty Fee shall be calculated on an annual basis, notwithstanding the provisions of Section 4.3(B)(1) and Section 4.4 below which require payment 9 based on the production of Qualified Fuels during a calendar quarter, and therefore Central City and CoBon shall make adjustments to the calendar quarter payments to ensure that the amounts paid to CoBon reflect payment of the Earned Royalty Fee on an annual basis. B. Payment of Earned Royalty Fees. Until an IRS Ruling is received, all the Earned Royalty Fees shall accrue but shall not be payable by Central City (such accrued Earned Royalty Fees, the "Accrued Earned Royalty Fees"). After an IRS Ruling is received, then: 1. Favorable Ruling. If a Favorable Ruling is received, then Central City shall be obligated to pay to CoBon (a) all Accrued Earned Royalty Fees, such fees to be paid within ten (10) days of the date of the Favorable Ruling; and (b) all Earned Royalty Fees based on the production of Qualified Fuels after the IRS Ruling, such fees to be made in arrears within fifteen (15) days following the end of each such calendar quarter, based on production during such previous calendar quarter, until this Agreement is terminated pursuant to Article 6. 2. Unfavorable Ruling; Cessation of Production. If an Unfavorable Ruling is received and the Facility ceases production of Qualified Fuel as a result of such Unfavorable Ruling, and (a) if Central City does not obtain the benefit of any Tax Credits, Central City shall not make any payments of any nature to CoBon, including the Accrued Earned Royalty Fee; or (b) if, notwithstanding the Unfavorable Ruling, Central City, in its sole discretion, does seek to obtain the benefit of the Tax Credits, if any, acquired prior to such cessation of production, within ten (10) days of the time that Central City reasonably determines that such Tax Credits are not subject to challenge or reversal, Central City shall pay CoBon, the Accrued Earned Royalty Fees for which Tax Credits were allowed, or in the event of a Final Determination (as defined below), a sum equal to (a) the 10 product of (i) the Accrued Earned Royalty Fees that would have been payable to CoBon if a Favorable Ruling had been received, multiplied by (ii) a fraction, the numerator of which is the amount of Tax Credits allowed to Central City pursuant to a Final Determination with respect to the Tax Credits claimed by Central City, minus any interest and penalties (including substantial understatement penalties and any penalties for underpayment of estimated taxes to the extent attributable to Tax Credits claimed by Central City), and the denominator of which is the amount of Tax Credits claimed by Central City, (b) plus interest accrued at 9% per annum commencing on the date that the Accrued Earned Royalty Fees described above were due. 3. Unfavorable Ruling; Continuation of Production. If a Unfavorable Ruling is received or deemed received and the Facility does not cease production of Qualified Fuel, then a lump sum payment shall be made in accordance with Section 4.3(B)(1). 4.4 Tax Event A. Definitions. For purposes of this Section 4.4 the following terms shall have the following meanings: 1. "Tax Event" means: (i) the issuance of any information document request related to Tax Credits or any other reasonable indication of an intention by the IRS or any related governmental authority to examine or disallow any portion of the Tax Credits taken by Central City for production of Qualified Fuel; (ii) Central City becoming aware that the IRS has questioned whether the Facility was placed in service as required by Section 29 of the Code or questioned or otherwise implicated the proprietary process licensed hereunder; (iii) Central City becoming aware that the IRS has or may question the production capacity of the Facility; or (iv) Central City otherwise has reason to believe that it is more likely than not that the IRS will disallow all or a portion of the Tax Credits. A Tax Event arising hereunder shall cease on the earlier of (A) a Final Determination, (B) when Central City and CoBon agree that the tax issue giving rise to the Tax Event has been resolved, or (C) solely with respect to a Tax Event arising under clause (iv) above, the issuance of a revenue agent's report subsequent to the Tax Event arising under clause (iv) above which does not propose to disallow any Tax Credits taken by Central City, or Central City determines, in its sole discretion, that the IRS does not intend to examine, review, or adjust all or a portion of the Tax Credits. 2. "Final Determination" means: (i) unless an adjustment is proposed with respect to any such Tax Credits, the expiration of the applicable statute of limitations for the relevant tax period and taxpayer; (ii) unless an administrative appeal or suit for refund is initiated by Central City, the date ninety (90) days after the issuance of a notice of deficiency; (iii) unless judicial proceedings are initiated by Central City, a final decision with respect to the proposed adjustment by an IRS appeals officer, as evidenced by the issuance of a 90-day letter, 870-AD or like notice and the expiration of the period for initiating judicial proceedings; (iv) unless appealed by Central City, a final decision with respect to the proposed adjustment by the United States Tax Court, Court of Federal Claims or the appropriate Federal District Court and the expiration of the period for filing 11 an appeal of such decision; (v) a final decision of a United States Court of Appeals with respect to the proposed adjustment, unless a petition for certiorari to the United States Supreme Court has been applied for and is pending or has been granted with respect to such decision; (vi) denial of certiorari by or final decision of the United States Supreme Court; or (vii) the settlement of a proposed adjustment as evidenced by a closing agreement. B. Earned Royalty Fee Tax Event Adjustment. Notwithstanding any other provision contained in this Agreement to the contrary, if Central City knows or is able to reasonably conclude that a Tax Event has or will occur, then Central City shall immediately notify CoBon of such Tax Event (the "Tax Event Notice") and thereafter Central City shall not be obligated to make any payments of Earned Royalty Fees, except as follows: 1. If there is no longer an extant Tax Event, Central City shall deliver to CoBon the Earned Royalty Fees that would have been payable to CoBon after the Tax Event Notice if the Tax Event had not occurred. 2. Upon a Final Determination that Tax Credits are being disallowed in whole or in part with respect to specified calendar quarters, Central City shall deliver to CoBon an amount (the "Adjusted Earned Royalty Fees") equal to the sum of (I) the product of (a) the Earned Royalty Fees that would have been payable to CoBon pursuant to Section 4.3 if a Tax Event had not occurred for such specified calendar quarters, multiplied by (b) a fraction, the numerator of which is the amount of Tax Credits allowed to Central City pursuant to the Final Determination minus any interest and penalties (including substantial understatement penalties and any penalties for underpayment of estimated taxes to the extent attributable to Tax Credits claimed by Central City), and the denominator of which is the amount of Tax Credits claimed by Central City, plus (II) interest at 9% per annum commencing on the date that the Earned Royalty Fees described in clause (I) was due. 4.5 Payment in Arrears. All payments due under Article 4, except for any lump sum payment due thereunder (including the Accrued Earned Royalty Fees) which shall be paid in accordance with the terms set forth above, shall be paid in arrears based on production of Qualified Fuels at the Facility during (a) with respect to the Initial Royalty Fee, such previous calendar month and shall be made within fifteen (15) days following the end of each such calendar month, and (b) with respect to the Earned Royalty Fee, such previous calendar quarter and shall be made within fifteen (15) days following the end of each such calendar quarter. 12 ARTICLE 5 BINDER PURCHASE AND SUPPLY 5.1. Agreement to Purchase and Sell Binder. During the term of this Agreement, except as specifically set forth herein, Central City shall purchase from Covol, and Covol shall supply to Central City, all of Central City's requirements for Binder for use in the manufacture of Qualified Fuel at the Facility . Covol shall have the right to delegate its obligation to supply Binder to Central City pursuant to this Section 5.1 and notwithstanding such delegation, Covol shall be liable at all times for its failure, or its delegate's failure, to supply Binder in the quantities required by Central City. Central City and Covol agree that the Binder to be purchased and sold under this Agreement may include any proprietary Covol binder now or hereafter available. Covol agrees that Central City may purchase binders from an alternative supplier, but otherwise continue to use the Coal Technology, if (a) Covol cannot satisfy Central City's volume requirements for Binder or (b) Central City is required when utilizing the Coal Technology to use more than the equivalent of two dry pounds of Binder per ton of coal feedstock in order to produce Qualified Fuel, such determination to be made by Combustion Resources, LLC, or such other nationally-recognized laboratory, selected by Central City and Covol by the following process: First, the laboratory shall prepare synthetic fuel test samples from representative samples of Central City's coal feedstock and Covol's Binder at the rate of two dry pounds of Binder per ton of coal feedstock. Second, utilizing generally accepted, Qualified Fuel testing procedures and protocols, the laboratory shall determine whether a significant chemical change has occurred such that a Qualified Fuel is produced. In any case, upon Central City's request, Covol shall provide Central City with such support and technical assistance in the use and proper application of Binder using the Coal Technology to produce a marketable Qualified Fuel at the facility utilizing a rate of two dry pounds of Binder per ton of coal feedstock. In the event that Central City elects to purchase an alternative binder, Central City shall provide Covol with written notice of such intent. Within ten (10) days of receipt of such notice, Covol may give notice to Central City that (a) Covol is able to satisfy Central City's requirement for Binder in accordance with this Section 5.1, together with evidence reasonably satisfactory to Central City or (b) is willing to provide more than the equivalent of two dry pounds of Binder per feedstock at a price not greater than the Binder Price (defined below) of two dry pounds of Binder. If Covol provides notice of its intention to cure its performance under this Section 5.1 and such cure is effected within twenty (20) days after Covol's receipt of notice from Central City, then Central City's obligation to purchase Binder from Covol under this Section 5.1 will be reinstated, subject to the terms and conditions set forth herein; provided, however, that Covol may not provide such notice and obtain such reinstatement more than once in any twelve month period or more than three times during the term of this Agreement. 5.2. Binder Price and Payment. The price of Binder purchased by Central City (the "Binder Price") shall be comprised of the Cost Basis and the Profit Basis. "Cost Basis" shall mean Covol's direct and actual costs (including, but not limited to material, labor and transportation costs) of manufacturing and delivering Binder, plus a reasonable allocation of overhead, provided that until December 31, 2003, in no event shall such cost exceed $**** per ton of Qualified 13 Fuel manufactured by Central City at the Facility. Covol shall provide Central City with supporting documentation sufficient to allow Central City to verify such calculation. "Profit Basis" shall mean the product of **** ($****) per ton of Qualified Fuel manufactured by Central City at the Facility. The Cost Basis of the Binder Price shall be paid within thirty (30) days after Central City's receipt of an invoice. The Profit Basis of the Binder Price shall be paid in arrears based on production of Qualified Fuels at the Facility during such previous calendar month and shall be made within fifteen (15) days following the end of each such calendar month. Central City will only be required to pay for Binder actually purchased from Covol under this Agreement. 5.3. Binder Certification. In connection with Covol's sale and delivery of Binder, Covol certifies, and shall provide Central City with further written certification upon request, that the Binder quality and chemical makeup is consistent with the quality and makeup of Binder described on the attached Exhibit D, and as set forth in that certain Letter Agreement by and between Covol and CoBon dated November 11, 1999 (a copy of which is attached hereto as Exhibit C). Such formulation certification shall be based upon independent, random sample testing conducted at the time of Binder production. 5.4. Representations and Warranties. Covol hereby acknowledges that Central City has, and is entitled to, rely on all its representations and warranties contained in the License Agreement (as amended to date) with respect to, and relating to, the Binder, and hereby reaffirms such representations and warranties. ARTICLE 6 TERM AND TERMINATION 6.1. Term. This Agreement shall expire on December 31, 2007, unless a Congressional extension of applicable Section 29 tax credit legislation is enacted, in which case the term of this Agreement shall, upon written agreement of the parties hereto, be extended by an equal period of time. 6.2. Termination. Unless earlier terminated by CoBon or Central City upon thirty (30) days' advance written notice for cause (including but not limited to an Event of Default hereunder), this Agreement shall terminate upon the expiration date set forth in Section 6.1. Upon termination of this Agreement, all rights granted hereunder and obligations to the parties shall immediately cease; however, termination shall not relieve either party of its obligations accrued during the Term of this Agreement which have not been fulfilled. ARTICLE 7 GENERAL PROVISIONS 7.1. Notices. Any notice, report, request or payment provided for in this Agreement shall be deemed made when furnished in writing and sent by U.S. 14 mail, addressed to the party for whom it is intended at the address indicated in the first paragraph of this Agreement, unless another address is given in writing by either party to the other party. 7.2. Utah Law Jurisdiction. This Agreement shall be governed by the laws of the State of Utah. 7.3. Arbitration. The parties agree that any claim or controversy arising hereunder, which the parties are unable to resolve in good faith, shall be finally resolved and settled exclusively by arbitration in Salt Lake City, Utah, by a panel of three (3) arbitrators under the American Arbitration Association's Commercial Arbitration Rules then in effect; provided that each party shall itself be entitled to select one arbitrator and the third arbitrator will be chosen by the two arbitrators selected by the parties. The arbitrators shall have authority to enter an award which includes injunctive relief or specific performance; however, the arbitrators shall have no authority to award punitive or exemplary damages against any party. 7.4. Attorneys' Fees. Should any party employ an attorney for the purpose of enforcing this Agreement in any lawful proceeding, the prevailing party shall be entitled to receive from the other party reimbursement for all attorneys' fees and costs. A "prevailing party" means a party prevailing on all material issues in dispute as determined by the trier of fact. 7.5. Modification. No modification of this Agreement shall be binding upon either party unless made in writing and signed by the party to be charged therewith. 7.6. Further Sublicense and Assignment. Subject to the written approval of CoBon and Covol, Central City may further sublicense or assign this Agreement if the sublicensee or assignee shall have agreed unqualifiedly to assume the obligations of Central City under this Agreement.. 7.7. Entire Agreement. This Agreement constitutes the entire and integrated agreement of the parties and supersedes any other agreements, whether oral or in writing, between the parties regarding the subject hereof. 7.8. Severability. The provisions of this Agreement shall be construed to be severable and the invalidity of any one provision shall not affect the enforceability of the remainder of this Agreement. 7.9. Indemnity. Central City agrees and shall indemnify, defend and hold harmless CoBon, its members, officers and agents, from and against all claims, disputes, losses, damages and liabilities, of any kind, arising from (i) the operation of the Facility and (ii) the breach of any warranty, representation or obligation of Central City contained herein. This indemnification shall include Central City's agreement that the Facility shall be operated in conformity with applicable local, state and federal law and regulations, including environmental and commercial use requirements. 15 7.10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same document. 7.11 Recitals Incorporated. The Recitals are hereby incorporated into this Agreement. 7.12. Audit of Records. Central City shall keep records for a period of two (2) years showing, and shall furnish CoBon and Covol with a quarterly report respecting, the quantity of Qualified Fuel manufactured and sold by Central City using the Coal Technology during the quarter. Central City shall permit Central City's records to be examined or audited by CoBon or Covol, or both, to the extent necessary to verify the information contained in such reports is accurate and commercially reasonable. If such examination or audit reveals that Central City has underpaid CoBon or Covol any amount due under this Agreement, then Central City shall pay to CoBon or Covol, or both, the amount of any underpayment, together with interest at9% per annum. [Remainder of Page Intentionally Left Blank] [Signature Page Follows] 16 SIGNATURE PAGE TO SECOND AMENDED AND RESTATED SUBLICENSE AGREEMENT AND BINDER PURCHASE AND SALE AGREEMENT IN WITNESS WHEREOF, each signing party represents that, having been duly authorized, they have read this Agreement in all particulars and consent to the rights, conditions, duties and obligations imposed upon that party in this Agreement, and that this Agreement has been executed in duplicate originals. CENTRAL CITY SYNFUEL, LLC By: Beta Synfuels, LLC, a Delaware limited liability company, its sole member By: /s/ Paul T. Champagne -------------------------------- Paul T. Champagne, President COBON ENERGY, LLC, a Utah limited liability com pany By: /s/ Steven R. Nash -------------------------------- Steven R. Nash, Manager HEADWATERS INCORPORATED, a Delaware corporation By: /s/ Brent M. Cook -------------------------------- Name: Brent M. Cook Title: President 17 EX-10.60 5 ex1060k093002.txt EMPLOYMENT AGREEMENT WITH KIRK BENSON Exhibit 10.60 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into as of October 25, 2002, by and between KIRK A. BENSON (the "Employee") and HEADWATERS INCORPORATED, a Delaware corporation (the "Company"). 1. Duties and Scope of Employment. (a) Position. For the term of his employment under this Agreement (the "Employment"), the Company agrees to employ the Employee in the position of Chairman and Chief Executive Officer. The Employee shall report to the Company's Board of Directors (the "Board"). (b) Obligations to the Company. During his Employment, the Employee shall devote his full business efforts and time to the Company. During his Employment, without the prior written approval of the Board, the Employee shall not render services in any capacity to any other person or entity and shall not act as a sole proprietor or partner of any other person or entity or as a shareholder owning more than five percent of the stock of any other corporation; provided that the Employee may devote a reasonable amount of time to charitable, educational, civic and political activities. The Employee shall comply with the Company's policies and rules, as they may be in effect from time to time during his Employment. (c) No Conflicting Obligations. The Employee represents and warrants to the Company that he is under no obligations or commitments, whether contractual or otherwise, that are inconsistent with his obligations under this Agreement. The Employee represents and warrants that he will not use or disclose, in connection with his Employment, any trade secrets or other proprietary information or intellectual property in which the Employee or any other person has any right, title or interest and that his Employment will not infringe or violate the rights of any other person. 2. Cash and Incentive Compensation. (a) Salary. The Company shall pay the Employee as compensation for his services a base salary at a gross annual rate of not less than (i) $400,000 for the 12-month period ending April 24, 2003, (ii) $450,000 for the 12-month period ending April 24, 2004, and (iii) $500,000 for the 12-month period ending April 24, 2005. Such salary shall be payable in accordance with the Company's standard payroll procedures. (The annual compensation specified in this Subsection (a), together with any increases in such compensation that the Company may grant from time to time, is referred to in this Agreement as "Base Salary.") (b) Incentive Bonuses. The Employee shall be eligible to be considered for an annual incentive bonus. Such bonus shall be awarded based on objective or subjective criteria established in advance by the Board or the Compensation Committee of the Board. The determinations of the Board or its Compensation Committee with respect to such bonus shall be final and binding. The foregoing notwithstanding, as long as the Company's Incentive Bonus Plan, as approved by the Board on November 10, 2001 (the "2001 Incentive Plan") remains applicable, the Employee's "bonus percent" within the meaning of such Plan shall not be less than 110%. If the Company replaces the 2001 Incentive Plan with a new program, the Employee's opportunity to earn a bonus under the new program shall at least 1 be equivalent to the opportunity that he enjoyed under the 2001 Incentive Plan. Upon termination of Employment for any reason, the Employee shall be eligible to receive a prorated bonus for the year of termination and any previously withheld or "banked" bonuses, subject in each case to the generally applicable terms and conditions of the 2001 Incentive Plan (or its successor) and to the determinations of the Board or its Compensation Committee; provided, however, if the Employee retires from Employment after having attained age 57 and has not been terminated for Cause, then previously withheld or "banked" bonuses shall be immediately paid to the Employee notwithstanding the terms of the 2001 Incentive Plan (or its successor). (c) Stock Option Grants. (i) February 2003 Grant. Subject to availability under a stock incentive plan of the Company that is approved by the stockholders, on or promptly after the date of the next regular annual meeting of the Company's stockholders, the Company shall grant the Employee a stock option covering a number of shares of the Company's Common Stock equal to the greater of (A) 164,000 or (B) the number that, when combined with the option covering 61,000 shares that was granted to the Employee on June 10, 2002, will have a value equal to the value of a hypothetical option covering 225,000 shares granted to the Employee on June 10, 2002. For purposes of the preceding sentence, the value of options shall be determined by the same methodology and assumptions used for purposes of footnote disclosure in the Company's financial statements for the year ending September 30, 2002. The option granted under this Paragraph (i) shall become exercisable in three equal installments on March 31, 2003, March 31, 2004, and March 31, 2005, provided that the Employee's Employment continues until the date in question. (ii) April 2003 Grant. Subject to availability under a stock incentive plan of the Company approved by the stockholders, on or promptly after April 24, 2003, the Company shall grant the Employee a stock option covering 137,500 shares of the Company's Common Stock. The option granted under this Paragraph (ii) shall become exercisable in three equal installments on April 24, 2004, April 24, 2005, and April 24, 2006, provided that the Employee's Employment continues until the date in question. (iii) April 2004 Grant. Subject to availability under a stock incentive plan of the Company approved by the stockholders, on or promptly after April 24, 2004, the Company shall grant the Employee a stock option covering 137,500 shares of the Company's Common Stock. The option granted under this Paragraph (iii) shall become exercisable in three equal installments on April 24, 2005, April 24, 2006, and April 24, 2007, provided that the Employee's Employment continues until the date in question. (iv) Other Option Terms. The exercise price per share of each option granted under this Subsection (d) shall be equal to the fair market value per share of the Company's Common Stock on the date of grant. The term of each such option shall be 10 years, provided that each such option may expire earlier if the Employee's Employment terminates, but not less than (A) 3 months after the termination of his Employment for any reason other than death or disability; (B) 12 months after termination of his Employment because of death; and (C) 6 months after termination of his Employment because of his total and permanent disability. All share numbers set forth in this Subsection (d) shall automatically be adjusted to reflect stock splits, stock dividends, reverse stock splits, and similar events. 2 (v) Substitution of Other Equity Grants. In lieu of all or part of the stock options described in Paragraphs (i), (ii) and (iii) above, the Company may grant the Employee equity in the Company in other forms, provided that (A) the equity grants in other forms have a value not less than the value of such options and (B) the Employee consents in writing to the substitution of other equity grants for such options. (d) Reimbursement of Legal Fees. The Company shall reimburse the Employee for the reasonable cost of retaining counsel to assist him in the preparation and negotiation of this Agreement in an amount not to exceed $5,000. 3. Vacation and Employee Benefits. During his Employment, the Employee shall be eligible for paid vacations in accordance with the Company's vacation policy, as it may be amended from time to time. The Employee shall be eligible to participate in the employee benefit plans maintained by the Company, subject in each case to the generally applicable terms and conditions of the plan in question and to the determinations of any person or committee administering such plan. The Employee shall also be entitled to any other perquisites that the Company makes available to its executive officers. 4. Business Expenses. During his Employment, the Employee shall be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties hereunder. The Company shall reimburse the Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. 5. Term of Employment. (a) Termination of Employment. The Company may terminate the Employee's Employment at any time and for any reason (or no reason), and with or without Cause, by giving the Employee notice in writing. The Employee may terminate his Employment by giving the Company notice in writing. The Employee's Employment shall terminate automatically in the event of his death. The termination of the Employee's Employment shall not limit or otherwise affect his obligations under Section 7. (b) Employment at Will. The Employee's Employment with the Company shall be "at will," meaning that either the Employee or the Company shall be entitled to terminate the Employee's Employment at any time and for any reason, with or without Cause. Any contrary representations that may have been made to the Employee shall be superseded by this Agreement. This Agreement shall constitute the full and complete agreement between the Employee and the Company on the "at will" nature of the Employee's Employment, which may only be changed in an express written agreement signed by the Employee and a duly authorized officer of the Company. (c) Rights Upon Termination. Except as expressly provided in Section 6, upon the termination of the Employee's Employment, the Employee shall only be entitled to the compensation, benefits and expense reimbursements that the Employee has earned under this Agreement before the effective date of the termination. The payments under this Agreement shall fully discharge all responsibilities of the Company to the Employee. 3 6. Termination Benefits. (a) General Release. Any other provision of this Agreement notwithstanding, Subsections (b), (c) and (d) below shall not apply unless the Employee (i) has executed a mutual release of all claims and (ii) has returned all property of the Company in the Employee's possession. (b) Severance Pay. If the Company terminates the Employee's Employment for any reason other than Cause, or if the Employee resigns all of his positions with the Company for Good Reason, then the Company shall immediately make a lump sum severance payment to the Employee in an amount equal to 300% of his annual Base Salary (at the rate in effect when his Employment terminates). (c) Option Acceleration. If Subsection (b) above applies, all options to purchase shares of the Company's stock that the Employee then holds shall immediately become fully vested and exercisable. (d) Health Insurance. If Subsection (b) above applies, and if the Employee elects continuation health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") following the termination of his Employment, then the Company shall pay the monthly premium under COBRA for the Employee and his dependents until the earliest of (i) the date that is 18 months after the Employee's termination of his Employment, (ii) the expiration of the Employee's continuation coverage under COBRA or (iii) the date when the Employee receives substantially equivalent health insurance coverage in connection with new employment or self-employment ("replacement coverage"). To the extent that the Employee is not receiving replacement coverage after the expiration of the COBRA continuation period, then the Company shall reimburse the Employee, on a monthly basis, for the cost of obtaining such coverage on an individual basis for up to an additional 18 months and in an amount not to exceed the cost of the last monthly COBRA premium paid by the Company on the Employee's behalf. (e) Definition of "Cause." For all purposes under this Agreement, "Cause" shall mean: (i) An unauthorized use or disclosure by the Employee of the Company's confidential information or trade secrets, which use or disclosure causes material harm to the Company; (ii) A willful act by the Employee which constitutes gross misconduct or fraud and which is materially injurious to the Company; (iii) The Employee's conviction of, or plea of "guilty" or "no contest" to, a felony under the laws of the United States or any state thereof; or (iv) A willful failure by the Employee to substantially perform his duties under this Agreement, other than a failure resulting from the Employee's complete or partial incapacity due to physical or mental illness. The foregoing shall not be deemed an exclusive list of all acts or omissions that the Company may consider as grounds for the termination of the Employee's Employment with Cause. No act, or failure to act, by the Employee shall be considered "willful" unless committed without good faith and without a reasonable belief that the act or omission was in the Company's best interest. 4 (f) Definition of "Good Reason." For all purposes under this Agreement, "Good Reason" shall mean that the Employee has not been terminated for Cause and elects to resign after one or more of the following events: (i) The reduction of the Employee's Base Salary; (ii) The diminution or reduction of Employee's title, authority, duties or responsibilities, including (without limitation) the Employee's removal from his position as the Company's Chief Executive Officer; (iii) The Employee, at any time after the Company has been subject to a Change in Control (as defined in Section 7), is assigned to any position other than the position of Chief Executive Officer of a corporation whose equity securities are regularly traded on a national securities exchange or the Nasdaq National Market; (iv) The relocation of the Employee's principal place of employment by more than 25 miles from its present location; or (v) Any breach by the Company of any material provision of this Agreement. 7. Change in Control. (a) Option Acceleration. If the Company is subject to a Change in Control, all options to purchase shares of the Company's stock that the Employee then holds shall immediately become fully vested and exercisable. (b) Definition of "Change in Control." For all purposes under this Agreement, "Change in Control" shall mean: (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; (ii) The sale, transfer or other disposition of all or substantially all of the Company's assets; (iii) A change in the composition of the Board, as a result of which fewer than 50% of the incumbent directors are directors who either: (A) Had been directors of the Company on the date 24 months prior to the date of such change in the composition of the Board (the "Original Directors"); or 5 (B) Were appointed to the Board, or nominated for election to the Board, with the affirmative votes of at least a majority of the aggregate of (I) the Original Directors who were in office at the time of their appointment or nomination and (II) the directors whose appointment or nomination was previously approved in a manner consistent with this Subparagraph (B); or (iv) Any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing at least 50% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this Paragraph (iv), the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Securities Exchange Act of 1934 but shall exclude (A) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a parent or subsidiary of the Company and (B) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. 8. Successors. (a) Company's Successors. This Agreement shall be binding upon any successor (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets which becomes bound by this Agreement. (b) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 6 9. Arbitration. (a) Scope of Arbitration Requirement. The parties hereby waive their rights to a trial before a judge or jury and agree to arbitrate before a neutral arbitrator any and all claims or disputes arising out of this Agreement and any and all claims arising from or relating to the Employee's Employment, including (but not limited to) claims against any current or former employee, director or agent of the Company, claims of wrongful termination, retaliation, discrimination, harassment, breach of contract, breach of the covenant of good faith and fair dealing, defamation, invasion of privacy, fraud, misrepresentation, constructive discharge or failure to provide a leave of absence, or claims regarding commissions, stock options or bonuses, infliction of emotional distress or unfair business practices. (b) Procedure. The arbitrator's decision shall be written and shall include the findings of fact and law that support the decision. The arbitrator's decision shall be final and binding on both parties, except to the extent applicable law allows for judicial review of arbitration awards. The arbitrator may award any remedies that would otherwise be available to the parties if they were to bring the dispute in court. The arbitration shall be conducted in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association; provided, however that the arbitrator shall allow the discovery that the arbitrator deems necessary for the parties to vindicate their respective claims or defenses. The arbitration shall take place in Salt Lake County, Utah, or, at the Employee's option, the county in which the Employee primarily worked with the Company at the time when the arbitrable dispute or claim first arose. (c) Costs. The parties shall share the costs of arbitration equally. Both the Company and the Employee shall be responsible for their own attorneys' fees, and the arbitrator may not award attorneys' fees unless a statute or contract at issue specifically authorizes such an award. (d) Applicability. This Section 9 shall not apply to (i) workers' compensation or unemployment insurance claims or (ii) claims concerning the validity, infringement or enforceability of any trade secret, patent right, copyright or any other trade secret or intellectual property held or sought by either the Employee or the Company. 10. Miscellaneous Provisions. (a) Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address that he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Modifications and Waivers. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. 7 (c) Whole Agreement. No other agreements, representations or understandings (whether oral or written and whether express or implied) that are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. (d) Withholding Taxes. All payments made under this Agreement shall be subject to reduction to reflect taxes or other charges required to be withheld by law. (e) Choice of Law and Severability. This Agreement shall be interpreted in accordance with the laws of the State of Utah (except their provisions governing the choice of law). If any provision of this Agreement becomes or is deemed invalid, illegal or unenforceable in any applicable jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the minimum extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Agreement shall continue in full force and effect. If any provision of this Agreement is rendered illegal by any present or future statute, law, ordinance or regulation (collectively the "Law"), then such provision shall be curtailed or limited only to the minimum extent necessary to bring such provision into compliance with the Law. All the other terms and provisions of this Agreement shall continue in full force and effect without impairment or limitation. (f) No Assignment. This Agreement and all rights and obligations of the Employee hereunder are personal to the Employee and may not be transferred or assigned by the Employee at any time. The Company may assign its rights under this Agreement to any entity that assumes the Company's obligations hereunder in connection with any sale or transfer of all or a substantial portion of the Company's assets to such entity. (g) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. EXECUTIVE /s/ Kirk A. Benson ---------------------------------- Kirk A. Benson HEADWATERS INCORPORATED By: /s/ Steven G. Stewart ---------------------------------- Title: CFO 8 EX-10.60.1 6 ex10601k093002.txt EMPLOYMENT AGREEMENT WITH R. STEVE CREAMER Exhibit 10.60.1 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This first amendment to employment agreement (this "Agreement") is effective on October 1, 2001 by and between ISG Resources, Inc. ("Employer") with its principal place of business located at 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111 and R Steve Creamer ("Employee"), an individual who resides in Salt Lake City, Utah. WHEREAS, JTM Industries, Inc. ("JTM") and Employee entered into an Employment Agreement on October 14, 1997 (the "Employment Agreement") and whereas JTM was merged into Employer on January 1, 1999; WHEREAS Employer and Employee desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as set forth herein. 1. Section 3 of the Employment Agreement is amended to provide that the term of employment shall run through December 31, 2003 (the "Term"), and all other obligations of Employer shall be extended for a like period. At the expiration of the Term, this Agreement shall be automatically extended for additional terms of one year, unless one party notifies the other party of its desire to not extend the term of this Agreement by giving written notice of such desire to the other party, in writing, by October 1 of the year of the then current term. 2. Section 4 (a) of the Employment Agreement is amended to provide that Employee's Base Salary shall be increased to the rate of three hundred sixty thousand dollars ($360,000). 3. The remaining provisions of the Employment Agreement shall remain in full force and effect. Reference is craved to the Employment Agreement for specific terms and conditions thereof which are incorporated herein by reference, except as amended by this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year above written. ISG RESOURCES, INC. R STEVE CREAMER /s/ Brett A. Hickman /s/ R. Steve Creamer - ----------------------------------- ---------------------------- By: Brett A. Hickman R Steve Creamer Its: Sr. V.P. and General Counsel EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of October 14, 1997 (this "Agreement"), by and between JTM Industries. Inc. (the "Company") and R. Stephen Creamer (the "Executive"). WHEREAS, simultaneous with and effective upon the acquisition of the Company by Industrial Quality Services, Inc., a Delaware corporation from Laidlaw, Inc., the Company desires to employ the Executive as Chief Executive Officer of the Company; and WHEREAS, the Executive desires to be retained in such capacity on the terms and conditions set forth herein, effective upon the consummation of such acquisition (the "Commencement Date"), it being understood and acknowledged that if the consummation of the acquisition shall not occur, this Agreement shall have no force or effect. NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, the Company and the Executive agree as follows: 1. No Conflict. The Executive represents to the Company that the execution, delivery and performance by the Executive of this Agreement do not and shall not conflict with or result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default under any contract, agreement or understanding, whether oral or written, to which the Executive is a party or of which the Executive is or should be aware. 2. Employment: Duties. The Company shall employ the Executive as Chief Financial Officer for the "Employment Period" as defined in Section 3. In addition, the Company shall use its best efforts to cause the Executive to be elected Chairman of the Board of Directors of the Company (the "Board") during the Employment Term. The Executive, in his capacity as Chief Executive Officer, shall have such duties, responsibilities and authority normally incident to such office. The precise duties, responsibilities and authority of the Executive may be expanded, limited or modified, at any time and from time to time, at the discretion of the Board of Directors of the Company (the "Board") or its Chief Executive Officer. During the Employment Period, the Executive shall devote all necessary working time, attention, knowledge and experience and give his diligent effort, skill and abilities, to promote the business and interests of the Company. Subject to Section 8, the Executive may serve as an officer or director of, make investments in, or otherwise participate in, other entities, provided that such service is disclosed in advance to the Board. 3. Employment Period. This Agreement shall have a term of three years, commencing as of the Commencement Date and ending on the third anniversary of the Commencement Date (the "Initial Period"), unless sooner terminated in accordance with the provisions of Section 9. On the expiration of the Initial Period and on each yearly anniversary thereof, this Agreement shall automatically renew for an additional one-year period, unless sooner terminated in accordance with the provisions of Section 9, unless the Company or the Executive notifies the other in writing of its intention not to renew this Agreement not less than sixty (60) days prior to such expiration date or anniversary, as the case may be. The term of this Agreement, as in effect from time to time, is referred to herein as the "Employment Period". 1 4. Compensation and Benefits. (a) Base Compensation. The Executive shall be paid an aggregate base salary (the "Base Salary") at the rate of $125,000 per annum, less statutory deductions and withholdings. The Base Salary shall be payable in a manner consistent with the normal payroll practices of the Company as in effect from time to time. The Base Salary shall be reviewed annually by the Compensation Committee of the Board (the "Committee"). (b) Annual Bonus. In addition to the Base Salary, the Executive may be entitled to receive a discretionary annual bonus for each year during the Employment Period based upon such factors as shall be established by the Committee, at the sole discretion of the Committee. (c) Employee Benefits. The Executive shall be entitled to participate in each and every employee benefit and group insurance plan and program provided by the Company for its officers and employees generally, in accordance with the terms of the applicable plan documents as they may be amended from time to time, substantially consistent with the employee benefits being provided to the officers and/or employees of the Company as of the date immediately preceding the effectiveness of this Employment Agreement. (d) Business Expense Reimbursement. The Company shall reimburse the Executive for all reasonable and necessary business and travel expenses that the Executive incurs in connection with the Executive's performance of services for the Company hereunder, in accordance with the reimbursement policies established by the Company from time to time (which, the parties hereto acknowledge, shall be consistent with the policies of the Company as they relate to business expense reimbursement as of the date immediately preceding the effectiveness of this Employment Agreement), and shall reimburse the Executive for the reasonable expenses associated with the maintenance of an office in Utah, provided that such reimbursement shall be limited to $3,000 per month. 5. Confidentiality. The Executive recognizes that it is in the legitimate business interest of the Company to restrict his disclosure or use of Trade Secrets and Confidential Information relating to the Company and its direct or indirect subsidiaries, parents or affiliates for any purpose other than in connection with his performance of his duties to the Company, and to limit any potential appropriation of such Trade Secrets and Confidential Information by the Executive. The Executive therefore agrees that both during and at all times after the Employment Period, be shall maintain as confidential all Trade Secrets and Confidential Information relating to the Company and its direct or indirect subsidiaries, parents or affiliates heretofore or in the future obtained by the Executive The terms "Trade Secrets" and/or "Confidential Information" means matters of a confidential technical or business nature that have been maintained as confidential or the disclosure of which could likely have an adverse effect upon the interests of the Company or its direct or indirect subsidiaries, parents or affiliates. 2 6. Return of Documents and Property. Upon the termination of the Executive's employment with the Company, or at any time upon the request of the Company, the Executive (or his heirs or personal representatives) shall deliver to the Company (a) all documents and materials (including, without limitation, computer files) containing Trade Secrets or other Confidential Information relating to the business and affairs of the Company and its direct and indirect subsidiaries, parents or affiliates, and (b) all documents, materials and other property (including. without limitation, computer files) belonging to the Company or its direct or indirect subsidiaries, parents or affiliates, which in either case are in the possession or under the control of the Executive (or his heirs or personal representatives). 7. Discoveries and Works. All Discoveries and Works made or conceived by the Executive during his employment by the Company, whether during the Employment Period or at any time prior thereto, whether or not on the property or premises of the Company, jointly or with others, which relate to the activities of the Executive with the Company or its direct or indirect subsidiaries, parents or affiliates shall be owned by the Company or its direct or indirect subsidiaries, parents or affiliates. The term "Discoveries and Works" includes, by way of example but without limitation, Trade Secrets and other Confidential Information, patents and patent applications, trademarks and trademark registrations and applications, service marks and service mark registrations and applications, trade names, copyrights and copyright registrations and applications. The Executive shall (a) promptly notify, make full disclosure to, and execute and deliver any documents requested by, the Company, as the case may be, to evidence or better assure title to Discoveries and Works in the Company or its direct or indirect subsidiaries, parents or affiliates, as so requested, (b) renounce any and all claims, including but not limited to claims of ownership and royalty, with respect to all Discoveries and Works and all other property owned or licensed by the Company or its direct or indirect subsidiaries, parents or affiliates, (c) assist the Company or its direct or indirect subsidiaries, parents or affiliates in obtaining or maintaining for itself at its own expense United States and foreign patents, copyrights, trade secret protection or other protection of any and all Discoveries and Works, and (d) promptly execute, whether during his employment with the Company or thereafter, all applications or other endorsements necessary or appropriate to maintain patents and other rights for the Company or its direct or indirect subsidiaries, parents or affiliates and to protect the title of the Company or its direct or indirect subsidiaries, parents or affiliates thereto, including but not limited to assignments of such patents and other rights. The Executive acknowledges that all Discoveries and Works shall be deemed "works made for hire" under the Copyright Act of 1976, as amended, 17 U.S.C. ss.101. 8. Noncompetition and Nonsolicitation. (a) Restrictive Covenant. The Executive agrees that he shall, during the Restricted Period (as defined below), refrain from, either alone or in conjunction with any other Person, or directly or indirectly through his present or future affiliates or Associates (as defined below): (i) (except pursuant to his duties performed for the Company during the Employment Period) directly or indirectly, owning, managing, operating, joining, or having a financial interest in, controlling or participating in the ownership, management, operation or control of, or 3 being employed as an employee, agent or the Executive, or in any other individual or representative capacity whatsoever, or using or permitting his name to be used in connection with, or lending assistance (financial or otherwise) to or being otherwise connected in any manner with any business or enterprise engaged in the Restricted Business (as defined below) within any portion of the United States (whether or not such business is physically located within the United States); provided, however, that nothing contained herein shall be construed as preventing the Executive from engaging in the ownership, purchase and/or sale of landfills; and (ii) soliciting, inducing, or attempting to influence any individual who the Executive, after due inquiry, knows is an employee of the Company or any of its subsidiaries, parents or affiliates to terminate his or her employment relationship with the Company or such subsidiary or affiliate, or to become employed by the Executive or any affiliate or associate of the Executive or any person by which the Executive is employed, or interfering in any other way with the employment, or other relationship, of the Company or such subsidiary, parent or affiliate and any employee thereof; provided, however, that this clause (ii) shall not apply as it may relate to R. Stephen Creamer. (b) Definitions. As used herein: (i) "Associate" means with respect to any person, any corporation or other business organization of which such person is an officer, employee or partner or is the beneficial owner, directly or indirectly, of ten percent (10%) or more of any class of equity securities, any trust or estate in which such person has a substantial beneficial interest or as to which such person serves as a trustee or in a similar capacity and any relative or spouse of such person, or any relative of such spouse; (ii) "Cause" shall mean (i) the willful and continued failure of the Executive to follow the lawful directions of the Board, (ii) any act of fraud or dishonesty, misappropriation or embezzlement, or wilful misconduct in connection with the performance of the Executive's duties hereunder, (iii) a material breach by the Executive of any material provision hereof or of any material contractual or material legal duty to the Company (including, but not limited to, the unauthorized disclosure of Trade Secrets or other Confidential Information), after written notice thereof from the Board and a 30-day opportunity to cure in the event that such breach is curable, (iv) the conviction of the Executive of a felony or other crime or offense involving moral turpitude (including pleading guilty or no contest to such a crime or offense or a lesser charge which results from plea bargaining), whether or not committed in connection with the business of the Company, (v) the Executive's alcohol or substance abuse or (vi) a material breach by the Executive of the provisions of any stockholders agreement or other agreement relating to the Executive's acquisition of an equity interest in the Company to which the Executive may become a party on or after the Commencement Date after written notice thereof from the Board and a 30-day opportunity to cure in the event that such breach is curable. (iii) "Good Reason" shall mean a material breach by the Company of any material provision hereof (after written notice thereof from the Executive and a 30-day opportunity to cure in the event that 4 such breach is curable); a transfer of the Executive's customary place of employment to a location more than 40 miles from Salt Lake City, Utah; or a material change in the nature of the Executive's duties, title or responsibility without the consent of the Executive. (iv) "Restricted Business" means the provision of coal by-product ("CCB") management services, such as collection, removal, disposal and marketing of fly-ash and other CCBs. (v) "Restricted Period" means the Employment Period, and the period thereafter equal to (i) three years in the case of a termination of the Employment Period by the Company with Cause or by the Executive without Good Reason, or (ii) two years in the case of a termination of the Employment Period for any other reason (including by reason of expiration of the term of the Agreement). (c) Reasonableness of Restrictions. The Executive acknowledges and agrees that the restrictions set forth in this Section 8, and, specifically, the period of time designated as the Restricted Period and geographical area specified hereunder, are reasonable in view of the nature of the business in which the Company is engaged, and the Executive's particular knowledge of the Company's and its subsidiaries, parents and affiliates' respective businesses, and the Executive hereby agrees not to challenge in any way, or to otherwise raise a defense to, the enforceability of any of the restrictions set forth in this Section 8 during the Restricted Period in any manner whatsoever, including but not limited to challenging the reasonableness of the restrictions set forth herein. (d) Enforceability of Restrictive Covenant. It is the understanding of the Executive and the Company that the provisions of this Section 8 be enforced to the fullest extent permissible under the laws and policies of each jurisdiction in which enforcement may be sought, and that the unenforceability (or the modification to conform to such laws or policies) of any provisions of this Section shall not render unenforceable, or impair, the remainder of the provisions of this Section 8, or of this Agreement. 9. Termination. The Company or the Executive may terminate this Agreement, with or without cause, with or without prior notice. In the event the Company terminates this Agreement or the Executive resigns from employment, the Executive's rights and the obligations of the Company hereunder shall cease as of the effective date of the termination, including, without limitation, the right to receive the Base Salary, any Bonus Award and all other compensation or benefits provided for in this Agreement, and the Executive hereby acknowledges and agrees that no severance or similar or other damages or payments of any kind whatsoever shall be payable to the Executive due to, in connection with, or in the event of, the Executive's termination or resignation from employment for any reason. 10. Enforcement. (a) Equitable Relief. The Executive agrees that the remedies at law for any breach or threat of breach by him of any of the provisions of Sections 5, 6, 7, and 8 hereof will be inadequate, and that, in addition to any other remedy to 5 which the Company may be entitled at law or in equity, the Company shall be entitled to a temporary or permanent injunction or injunctions or temporary restraining order or orders to prevent breaches of the provisions of Sections 5, 6, 7, and 8 hereof and to enforce specifically the terms and provisions thereof, in each case without the need to post any security or bond. Nothing herein contained shall be construed as prohibiting the Company from pursuing, in addition, any other remedies available to the Company for such breach or threatened breach. A waiver by the Company of any breach of any provision hereof shall not operate or be construed as a waiver of a breach of any other provision of this Agreement or of any subsequent breach by the Executive. (b) Enforceability. It is expressly understood and agreed that although the Company and the Executive consider the restrictions contained in Sections 5, 6, 7 and 8 hereof to be reasonable for the purpose of preserving the goodwill, proprietary rights and going concern value of the Company, if a final judicial determination is made by a court having jurisdiction that the time or territory or any other restriction contained in such Sections 5, 6, 7 and 8 is an unenforceable restriction on the Executive's activities, the provisions of such Sections 5, 6, 7 and 8 shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such other extent as such court may judicially determine or indicate to be reasonable. Alternatively, if the court referred to above finds that any restriction contained in Sections 5, 6, 7 or 8 or any remedy provided herein is unenforceable, and such restriction or remedy cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained therein or the availability of any other remedy. The provisions of Sections 5, 6, 7 and 8 shall in no respect limit or otherwise affect the Executive's obligations under other agreements with the Company. 11. Assignment. The rights and obligations of the parties under this Agreement shall not be assignable by either the Company or the Executive, provided that this Agreement is assignable by the Company to any affiliate of the Company, to any successor in interest to any business of the Company, or to a purchaser of all or substantially all of the assets of any business of the Company. 12. Notices. Any notice required or permitted under this Agreement shall be deemed to have been effectively made or given if in writing and personally delivered, mailed properly addressed in a sealed envelope, postage prepaid by certified or registered mail, delivered by a reputable overnight delivery service or sent by facsimile. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to: R. Stephen Creamer ECDC Environmental 127 South 500 East Suite 675 Salt Lake City, Utah 84102 Fax:(801)536-6111 6 with a copy to: Parson Behle & Latimer One Utah Center 201 South Main Street Suite 1800 Salt Lake City, Utah 84111 Fax:(801)536-6111 Attention: J. Gordon Hansen, Esq. and properly addressed to the Company if addressed to: JTM Industries, Inc. c/o Citicorp Venture Capital, Ltd. 399 Park Avenue New York, New York 10043 Attention: Joseph Silvestri Facsimile No.: (212) 888-2940 with a copy to: Morgan Lewis & Bockius LLP 101 Park Avenue New York, NY 10178 Attention: Philip Werner, Esq. 13. Severability. Wherever there is any conflict between any provision of this Agreement and any statute, law, regulation or judicial precedent, the latter shall prevail, but in such event the provisions of this Agreement thus affected shall be curtailed and limited only to the extent necessary to bring them within the requirements of the law. In the event that any provision of this Agreement shall be held by a court of proper jurisdiction to be indefinite, invalid, void or voidable or otherwise unenforceable, the balance of the Agreement shall continue in full force and effect unless such construction would clearly be contrary to the intentions of the parties or would result in an unconscionable injustice. 14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. Effect of Termination. Notwithstanding anything to the contrary contained herein, if this Agreement or the Executive's employment is terminated pursuant to Section 9 or otherwise expires, the provisions of Sections 5, 6, 7, 8, 9, 10, 12, 13, 15, 16, 17 and 18 shall continue in full force and effect. 16. Disputes. Except as necessary to obtain the relief specified in Section 10(a). any claim or controversy arising out of or relating to this Agreement, or any breach thereof, or otherwise arising out of or relating to the Executive's employment, compensation and benefits with the Company or the 7 termination thereof, shall be settled by arbitration in Salt Lake City, Utah in accordance with the rules established by the American Arbitration Association, provided, however. that the parties agree that (i) the arbitrator shall be prohibited from disregarding, adding to or modifying the terms of this Agreement; and (ii) the arbitrator shall be required to follow established principles of substantive law and the law governing burdens of proof. Any claim or controversy not submitted to arbitration in accordance with this Section 16 shall be considered waived and, thereafter, no arbitration panel or tribunal or court shall have the power to rule or make any award on any such claim or controversy. The award rendered in any arbitration proceeding held under this Section 16 shall be final and binding, and judgment upon the award may be entered in any court having jurisdiction thereof. 17. Miscellaneous: Choice of Law. This Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Utah, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Utah or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Utah, 18. Indemnification. In the event the Executive is made, or threatened to be made, a party to any legal action or proceeding, whether civil or criminal, by reason of the fact that the Executive is or was an officer or director of the Company or any subsidiary of the Company, the Executive shall be indemnified by the Company, and the Company shall pay the Executive's related expenses when and as incurred, all to the fullest extent permitted by law, provided, however, that no indemnification shall be made hereunder with respect to payments and expenses incurred in relation to (i) matters as to which the Executive shall not have acted in good faith and in the reasonable belief that his action was in the best interest of the Company, or (ii) matters as to which are otherwise prohibited by law. 8 IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. JTM INDUSTRIES, INC. /s/ J.I. Everest, II ---------------------------------- By: J.I. Everest, II Title: Treasurer and CFO EXECUTIVE /s/ R. Stephen Creamer ---------------------------------- R. Stephen Creamer 9 EX-10.60.2 7 ex10602k093002.txt EMPLOYMENT AGREEMENT WITH J.I. EVEREST, II Exhibit 10.60.2 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This first amendment to employment agreement (this "Agreement") is effective on October 1, 2001 by and between ISG Resources, Inc. ("Employer") with its principal place of business located at 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111 and J.I. Everest, II ("Employee"), an individual who resides in Salt Lake City, Utah. WHEREAS, JTM Industries, Inc. ("JTM") and Employee entered into an Employment Agreement on October 14, 1997 (the "Employment Agreement") and whereas JTM was merged into Employer on January 1, 1999; WHEREAS Employer and Employee desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as set forth herein. 1. Section 3 of the Employment Agreement is amended to provide that the term of employment shall run through December 31, 2003 (the "Term"), and all other obligations of Employer shall be extended by a like period. At the expiration of the Term, this Agreement shall be automatically extended for additional terms of one year, unless one party notifies the other party of its desire to not extend the term of this Agreement by giving written notice of such desire to the other party, in writing, by October 1 of the year of the then current term. 2. Section 4 (a) of the Employment Agreement is amended to provide that Employee's Base Salary shall be increased to the rate of two hundred sixty thousand dollars ($260,000). 3. The remaining provisions of the Employment Agreement shall remain in full force and effect. Reference is craved to the Employment Agreement for specific terms and conditions thereof which are incorporated herein by reference, except as amended by this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year above written. ISG RESOURCES, INC. J.I. Everest, II /s/ R. Steve Creamer /s/ J.I. Everest, II - ------------------------ ------------------------- By: R. Steve Creamer J.I. Everest, II Its:CEO EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of October 14, 1997 (this "Agreement"), by and between JTM Industries. Inc. (the "Company") and Jean I. ("Chip") Everest (the "Executive"). WHEREAS, simultaneous with and effective upon the acquisition of the Company by Industrial Quality Services, Inc., a Delaware corporation from Laidlaw, Inc., the Company desires to employ the Executive as Chief Financial Officer of the Company; and WHEREAS, the Executive desires to be retained in such capacity on the terms and conditions set forth herein, effective upon the consummation of such acquisition (the "Commencement Date"), it being understood and acknowledged that if the consummation of the acquisition shall not occur, this Agreement shall have no force or effect. NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, the Company and the Executive agree as follows: 1. No Conflict. The Executive represents to the Company that the execution, delivery and performance by the Executive of this Agreement do not and shall not conflict with or result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default under any contract, agreement or understanding, whether oral or written, to which the Executive is a party or of which the Executive is or should be aware. 2. Employment: Duties. The Company shall employ the Executive as Chief Financial Officer for the "Employment Period" as defined in Section 3. The Executive, in his capacity as Chief Financial Officer, shall have such duties, responsibilities and authority normally incident to such office. The precise duties, responsibilities and authority of the Executive may be expanded, limited or modified, at any time and from time to time, at the discretion of the Board of Directors of the Company (the "Board") or its Chief Executive Officer. During the Employment Period, the Executive shall devote all necessary working time, attention, knowledge and experience and give his diligent effort, skill and abilities, to promote the business and interests of the Company. Subject to Section 8, the Executive may serve as an officer or director of, make investments in, or otherwise participate in, other entities, provided that such service is disclosed in advance to the Board. 3. Employment Period. This Agreement shall have a term of three years, commencing as of the Commencement Date and ending on the third anniversary of the Commencement Date (the "Initial Period"), unless sooner terminated in accordance with the provisions of Section 9. On the expiration of the Initial Period and on each yearly anniversary thereof, this Agreement shall automatically renew for an additional one-year period, unless sooner terminated in accordance with the provisions of Section 9, unless the Company or the Executive notifies the other in writing of its intention not to renew this Agreement not less than sixty (60) days prior to such expiration date or anniversary, as the case may be. The term of this Agreement, as in effect from time to time, is referred to herein as the "Employment Period". 1 4. Compensation and Benefits. (a) Base Compensation. The Executive shall be paid an aggregate base salary (the "Base Salary") at the rate of $125,000 per annum, less statutory deductions and withholdings. The Base Salary shall be payable in a manner consistent with the normal payroll practices of the Company as in effect from time to time. The Base Salary shall be reviewed annually by the Compensation Committee of the Board (the "Committee"). (b) Annual Bonus. In addition to the Base Salary, the Executive may be entitled to receive a discretionary annual bonus for each year during the Employment Period based upon such factors as shall be established by the Committee, at the sole discretion of the Committee. (c) Employee Benefits. The Executive shall be entitled to participate in each and every employee benefit and group insurance plan and program provided by the Company for its officers and employees generally, in accordance with the terms of the applicable plan documents as they may be amended from time to time, substantially consistent with the employee benefits being provided to the officers and/or employees of the Company as of the date immediately preceding the effectiveness of this Employment Agreement. (d) Business Expense Reimbursement. The Company shall reimburse the Executive for all reasonable and necessary business and travel expenses that the Executive incurs in connection with the Executive's performance of services for the Company hereunder, in accordance with the reimbursement policies established by the Company from time to time (which, the parties hereto acknowledge, shall be consistent with the policies of the Company as they relate to business expense reimbursement as of the date immediately preceding the effectiveness of this Employment Agreement), and shall reimburse the Executive for the reasonable expenses associated with the maintenance of an office in Utah, provided that such reimbursement shall be limited to $3,000 per month. 5. Confidentiality. The Executive recognizes that it is in the legitimate business interest of the Company to restrict his disclosure or use of Trade Secrets and Confidential Information relating to the Company and its direct or indirect subsidiaries, parents or affiliates for any purpose other than in connection with his performance of his duties to the Company, and to limit any potential appropriation of such Trade Secrets and Confidential Information by the Executive. The Executive therefore agrees that both during and at all times after the Employment Period, be shall maintain as confidential all Trade Secrets and Confidential Information relating to the Company and its direct or indirect subsidiaries, parents or affiliates heretofore or in the future obtained by the Executive The terms "Trade Secrets" and/or "Confidential Information" means matters of a confidential technical or business nature that have been maintained as confidential or the disclosure of which could likely have an adverse effect upon the interests of the Company or its direct or indirect subsidiaries, parents or affiliates. 6. Return of Documents and Property. Upon the termination of the Executive's employment with the Company, or at any time upon the request of the Company, the Executive (or his heirs or personal representatives) shall deliver 2 to the Company (a) all documents and materials (including, without limitation, computer files) containing Trade Secrets or other Confidential Information relating to the business and affairs of the Company and its direct and indirect subsidiaries, parents or affiliates, and (b) all documents, materials and other property (including. without limitation, computer files) belonging to the Company or its direct or indirect subsidiaries, parents or affiliates, which in either case are in the possession or under the control of the Executive (or his heirs or personal representatives). 7. Discoveries and Works. All Discoveries and Works made or conceived by the Executive during his employment by the Company, whether during the Employment Period or at any time prior thereto, whether or not on the property or premises of the Company, jointly or with others, which relate to the activities of the Executive with the Company or its direct or indirect subsidiaries, parents or affiliates shall be owned by the Company or its direct or indirect subsidiaries, parents or affiliates. The term "Discoveries and Works" includes, by way of example but without limitation, Trade Secrets and other Confidential Information, patents and patent applications, trademarks and trademark registrations and applications, service marks and service mark registrations and applications, trade names, copyrights and copyright registrations and applications. The Executive shall (a) promptly notify, make full disclosure to, and execute and deliver any documents requested by, the Company, as the case may be, to evidence or better assure title to Discoveries and Works in the Company or its direct or indirect subsidiaries, parents or affiliates, as so requested, (b) renounce any and all claims, including but not limited to claims of ownership and royalty, with respect to all Discoveries and Works and all other property owned or licensed by the Company or its direct or indirect subsidiaries, parents or affiliates, (c) assist the Company or its direct or indirect subsidiaries, parents or affiliates in obtaining or maintaining for itself at its own expense United States and foreign patents, copyrights, trade secret protection or other protection of any and all Discoveries and Works, and (d) promptly execute, whether during his employment with the Company or thereafter, all applications or other endorsements necessary or appropriate to maintain patents and other rights for the Company or its direct or indirect subsidiaries, parents or affiliates and to protect the title of the Company or its direct or indirect subsidiaries, parents or affiliates thereto, including but not limited to assignments of such patents and other rights. The Executive acknowledges that all Discoveries and Works shall be deemed "works made for hire" under the Copyright Act of 1976, as amended, 17 U.S.C. ss.101. 8. Noncompetition and Nonsolicitation. (a) Restrictive Covenant. The Executive agrees that he shall, during the Restricted Period (as defined below), refrain from, either alone or in conjunction with any other Person, or directly or indirectly through his present or future affiliates or Associates (as defined below): (i) (except pursuant to his duties performed for the Company during the Employment Period) directly or indirectly, owning, managing, operating, joining, or having a financial interest in, controlling or participating in the ownership, management, operation or control of, or being employed as an employee, agent or the Executive, or in any other individual or representative capacity whatsoever, or using or permitting his name to be used in connection with, or lending assistance (financial or otherwise) to or being otherwise connected in 3 any manner with any business or enterprise engaged in the Restricted Business (as defined below) within any portion of the United States (whether or not such business is physically located within the United States); provided, however, that nothing contained herein shall be construed as preventing the Executive from engaging in the ownership, purchase and/or sale of landfills; and (ii) soliciting, inducing, or attempting to influence any individual who the Executive, after due inquiry, knows is an employee of the Company or any of its subsidiaries, parents or affiliates to terminate his or her employment relationship with the Company or such subsidiary or affiliate, or to become employed by the Executive or any affiliate or associate of the Executive or any person by which the Executive is employed, or interfering in any other way with the employment, or other relationship, of the Company or such subsidiary, parent or affiliate and any employee thereof; provided, however, that this clause (ii) shall not apply as it may relate to Jean I. Everest. (b) Definitions. As used herein: (i) "Associate" means with respect to any person, any corporation or other business organization of which such person is an officer, employee or partner or is the beneficial owner, directly or indirectly, of ten percent (10%) or more of any class of equity securities, any trust or estate in which such person has a substantial beneficial interest or as to which such person serves as a trustee or in a similar capacity and any relative or spouse of such person, or any relative of such spouse; (ii) "Cause" shall mean (i) the willful and continued failure of the Executive to follow the lawful directions of the Board, (ii) any act of fraud or dishonesty, misappropriation or embezzlement, or wilful misconduct in connection with the performance of the Executive's duties hereunder, (iii) a material breach by the Executive of any material provision hereof or of any material contractual or material legal duty to the Company (including, but not limited to, the unauthorized disclosure of Trade Secrets or other Confidential Information), after written notice thereof from the Board and a 30-day opportunity to cure in the event that such breach is curable, (iv) the conviction of the Executive of a felony or other crime or offense involving moral turpitude (including pleading guilty or no contest to such a crime or offense or a lesser charge which results from plea bargaining), whether or not committed in connection with the business of the Company, (v) the Executive's alcohol or substance abuse or (vi) a material breach by the Executive of the provisions of any stockholders agreement or other agreement relating to the Executive's acquisition of an equity interest in the Company to which the Executive may become a party on or after the Commencement Date after written notice thereof from the Board and a 30-day opportunity to cure in the event that such breach is curable. (iii) "Good Reason" shall mean a material breach by the Company of any material provision hereof (after written notice thereof from the Executive and a 30-day opportunity to cure in the event that such breach is curable); a transfer of the Executive's customary place of employment to a location more than 40 miles from Salt Lake City, 4 Utah; or a material change in the nature of the Executive's duties, title or responsibility without the consent of the Executive. (iv) "Restricted Business" means the provision of coal by-product ("CCB") management services, such as collection, removal, disposal and marketing of fly-ash and other CCBs. (v) "Restricted Period" means the Employment Period, and the period thereafter equal to (i) three years in the case of a termination of the Employment Period by the Company with Cause or by the Executive without Good Reason, or (ii) two years in the case of a termination of the Employment Period for any other reason (including by reason of expiration of the term of the Agreement). (c) Reasonableness of Restrictions. The Executive acknowledges and agrees that the restrictions set forth in this Section 8, and, specifically, the period of time designated as the Restricted Period and geographical area specified hereunder, are reasonable in view of the nature of the business in which the Company is engaged, and the Executive's particular knowledge of the Company's and its subsidiaries, parents and affiliates' respective businesses, and the Executive hereby agrees not to challenge in any way, or to otherwise raise a defense to, the enforceability of any of the restrictions set forth in this Section 8 during the Restricted Period in any manner whatsoever, including but not limited to challenging the reasonableness of the restrictions set forth herein. (d) Enforceability of Restrictive Covenant. It is the understanding of the Executive and the Company that the provisions of this Section 8 be enforced to the fullest extent permissible under the laws and policies of each jurisdiction in which enforcement may be sought, and that the unenforceability (or the modification to conform to such laws or policies) of any provisions of this Section shall not render unenforceable, or impair, the remainder of the provisions of this Section 8, or of this Agreement. 9. Termination. The Company or the Executive may terminate this Agreement, with or without cause, with or without prior notice. In the event the Company terminates this Agreement or the Executive resigns from employment, the Executive's rights and the obligations of the Company hereunder shall cease as of the effective date of the termination, including, without limitation, the right to receive the Base Salary, any Bonus Award and all other compensation or benefits provided for in this Agreement, and the Executive hereby acknowledges and agrees that no severance or similar or other damages or payments of any kind whatsoever shall be payable to the Executive due to, in connection with, or in the event of, the Executive's termination or resignation from employment for any reason. 10. Enforcement. (a) Equitable Relief. The Executive agrees that the remedies at law for any breach or threat of breach by him of any of the provisions of Sections 5, 6, 7, and 8 hereof will be inadequate, and that, in addition to any other remedy to which the Company may be entitled at law or in equity, the Company shall be entitled to a temporary or permanent injunction or injunctions or temporary 5 restraining order or orders to prevent breaches of the provisions of Sections 5, 6, 7, and 8 hereof and to enforce specifically the terms and provisions thereof, in each case without the need to post any security or bond. Nothing herein contained shall be construed as prohibiting the Company from pursuing, in addition, any other remedies available to the Company for such breach or threatened breach. A waiver by the Company of any breach of any provision hereof shall not operate or be construed as a waiver of a breach of any other provision of this Agreement or of any subsequent breach by the Executive. (b) Enforceability. It is expressly understood and agreed that although the Company and the Executive consider the restrictions contained in Sections 5, 6, 7 and 8 hereof to be reasonable for the purpose of preserving the goodwill, proprietary rights and going concern value of the Company, if a final judicial determination is made by a court having jurisdiction that the time or territory or any other restriction contained in such Sections 5, 6, 7 and 8 is an unenforceable restriction on the Executive's activities, the provisions of such Sections 5, 6, 7 and 8 shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such other extent as such court may judicially determine or indicate to be reasonable. Alternatively, if the court referred to above finds that any restriction contained in Sections 5, 6, 7 or 8 or any remedy provided herein is unenforceable, and such restriction or remedy cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained therein or the availability of any other remedy. The provisions of Sections 5, 6, 7 and 8 shall in no respect limit or otherwise affect the Executive's obligations under other agreements with the Company. 11. Assignment. The rights and obligations of the parties under this Agreement shall not be assignable by either the Company or the Executive, provided that this Agreement is assignable by the Company to any affiliate of the Company, to any successor in interest to any business of the Company, or to a purchaser of all or substantially all of the assets of any business of the Company. 12. Notices. Any notice required or permitted under this Agreement shall be deemed to have been effectively made or given if in writing and personally delivered, mailed properly addressed in a sealed envelope, postage prepaid by certified or registered mail, delivered by a reputable overnight delivery service or sent by facsimile. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to: Jean I. ("Chip") Everest ECDC Environmental 127 South 500 East Suite 675 Salt Lake City, Utah 84102 Fax:(801) 536-6111 6 with a copy to: Parson Behle & Latimer One Utah Center 201 South Main Street Suite 1800 Salt Lake City, Utah 84111 Fax:(801)536-6111 Attention: J. Gordon Hansen, Esq. and properly addressed to the Company if addressed to: JTM Industries, Inc. c/o Citicorp Venture Capital, Ltd. 399 Park Avenue New York, New York 10043 Attention: Joseph Silvestri Facsimile No.: (212) 888-2940 with a copy to: Morgan Lewis & Bockius LLP 101 Park Avenue New York, NY 10178 Attention: Philip Werner, Esq. 7 IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. JTM INDUSTRIES, INC. /s/ R Steve Creamer ---------------------------------- By: R Steve Creamer Title: CEO EXECUTIVE /s/ J.I. Everest ---------------------------------- Jean I. ("Chip") Everest 8 EX-10.60.3 8 ex10603k093002.txt EMPLOYMENT AGREEMENT WITH RAUL DEJU Exhibit 10.60.3 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This first amendment to employment agreement (this "Agreement") is effective on October 1, 2001 by and between ISG Resources, Inc. ("Employer") with its principal place of business located at 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111 and Raul A. Deju ("Employee"), an individual who resides in Moraga, California. WHEREAS, JTM Industries, Inc. ("JTM") and Employee entered into an Employment Agreement on October 14, 1997 (the "Employment Agreement") and whereas JTM was merged into Employer on January 1, 1999; WHEREAS Employer and Employee desire to amend the Employment Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as set forth herein. 1. Section 3 of the Employment Agreement is amended to provide that the term of employment shall run through December 31, 2003 (the "Term"), and all other obligations of Employer shall be extended for a like period. At the expiration of the Term, this Agreement shall be automatically extended for additional terms of one year, unless one party notifies the other party of its desire to not extend the term of this Agreement by giving written notice of such desire to the other party, in writing, by October 1 of the year of the then current term. 2. Section 4 (a) of the Employment Agreement is amended to provide that Employee's Base Salary shall be increased to the rate of three hundred forty thousand dollars ($340,000). 3. The remaining provisions of the Employment Agreement shall remain in full force and effect. Reference is craved to the Employment Agreement for specific terms and conditions thereof which are incorporated herein by reference, except as amended by this Agreement. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year above written. ISG RESOURCES, INC. RAUL A. DEJU /s/ R. Steve Creamer /s/ Raul A. Deju ---------------------------- By: R. Steve Creamer Raul A. Deju Its: CEO EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of October 14, 1997 (this "Agreement"), by and between JTM Industries. Inc. (the "Company") and Raul Deju (the "Executive"). WHEREAS, simultaneous with and effective upon the acquisition of the Company by Industrial Quality Services, Inc., a Delaware corporation from Laidlaw, Inc. the Company desires to employ the Executive as President and Chief Operating Officer of the Company; and WHEREAS, the Executive desires to be retained in such capacity on the terms and conditions set forth herein, effective upon the consummation of such acquisition (the "Commencement Date"), it being understood and acknowledged that if the consummation of the acquisition shall not occur, this Agreement shall have no force or effect. NOW, THEREFORE, in consideration of the premises and the mutual agreements made herein, the Company and the Executive agree as follows: 1. No Conflict. The Executive represents to the Company that the execution, delivery and performance by the Executive of this Agreement do not and shall not conflict with or result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default under any contract, agreement or understanding, whether oral or written, to which the Executive is a party or of which the Executive is or should be aware. 2. Employment: Duties. The Company shall employ the Executive as President and Chief Operating Officer for the "Employment Period" as defined in Section 3. The Executive, in his capacity as President Chief Operating Officer, shall have such duties, responsibilities and authority normally incident to such office. The precise duties, responsibilities and authority of the Executive may be expanded, limited or modified, at any time and from time to time, at the discretion of the Board of Directors of the Company (the "Board"). During the Employment Period, the Executive shall render his business services primarily in the performance of his duties hereunder, and the Executive agrees that during the term of his employment hereunder, he shall devote substantially all of his working time, attention, knowledge and experience and give his best effort, skill and abilities, to promote the business and interests of the Company. Other than as set forth on Schedule A hereto, the Executive may not serve as an officer or director of, make investments in, or otherwise participate in, any other entity without the prior written consent of the Board; provided, however, that the foregoing shall not prevent the Executive from acquiring, directly or indirectly, solely as an investment, not more that five percent (5%) of any class of securities of any entity that are registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, including the regulations issued thereunder. 3. Employment Period. This Agreement shall have a term of three years, commencing as of the Commencement Date and ending on the third anniversary of the Commencement Date (the "Initial Period"), unless sooner terminated in 1 accordance with the provisions of Section 9. On the expiration of the Initial Period and on each yearly anniversary thereof, this Agreement shall automatically renew for an additional one-year period, unless sooner terminated in accordance with the provisions of Section 9, unless the Company or the Executive notifies the other in writing of its intention not to renew this Agreement not less than sixty (60) days prior to such expiration date or anniversary, as the case may be. The term of this Agreement, as in effect from time to time, is referred to herein as the "Employment Period". 4. Compensation and Benefits. (a) Base Compensation. The Executive shall be paid an aggregate base salary (the "Base Salary") at the rate of $140,000 per annum, less statutory deductions and withholdings. The Base Salary shall be payable in a manner consistent with the normal payroll practices of the Company as in effect from time to time. The Base Salary shall be reviewed annually by the Compensation Committee of the Board (the "Committee"). (b) Annual Bonus. In addition to the Base Salary, the Executive may be entitled to receive a discretionary annual bonus for each year during the Employment Period based upon such factors as shall be established by the Committee, at the sole discretion of the Committee. (c) Employee Benefits. The Executive shall be entitled to participate in each and every employee benefit and group insurance plan and program provided by the Company for its officers and employees generally, in accordance with the terms of the applicable plan documents as they may be amended from time to time, substantially consistent with the employee benefits being provided to the officers and/or employees of the Company as of the date immediately preceding the effectiveness of this Employment Agreement. (d) Business Expense Reimbursement. The Company shall reimburse the Executive for all reasonable and necessary business and travel expenses that the Executive incurs in connection with the Executive's performance of services for the Company hereunder, in accordance with the reimbursement policies established by the Company from time to time (which, the parties hereto acknowledge, shall be consistent with the policies of the Company as they relate to business expense reimbursement as of the date immediately preceding the effectiveness of this Employment Agreement), and shall reimburse the Executive for the reasonable expenses associated with the maintenance of an office in California, provided that such reimbursement shall be limited to $3,000 per month. 5. Confidentiality. The Executive recognizes that it is in the legitimate business interest of the Company to restrict his disclosure or use of Trade Secrets and Confidential Information relating to the Company and its direct or indirect subsidiaries, parents or affiliates for any purpose other than in connection with his performance of his duties to the Company, and to limit any potential appropriation of such Trade Secrets and Confidential Information by the Executive. The Executive therefore agrees that both during and at all times after the Employment Period, be shall maintain as confidential all Trade Secrets and Confidential Information relating to the Company and its direct or indirect subsidiaries, parents or affiliates heretofore or in the future obtained by the Executive The terms "Trade Secrets" and/or "Confidential 2 Information" means matters protected by the Uniform Trade Secrets Act as stated in California Civil Code Sections 3426 through 3426.10 and as interrupted under California law. Confidential Information includes matters of a significant technical or business nature that have been maintained as confidential or the disclosure of which could likely have an adverse effect upon the interests of the Company or its direct or indirect subsidiaries, parents or affiliates. 6. Return of Documents and Property. Upon the termination of the Executive's employment with the Company, or at any time upon the request of the Company, the Executive (or his heirs or personal representatives) shall deliver to the Company (a) all documents and materials (including, without limitation, computer files) containing Trade Secrets or other Confidential Information relating to the business and affairs of the Company and its direct and indirect subsidiaries, parents or affiliates, and (b) all documents, materials and other property (including. without limitation, computer files) belonging to the Company or its direct or indirect subsidiaries, parents or affiliates, which in either case are in the possession or under the control of the Executive (or his heirs or personal representatives). 7. Discoveries and Works. All Discoveries and Works made or conceived by the Executive during his employment by the Company, whether during the Employment Period or at any time prior thereto, whether or not on the property or premises of the Company, jointly or with others, which relate to the activities of the Executive with the Company or its direct or indirect subsidiaries, parents or affiliates shall be owned by the Company or its direct or indirect subsidiaries, parents or affiliates. The term "Discoveries and Works" includes, by way of example but without limitation, Trade Secrets and other Confidential Information, patents and patent applications, trademarks and trademark registrations and applications, service marks and service mark registrations and applications, trade names, copyrights and copyright registrations and applications. The Executive shall (a) promptly notify, make full disclosure to, and execute and deliver any documents requested by, the Company, as the case may be, to evidence or better assure title to Discoveries and Works in the Company or its direct or indirect subsidiaries, parents or affiliates, as so requested, (b) renounce any and all claims, including but not limited to claims of ownership and royalty, with respect to all Discoveries and Works and all other property owned or licensed by the Company or its direct or indirect subsidiaries, parents or affiliates, (c) assist the Company or its direct or indirect subsidiaries, parents or affiliates in obtaining or maintaining for itself at its own expense United States and foreign patents, copyrights, trade secret protection or other protection of any and all Discoveries and Works, and (d) promptly execute, whether during his employment with the Company or thereafter, all applications or other endorsements necessary or appropriate to maintain patents and other rights for the Company or its direct or indirect subsidiaries, parents or affiliates and to protect the title of the Company or its direct or indirect subsidiaries, parents or affiliates thereto, including but not limited to assignments of such patents and other rights. The Executive acknowledges that all Discoveries and Works shall be deemed "works made for hire" under the Copyright Act of 1976, as amended, 17 U.S.C. ss.101. 3 8. Noncompetition and Nonsolicitation. (a) Restrictive Covenant. The Executive agrees that he shall, during the Restricted Period (as defined below), refrain from, either alone or in conjunction with any other Person, or directly or indirectly through his present or future affiliates or Associates (as defined below): (i) (except pursuant to his duties performed for the Company during the Employment Period) directly or indirectly, owning, managing, operating, joining, or having a financial interest in, controlling or participating in the ownership, management, operation or control of, or being employed as an employee, agent or the Executive, or in any other individual or representative capacity whatsoever, or using or permitting his name to be used in connection with, or lending assistance (financial or otherwise) to or being otherwise connected in any manner with any business or enterprise engaged in the Restricted Business (as defined below) within any portion of the United States (whether or not such business is physically located within the United States); provided, however, that nothing contained herein shall be construed as preventing the Executive from engaging in the ownership, purchase and/or sale of landfills; and (ii) soliciting, inducing, entering into any agreement with, or attempting to influence any individual who the Executive, after due inquiry, knows is an employee of the Company or any of its subsidiaries, parents or affiliates during the Restricted Period to terminate his or her employment relationship with the Company or such subsidiary or affiliate, or to become employed by the Executive or any affiliate or associate of the Executive or any person by which the Executive is employed, or interfering in any other way with the employment, or other relationship, of the Company or such subsidiary, parent or affiliate and any employee thereof. (b) Definitions. As used herein: (i) "Associate" means with respect to any person, any corporation or other business organization of which such person is an officer, employee or partner or is the beneficial owner, directly or indirectly, of ten percent (10%) or more of any class of equity securities, any trust or estate in which such person has a substantial beneficial interest or as to which such person serves as a trustee or in a similar capacity and any relative or spouse of such person, or any relative of such spouse; (ii) "Cause" shall mean (i) the willful and continued failure of the Executive to follow the lawful directions of the Board, (ii) any act of fraud or dishonesty, misappropriation or embezzlement, or willful and material misconduct in connection with the performance of the Executive's duties hereunder, (iii) a material breach by the Executive of any material provision hereof or of any material contractual or material legal duty to the Company (including, but not limited to, the unauthorized disclosure of Trade Secrets or other Confidential Information), after written notice thereof from the Board and a 30-day opportunity to cure in the event that such breach is curable, (iv) the conviction of the Executive of a felony or other crime or offense involving moral turpitude (including pleading guilty or no contest to such a crime or offense or a lesser charge which results from plea bargaining), whether or not committed in connection with the business of the Company, (v) the Executive's alcohol or substance abuse or (vi) a material breach by the Executive of the 4 provisions of any stockholders agreement or other agreement relating to the Executive's acquisition of an equity interest in the Company to which the Executive may become a party on or after the Commencement Date after written notice thereof from the Board and a 30-day opportunity to cure in the event that such breach is curable. (iii) "Good Reason" shall mean a material breach by the Company of any material provision hereof (after written notice thereof from the Executive and a 30-day opportunity to cure in the event that such breach is curable); a transfer of the Executive's customary place of employment to a location more than 40 miles from Salt Lake City, Utah; or a material change in the nature of the Executive's duties, title or responsibility without the consent of the Executive. (iv) "Restricted Business" means the provision of coal by-product ("CCB") management services, such as collection, removal, disposal and marketing of fly-ash and other CCBs. (v) "Restricted Period" means the Employment Period, and the period thereafter equal to (i) three years in the case of a termination of the Employment Period by the Company with Cause or by the Executive without Good Reason, or (ii) two years in the case of a termination of the Employment Period for any other reason (including by reason of expiration of the term of the Agreement). (c) Reasonableness of Restrictions. The Executive acknowledges and agrees that the restrictions set forth in this Section 8, and, specifically, the period of time designated as the Restricted Period and geographical area specified hereunder, are reasonable in view of the nature of the business in which the Company is engaged, and the Executive's particular knowledge of the Company's and its subsidiaries, parents and affiliates' respective businesses, and the Executive hereby agrees not to challenge in any way, or to otherwise raise a defense to, the enforceability of any of the restrictions set forth in this Section 8 during the Restricted Period in any manner whatsoever, including but not limited to challenging the reasonableness of the restrictions set forth herein. (d) Enforceability of Restrictive Covenant. It is the understanding of the Executive and the Company that the provisions of this Section 8 be enforced to the fullest extent permissible under the laws and policies of each jurisdiction in which enforcement may be sought, and that the unenforceability (or the modification to conform to such laws or policies) of any provisions of this Section shall not render unenforceable, or impair, the remainder of the provisions of this Section 8, or of this Agreement. 9. Termination. (a) The Company or the Executive may terminate this Agreement, with or without cause, with or without prior notice. In the event the Company terminates this Agreement or the Executive resigns from employment, the Executive's rights and the obligations of the Company hereunder shall cease as of the effective 5 date of the termination, including, without limitation, the right to receive the Base Salary, any Bonus Award and all other compensation or benefits provided for in this Agreement, and the Executive hereby acknowledges and agrees that no severance or similar or other damages or payments of any kind whatsoever shall be payable to the Executive due to, in connection with, or in the event of, the Executive's termination or resignation from employment for any reason. (b) Termination Without Cause; Resignation for Good Reason. In the event the Company terminates this Agreement without Cause, or the Executive resigns for Good Reason, the Executive shall be entitled to continue to receive payments of his Base Salary for the balance of the then-existing Employment Period, payable at such times and in such amounts as if this Agreement were not terminated; provided, however, that the period during which the Executive shall be entitled to continue to receive payments of his Base Salary, any Bonus Award and all other compensation or benefits provided for in this Agreement, and the Executive hereby acknowledges and agrees that, except for the Accrued Obligations, no severance or similar or other damages or payments of any kind whatsoever shall be payable to the Executive due to, in connection with, or in the event of, such termination or resignation. Notwithstanding the foregoing, such continuation of Base Salary shall immediately cease upon any violation by the Executive of the restrictions contained in Sections 5, 6, 7 and 8 hereof, provided, that if such violation is curable, the Company shall have first given the Executive notice thereof and a period of 30 days in which to cure such violation. (c) Termination for Cause: Resignation without Good Reason. In the event the Company terminates this Agreement for Cause or in the event that the Executive resigns from his employment under this Agreement without Good Reason, the Executive's rights hereunder shall cease as of the effective date of the termination, including, without limitation, the right to receive the Base Salary, and Bonus Award and all other compensation or benefits provided for in this Agreement. In such event, the Executive hereby acknowledges and agrees that, except for the Accrue Obligations, no severance or similar or other damages or payment of any kind whatsoever shall be payable to the Executive due to, in connection with, or in the event of, such termination. (d) Disability: Death. If, prior to the expiration of the Employment Period or the termination of this Agreement, the Executive shall be unable to perform his duties by reason of mental or physical disability for at least one-hundred eighty (180) consecutive days or any one-hundred eighty (180) days (whether or not consecutive ) in any three-hundred sixty (360) consecutive day period, the Company may terminate this Agreement and the remainder of the Employment Period by giving written notice to the Executive to that effect. Immediately upon the giving of such notice, the Employment Period shall terminate. Upon termination of this Agreement pursuant to this Section 9(d), the Executive shall be paid, in addition to the Accrued Obligations, his Base Salary for the month in which notice is given. In the event of a dispute as to whether the Executive is disabled within the meaning of Section 9(d), either party may from time to time request a medical examination of the Executive by a doctor appointed by the Chief of Staff of a hospital selected by mutual agreement of the parties, or as the parties may otherwise agree, and the written medical opinion of such doctor shall be conclusive and binding upon the parties as to whether the Executive has become disabled and the date when such disability 6 arose. If, prior to the expiration of the Employment Period or the termination of this Agreement, the Executive shall die, the Executive's estate shall be paid, in addition to the Accrued Obligations, his Base Salary through the end of the month in which the Executive's death has occurred, at which time the Employment Period shall terminate without further notice and the Company shall have no further obligations hereunder. 10. Enforcement. (a) Equitable Relief. The Executive agrees that the remedies at law for any breach or threat of breach by him of any of the provisions of Sections 5, 6, 7, and 8 hereof will be inadequate, and that, in addition to any other remedy to which the Company may be entitled at law or in equity, the Company shall be entitled to a temporary or permanent injunction or injunctions or temporary restraining order or orders to prevent breaches of the provisions of Sections 5, 6, 7, and 8 hereof and to enforce specifically the terms and provisions thereof, in each case without the need to post any security or bond. Nothing herein contained shall be construed as prohibiting the Company from pursuing, in addition, any other remedies available to the Company for such breach or threatened breach. A waiver by the Company of any breach of any provision hereof shall not operate or be construed as a waiver of a breach of any other provision of this Agreement or of any subsequent breach by the Executive. (b) Enforceability. It is expressly understood and agreed that although the Company and the Executive consider the restrictions contained in Sections 5, 6, 7 and 8 hereof to be reasonable for the purpose of preserving the goodwill, proprietary rights and going concern value of the Company, if a final arbitratory or judicial determination is made by a court or arbitrator having jurisdiction that the time or territory or any other restriction contained in such Sections 5, 6, 7 and 8 is an unenforceable restriction on the Executive's activities, the provisions of such Sections 5, 6, 7 and 8 shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such other extent as such arbitrator or court may determine or indicate to be reasonable. Alternatively, if the arbitrator or court referred to above finds that any restriction contained in Sections 5, 6, 7 or 8 or any remedy provided herein is unenforceable, and such restriction or remedy cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained therein or the availability of any other remedy. The provisions of Sections 5, 6, 7 and 8 shall in no respect limit or otherwise affect the Executive's obligations under other agreements with the Company, and the provisions of Sections 5,6,7 and 8 shall in no respect limit the rights of the Executive as set forth in this Agreement or any other agreement between the Executive and the Company. 11. Assignment. The rights and obligations of the parties under this Agreement shall not be assignable by either the Company or the Executive, provided that this Agreement is assignable by the Company to any affiliate of the Company, to any successor in interest to any business of the Company, or to a purchaser of all or substantially all of the assets of any business of the Company. 7 12. Notices. Any notice required or permitted under this Agreement shall be deemed to have been effectively made or given if in writing and personally delivered, mailed properly addressed in a sealed envelope, postage prepaid by certified or registered mail, delivered by a reputable overnight delivery service or sent by facsimile. Unless otherwise changed by notice, notice shall be properly addressed to the Executive if addressed to: Raul Deju 5 Hastings Court Moraga, California 94556 Facsimile No.: (510) 299-7840 with a copy to: Otis & Hogan 180 Montgomery Street, Suite 1240 San Francisco, California 94104 Facsimile No.: (415) 362-7332 Attention: J. Morrow Otis and properly addressed to the Company if addressed to: JTM Industries, Inc. 127 South 500 East Suite 675 Salt Lake City, Utah 84102 Attention: Chief Executive Officer with a copy to: Citicorp Venture Capital, Ltd. 399 Park Avenue New York, New York 10043 Attention: Joseph Silvestri Facsimile No.: (212) 888-2940 13. Severability. Wherever there is any conflict between any provision of this Agreement and any statute, law, regulation or judicial precedent, the latter shall prevail. In the event that any provision of this Agreement shall be held by a court of proper jurisdiction to be indefinite, invalid, void or voidable or otherwise unenforceable, the balance of the Agreement shall continue in full force and effect unless such construction would clearly be contrary to the intentions of the parties or would result in an unconscionable injustice. 14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 8 15. Effect of Termination. Notwithstanding anything to the contrary contained herein, if this Agreement or the Executive's employment is terminated pursuant to Section 9 or otherwise expires, the provisions of Sections 5, 6, 7, 8, 9, 10, 12, 13, 15, 16, 17 and 18 shall continue in full force and effect. 16. Disputes. Except as necessary to obtain the relief specified in Section 10(a). any claim or controversy arising out of or relating to this Agreement, or any breach thereof, or otherwise arising out of or relating to the Executive's employment, compensation and benefits with the Company or the termination thereof hereafter, shall be settled by arbitration in San Francisco County, California, in accordance with the rules established by the American Arbitration Association, provided, however, that the parties agree that (i) a 30-day negotiation period between the Company and the Executive will be specified prior to any arbitration proceeding; (ii) the arbitrator shall be prohibited from disregarding, adding to or modifying the terms of this Agreement; and (iii) the arbitrator shall be required to follow established principles of substantive law and the law governing burdens of proof. Any claim or controversy not submitted to arbitration in accordance with this Section 16 shall be considered waived and, thereafter, no arbitration panel or tribunal or court shall have the power to rule or make any award on any such claim or controversy. The award rendered in any arbitration proceeding held under this Section 16 shall be final and binding, and judgment upon the award may be entered in any court having jurisdiction thereof. The prevailing party shall be entitled to recover all reasonable attorneys fees and related costs from the losing party. 17. Miscellaneous: Choice of Law. This Agreement constitutes the entire agreement, and supersedes all prior agreements, of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. This Agreement shall be governed by and construed in accordance with (i) with respect to Section 8 and all other provisions of this Agreement which affect the interpretation and/or the enforceability of the restrictive covenants therein contained, the domestic laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York, and (ii) with respect to all other provisions of this Agreement, the domestic laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 18. Indemnification. In the event that any claim is asserted against the Executive, including but not limited to any legal action or administrative proceeding, whether civil or criminal, by reason of the fact that the Executive is or was an officer or director of the Company or any subsidiary or affiliate of the Company, the Executive shall be indemnified by the Company, and the Company shall pay the Executive's attorney fees, accounting fees, expert witness fees and other customary expense within 30 days after the Company receives notice of such fees, expenses and costs, all to the fullest extent permitted by law, provided, however, that no indemnification shall be made hereunder with respect to payments and expenses incurred in relation to (i) matters as to which the Executive shall not have acted in good faith and in the reasonable belief that his action was in the best interest of the Company, or (ii) matters as to which are otherwise prohibited by law. 9 IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. JTM INDUSTRIES, INC. /s/ J.I. Everest, II ---------------------------------- By: J.I. Everest, II Title: Treasurer and CFO EXECUTIVE /s/ Raul Deju ---------------------------------- Raul Deju 10 EX-10.65.3 9 ex10653k093002.txt AMENDED LICENSE AND REAGENT PURCHASE AGREEMENT Exhibit 10.65.3 AMENDED AND RESTATED LICENSE AND REAGENT PURCHASE AGREEMENT THIS AMENDED AND RESTATED LICENSE AND REAGENT PURCHASE AGREEMENT (the "Agreement"), is made and entered into as of July 1, 2002, by and between Premier Elkhorn Coal Company, a Kentucky corporation (the "Licensee"), and Headwaters Incorporated, a Delaware corporation, formerly known as Covol Technologies, Inc. (the "Licensor"). RECITALS WHEREAS, Licensor has developed and owns a proprietary process to produce synthetic coal fuel qualifying for tax credits under Internal Revenue Code Section 29 from waste coal dust, coal fines, run of mine coal and other similar coal derivatives (collectively, "Coal Feedstock"), and Licensor is entitled to license the Coal Technology (as defined below) to Licensee; WHEREAS, Mohave Fuel Company, L.L.C., a Utah limited liability company ("Mohave"), sold a solid synthetic fuel manufacturing plant (the "Facility") to Licensee as set forth in that certain Purchase and Sale Agreement dated January 21, 2002 (the "Purchase and Sale Agreement"); WHEREAS, in connection with the Purchase and Sale Agreement, Licensee and Licensor entered into a License and Binder Purchase Agreement dated January 21, 2000 for the Licensee's use of the Coal Technology and wish to amend certain terms and restate their agreement herein. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Licensor and Licensee each agree as follows: Section 1. Definitions. Capitalized terms used herein shall have the meanings specified in the Purchase and Sale Agreement, unless otherwise specified below: 1.1 "Bankruptcy Code" has the meaning set forth in Section 16. 1.2 "Claimant" has the meaning set forth in Section 3.2. 1.3 "Coal Technology" means all intellectual property, patents (including, but not limited to, United States Patent Numbers 5,599,361; 5,487,764; and 5,453,103) and applications therefor, printed and not printed technical data, know-how, trade secrets, copyrights and other intellectual property rights, inventions, discoveries, techniques, works, processes, methods, plans, software, designs, drawings, schematics, specifications, communications protocols, source and object code and modifications, test procedures, program cards, tapes, disks, algorithms and all other scientific or technical information in whatever form including "Developed Technology" relating to, embodied in or used in the process to produce synthetic coal fuel from Coal Feedstock, including all such information in existence as of the date of this Agreement as well as related information later developed by Licensor; provided, however, that the defined term "Coal Technology" shall not include the proprietary process/method or other Reagent material or composition developed by Licensor to produce synthetic coke briquettes from coke breeze, iron revert materials, or any technology used in any application other than the processing and production of synthetic coal fuel. Nothing in this Agreement is intended to grant to Licensee the right to apply the Coal Technology to produce anything other than synthetic coal fuel intended to qualify for tax credits under Section 29(c)(1)(C) of the Code. 1.4 "Code" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. 1.5 "Confidential Information" has the meaning set forth in Section 2.4. 1.6 "Developed Technology" means any inventions, "Improvement" or technology that Licensor may conceive, make, invent or suggest in connection with or related to the Coal Technology; provided, however, that "Developed Technology" shall not include (i) coal fines recovery, coal fines washing, material handling or product marketing techniques or technologies conceived, made, invented or suggested by Licensee that are generally applicable to the coal industry but which are used at the Facility in connection with the Coal Technology or (ii) any inventions, "Improvement" or technology that Licensee may conceive, make, invent or suggest in connection with or related to the Coal Technology. 1.7 "Dow Agreement" means that certain agreement between Dow Chemical Company and Licensor, effective January 1, 1998. 2 1.8 "Facility" has the meaning set forth in the Recitals. 1.9 "Hazardous Substances" means (a) any petrochemical or petroleum products (provided that for purposes of this Agreement, the Proprietary Reagent Material shall not be considered to be a petrochemical or petroleum product), oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain polychlorinated biphenyls, (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants" or words of similar meaning and regulatory effect under any applicable environmental law and (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any applicable environmental law. 1.10 "Increased Cost of Manufacture" has the meaning set forth in Section 4.2. 1.11 "Improvement" means an alteration or addition to an invention or discovery which may enhance performance or economics while maintaining a product's, device's or method's essential identity and character; provided, however, that "Improvement" shall not include (i) coal fines recovery, coal fines washing, material handling, or product marketing techniques or technologies conceived, made, invented or suggested by Licensee that are generally applicable to the coal industry but which are used at the Facility in connection with the Coal Technology or (ii) any alteration or addition to an invention or discovery which was conceived, made, invented or suggested by Licensee. An "Improvement" may comprise alterations or additions to either patented or unpatented inventions, discoveries, technology or devices and may or may not be patentable. 1.12 "Licensee" has the meaning set forth in the preamble. 1.13 "Licensor" has the meaning set forth in the preamble. 1.14 "Proprietary Reagent Material" means and refers to the chemical reagent compound supplied by Licensor and used for the production of synthetic coal by the Facility. 3 1.15 "Purchase and Sale Agreement" has the meaning set forth in the Recitals. 1.16 "Reduced Cost of Manufacture" has the meaning set forth in Section 4.2. Section 2. License Grant. 2.1 General. Licensor hereby grants to Licensee a non-exclusive license to use the Coal Technology, including Developed Technology relating to the Coal Technology, for the term of this Agreement, for the purpose of commercial exploitation, including the non-exclusive right to make, have made or use at the Facility and to offer to sell and to sell or otherwise transfer products that have been manufactured with the Coal Technology, subject to the terms and conditions of this Agreement. Licensee hereby accepts the license on the terms hereof. Licensee shall not have the right to sublicense the Coal Technology, except to any assignee, transferee or purchaser in accordance with Section 18. Licensee further agrees to use the Coal Technology only under authority of this Agreement with Licensor. 2.2 Licensor's Ownership of Developed Technology. All Developed Technology is and shall become Licensor's absolute property, subject to the terms of this Agreement. 2.3 Non-licensed Technology. Licensor retains the absolute right to fully exploit its technologies including, but not limited to, the application of such technology embodied in the Coal Technology to produce, market and use synthetic coke briquettes from coke breeze, iron revert materials and any other materials to which Licensor's technology can be applied. 2.4 Confidentiality. Each of the parties hereby agree to maintain the Coal Technology confidential and not to disclose the Coal Technology, or any aspect thereof, including, but not limited to, the Developed Technology (collectively, the "Confidential Information"). Notwithstanding the foregoing, information which (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the parties or their respective agents, employees, directors or representatives, (ii) was available to the party receiving disclosure on a non-confidential basis prior to its receiving disclosure hereunder, (iii) lawfully becomes available to the party receiving disclosure on a non-confidential basis from a third party source (provided that such source is not known by the party receiving disclosure or its agents, 4 employees, directors or representatives to be prohibited from transmitting the information), (iv) a party is compelled by legal process by any court or other authority to disclose or (v) is developed by Licensee independently of (or which does not depend on the use of) Confidential Information received from Licensor, shall not be subject to the terms of this Section 2.4. In the case of (iv) above, the compelled party shall give the other party prompt written notice of such legal process in order that an appropriate protective order can be sought and each party agrees not to oppose the other party's efforts to prevent the public disclosure of Confidential Information. At the termination of this Agreement, each party receiving Confidential Information shall use commercially reasonable efforts to return all copies of such Confidential Information (including, without limitation, any reports or memoranda), except to the extent such Confidential Information is necessary for accounting, tax, regulatory or other similar purposes. Nothing in this Agreement shall prohibit Licensee from disclosing the Confidential Information to affiliates or to others as may be reasonably necessary for Licensee to exploit Licensee's rights under the Purchase and Sale Agreement and/or this Agreement, provided that the recipient of any such Confidential Information executes a confidentiality agreement restricting further disclosure of the Confidential Information. 2.5 Know-How and Assistance. To enable Licensee to benefit fully from the license of the Coal Technology, Licensor shall provide access to all relevant documentation, drawings, engineering specifications and other know-how in its possession, reasonable access to its employees or agents who are familiar with the Coal Technology, including, but not limited to, Developed Technology, and shall provide such technical assistance and training as is requested by Licensee. If Licensor does not have responsibility for the operation of the Facility, Licensee shall reimburse Licensor for reasonable travel and other similar out-of-pocket expenses of Licensor in performing services under this Section 2.5; provided, however, that Licensor shall obtain the prior approval of Licensee for any expenditures in excess of $5,000. Section 3. Royalty. 3.1 Royalty Payments. Subject to Section 18 below, during the term of this Agreement, Licensee shall pay to Licensor a royalty in an amount equal to $**** per ton of synthetic fuel produced at the Facility and sold during the period commencing on the date of this Agreement and ending upon the expiration of the term (or earlier termination) of this Agreement. Such royalty shall be paid quarterly on the last business day of January, April, July and October of each calendar year for the synthetic fuel produced at the Facility and sold during the previous calendar quarter (commencing with the calendar quarter which includes the date of this Agreement), regardless of whether all or any part of the Coal Technology is used. 5 3.2 Royalty Set-off. If any person ("Claimant") asserts a claim that all or any part of the Coal Technology is not the property of Licensor and is instead the property of Claimant, Licensee may, pending resolution of such claim, withhold from the royalty payment otherwise due Licensor pursuant to Section 3.1, amounts equal to such licensee fees as Claimant may demand for the use by Licensee of the Coal Technology allegedly owned by Claimant. Any amounts so withheld will be placed in escrow by Licensee. Upon entrance of a final non-appealable order by a court of competent jurisdiction that the Coal Technology is the property of Licensor or upon receipt of a release of Licensee from liability by Claimant, Licensee shall pay to Licensor any amounts withheld pursuant to this Section 3.2. If a court of competent jurisdiction enters a final non-appealable order that all or any portion of the Coal Technology is the property of the Claimant, Licensee may pay to Claimant a reasonable license fee and set off any amounts so paid against any amount withheld pursuant to this Section 3.2 and/or any other royalty otherwise due Licensor without any further liability with respect thereto. Nothing in this Section 3.2 shall be construed as limiting in any respect Licensee's rights and remedies related to a breach by Licensor of the representations and warranties contained in Section 7.3. 3.2 Section 4. Sales of Reagent. 4.1 Sale and Purchase. Licensor shall sell to Licensee, and Licensee shall purchase from Licensor, the Facility's full requirements of chemical reagent to produce synthetic fuel, provided, that Licensee's obligation hereunder may be reduced or eliminated if, after written notice from Licensee to Licensor, and reasonable opportunity to cure (not to exceed thirty (30) days from receipt of said notice) (i) Licensor fails to deliver a chemical reagent that when properly applied to Coal Feedstock produces a "qualified fuel" for purposes of Section 29 of the Code; (ii) Licensor fails to deliver on the terms and conditions set forth in this Agreement the Facility's full requirements of chemical reagent to produce synthetic fuel; (iii) customers of synthetic fuel produced at the Facility provide Licensor with objective, verifiable evidence that either (A) an alternative available chemical reagent makes Licensor's chemical reagents obsolete, or (B) the customer's operating conditions preclude the use of synthetic fuel produced with Licensor's chemical reagents; or (iv) it is necessary to do so to comply with applicable environmental agency rulings, orders, or regulations. Each calendar month Licensor shall deliver an invoice to Licensee for the chemical reagent delivered to Licensee during the immediately preceding calendar month. Payments for chemical reagent delivered by Licensor to Licensee during any calendar month shall be due and payable to Licensor within fifteen (15) days following receipt of an invoice from Licensor with respect to such chemical reagent. 6 4.2 Price. The price which Licensee shall pay for any Proprietary Reagent Material delivered by Licensor to Licensee shall be an amount equal to (a) $**** per dry pound of Covol 298 Proprietary Reagent Material, or (b) $**** per dry pound of Covol 298-1 Proprietary Reagent Material. If during the term of this Agreement, Licensor's direct and actual costs (including, but not limited to, material, labor and transportation costs) incurred in connection with the manufacture and sale of the Proprietary Reagent Material delivered by Licensor to Licensee pursuant to this Agreement shall exceed the price set forth in clauses (a) or (b) in the preceding sentence (such price, the "Increased Cost of Manufacture"), then the parties hereto agree that the price which Licensee shall pay for Proprietary Reagent Material delivered by Licensor to Licensee pursuant to this Agreement shall be automatically increased to an amount equal to such Increased Cost of Manufacture. Licensee shall be entitled to receive volume pricing general discounts on Proprietary Reagent Material that Licensor receives under the Dow Agreement, as the same may be amended from time to time. 4.3 Licensor Representations, Warranties and Covenants. Licensor represents, warrants and covenants as follows: (1) Licensor shall convey to Licensee good, valid and marketable title to all Proprietary Reagent Material purchased by Licensee from Licensor hereunder, free and clear of any and all liens, claims and encumbrances of any type whatsoever. (2) Proprietary Reagent Material purchased by Licensee from Licensor hereunder shall not be a Hazardous Substance and its sale, delivery and use to produce solid synthetic fuel at the Facility, in each case, as contemplated by this Agreement shall comply with all applicable laws and governmental regulations (including, but not limited to, environmental laws and regulations). (3) Licensor represents and warrants to Licensee that the Proprietary Reagent Material when properly applied to Coal Feedstock produces a "significant chemical change" for purposes of Section 29 of the Code. (4) Licensor agrees that it shall not substitute other monomers or polymers for the Dow carboxylated styrene/butadiene/acrylate/acetate latex formulations currently being used by Licensor to produce Proprietary Reagent Material without the prior written consent of Buyer and without first providing Buyer with a written report of a third party fuels expert reasonably acceptable to the Licensor and Licensee to the effect that (in such third party's professional judgment) the monomers or polymers so to be substituted will achieve the results set forth in Section 4.3(c). 7 (5) Licensor agrees that all Proprietary Reagent Material delivered to Licensee shall be in accordance with the specifications set forth in Exhibit A attached hereto. (6) At Licensee's request, Licensor shall replace, or refund the purchase price of, all non-conforming Proprietary Binding Material. In addition, Licensor shall (i) pay all of Licensee's costs and expenses incurred to return, remove or dispose of non-conforming Proprietary Reagent Material and (ii) indemnify, defend and hold harmless Licensee and its partners, directors, officers, members, agents, representatives, subsidiaries and affiliates from and against any and all claims, demands or suits (by any party, including any governmental entity), losses, liabilities, damages, obligations, penalties, payments, costs and expenses (including the costs and expenses of enforcing this indemnification and defending any and all actions, suits, proceedings, demands and assessments, which shall include reasonable attorneys' fees and court costs) resulting from, relating to, arising out of, or incurred in connection with any products liability claim resulting from, relating to, arising out of, or incurred in connection with the delivery to and use by Licensee of Proprietary Reagent Material delivered by Licensor; provided, however, that in no event shall Licensor's liability under this Section 4.3(f)(ii) exceed the greater of (i) the proceeds received from insurance provided for in Section 4.8 and (ii) the proceeds received under the Dow Agreement and/or any of its other vendor or Reagent manufacturing agreements which Licensor may enter into from time to time. (7) Licensor agrees that there will be available at the Facility from time to time as reasonably requested by Licensee sufficient quantities of the Proprietary Reagent Material to supply the Facility's full requirements from the date hereof until at least December 31, 2007. 4.4 Order Procedure. Licensee shall deliver all purchase orders for chemical Reagent at least thirty (30) days in advance of the first day of the month in which delivery of such chemical Reagent is required under such purchase order. (For example, Licensee shall deliver a purchase order for December delivery by no later than November 1st). Each such purchase order shall be delivered either (i) in writing (including by fax) or (ii) orally by telephone by an authorized agent of Licensee (subject to the condition that it is followed by a written purchase order within twenty-four (24) hours). Such purchase orders shall be sent to Licensor at such address as Licensor shall direct in writing from time to time. 8 4.5 Delivery and Acceptance. All Proprietary Reagent Material purchased hereunder shall be delivered F.O.B. the Facility. Licensor shall arrange for any necessary transportation of the Proprietary Reagent Material to the Facility and shall deliver or cause to be delivered to Licensee a material safety data sheet in respect of each delivery of Proprietary Reagent Material to Licensee. Licensee shall bear the expense of unloading Proprietary Reagent Material from the trucks. Licensee shall have a reasonable opportunity to sample Proprietary Reagent Material delivered to it hereunder to confirm that such Proprietary Reagent Material conforms to the terms and requirements hereof (including, but not limited to, the specifications set forth in Exhibit A attached hereto), and Licensee shall not be deemed or required to accept any such Proprietary Reagent Material prior to the completion of such sampling. From time to time as requested by Licensee, Licensor shall certify in writing to Licensee that the representations and warranties in Section 4.3 are true and complete with respect to the Proprietary Reagent Material delivered to Licensee pursuant to this Agreement. 4.6 Grant of License. Licensor hereby grants to Licensee a nonexclusive license for the term of this Agreement (or such shorter period as provided in the proviso hereto) to use the technology used to manufacture the Proprietary Reagent Material, to manufacture the Proprietary Reagent Material in sufficient quantities to operate the Facility to full capacity, and such technology shall be deemed "Coal Technology" for the purposes of this Agreement; provided, however, that Licensee shall not be permitted to use, and Licensee agrees that it shall not use, such license unless and until Licensor has given notice to Licensee of its inability to deliver the Proprietary Reagent Material to Licensee (which Licensor shall give to Licensee not less than ninety (90) days before its ability to deliver the Proprietary Reagent Material to Licensee will be interrupted or terminated for any reason, including Licensor's insolvency, bankruptcy or liquidation) or, in the absence of such notice, the actual failure by Licensor to deliver the Proprietary Reagent Material to Licensee for at least five (5) calendar days after Licensee gives written notice of non-delivery to Licensor. Upon the occurrence of the events described in the immediately proceeding proviso, Licensor agrees to coordinate and arrange for, and does hereby authorize and permit, Licensee, its sublicensees or assignees, to purchase the Proprietary Reagent Material directly from Licensor's Proprietary Reagent Material manufacturer or other sources. The license granted to Licensee under this Section shall cease (subject to reinstatement upon the reoccurrence of the events contemplated above) and sales of Proprietary Reagent Material under the terms of this Agreement shall be reinstated, in each case, on a date not less than ninety (90) days after Licensor gives notice to Licensee, together 9 with evidence reasonably satisfactory to Licensee, that Licensor is able to deliver the Proprietary Reagent Material to Licensee in accordance with this Agreement. No additional fee or royalty shall be payable to Licensor in connection with the license granted pursuant to this Section and Licensor shall be responsible for any additional out-of-pocket costs incurred by Licensee in connection with the production of Proprietary Reagent Material pursuant to this Section. 4.7 Required Insurance. (1) Types. Licensor shall obtain and maintain, at its own cost, from reputable insurers at all times during the term of this Agreement, general third party liability insurance, including product liability coverage, with a $10,000,000 coverage limit, which may be comprised of a $1,000,000 per occurrence primary policy and a $10,000,000 umbrella policy. (2) "Occurrence" Basis Coverage. To the extent available on commercially reasonable terms at commercially reasonable rates the liability coverage required in this Section 4.7 shall be written on an "occurrence" basis. (3) Named Insured. Licensor shall cause Licensee to be named as an additional insured on all the insurance policies required under this Section 4.7. (4) Subrogation Waiver. Licensor shall cause all the insurance policies required under this Section 4.7 to contain a waiver of subrogation by the insurer in favor of Licensee. (5) Notice of Cancellation/Coverage Reduction. Licensor shall insure that each insurance policy required under this Section 4.7 shall contain a "notice of cancellation/coverage reduction" provision requiring the insurer to give at least thirty (30) days prior written notice to Licensee of the cancellation of and/or material change to (including, but not limited to, a reduction in coverage under such insurance policy) its insurance policy. (6) Default. If Licensor fails duly to perform it obligations to effect and maintain any of the insurance required pursuant to this Section 4.7, Licensee may, but shall not be obligated to, upon written notice to Licensor, in the name of and on behalf of Licensor effect and maintain such insurance, and all costs and expenses thereby incurred by Licensee shall be paid by Licensor within ten (10) days of written demand. 10 (7) Certificates of Insurance. Licensor shall cause its insurers under each insurance policy required under this Section 4.7 to provide Licensee with certificates of insurance evidencing the insurance policies and endorsements required by this Section 4.7. Failure of the Licensee to receive such certificates shall not relieve Licensor of its obligation to obtain and maintain insurance in accordance with this Section 4.7. Failure to obtain insurance pursuant to this Section 4.7 shall in no way relieve or limit Licensor's obligations and liabilities under this Agreement. Section 5. Records; Inspection; Confidentiality. 5.1 Records. Each party hereto shall keep accurate records containing all data reasonably required for the computation and verification of the amounts to be paid by the respective parties under this Agreement (including, but not limited to, any Reduced Cost of Manufacture or Increased Cost of Manufacture), and shall permit each other party or an independent accounting firm designated by such other party to inspect and/or audit such records during normal business hours upon reasonable advance notice. All costs and expenses incurred by a party in connection with such inspection shall be borne by it. 5.2 Confidentiality. Each party agrees to hold confidential from all third parties all information contained in records examined by or on behalf of it pursuant to this Section 5; provided, however, that information shall not be subject to the terms of this Section 5 which (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the parties or their respective agents, employees, directors or representatives, (ii) was available to the party receiving disclosure on a non-confidential basis prior to its receiving disclosure hereunder, (iii) lawfully becomes available to the party receiving disclosure on a non-confidential basis from a third party source (provided that such source is not known by the party receiving disclosure or its agents, employees, directors or representatives to be prohibited from transmitting the information), (iv) a party is compelled by legal process by any court or other authority to disclose, or (v) is developed by the party independently of (or which does not depend on the use of) disclosure hereunder. In the case of (iv) above, the compelled party shall give the other party prompt written notice of such legal process in order that an appropriate protective order can be sought and each party agrees not to oppose the other party's efforts to prevent the public disclosure of such information. At the termination of this Agreement, each party receiving copies of such information (including, without limitation, any reports or memoranda) shall use commercially reasonable 11 efforts to return all such copies, except to the extent such information is necessary for accounting, tax, regulatory or other similar purposes. Nothing in this Agreement shall prohibit Licensee from disclosing such information to affiliates or to others as may be reasonably necessary for Licensee to exploit Licensee's rights under the Purchase and Sale Agreement and/or this Agreement, provided that the recipient of any such information executes a confidentiality agreement restricting further disclosure of such information. Section 6. Enforcement Of Proprietary Rights. Licensee shall cooperate in good faith, with Licensor's efforts to enforce its proprietary patent and trade secret rights at Licensor's sole expense. Section 7. General Representations, Warranties and Covenants. 7.1 Authority. Each party represents and warrants to the other party that (a) the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby (i) have been duly authorized on its behalf by all requisite action, corporate or otherwise, (ii) does not and will not result in any violation of, conflict with or default under the terms of any of its organizational documents (nor, to its knowledge, does there exist any condition which upon the passage of time or the giving of notice would cause such violation, conflict or default), and (iii) does not and will not result in any violation of, conflict with or default under any collective bargaining agreement, permit, lease, venture, indenture, mortgage, agreement, contract, judgment, order or other obligation or restriction to which it or its assets may be bound or encumbered (nor, to its knowledge, does there exist any condition which upon the passage of time or the giving of notice would cause such violation, conflict or default), (b) it has the full right, power and authority to enter into this Agreement and to carry out the terms of this Agreement, (c) it has duly executed and delivered this Agreement, and (d) this Agreement is its valid and binding obligation, enforceable in accordance with its terms (subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium, and similar laws from time to time in effect relating to the rights and remedies of creditors as well as to general principles of equity). 7.2 No Consent. Each party represents and warrants to the other party that no approval, consent, authorization, order, designation or declaration of any court or regulatory authority or governmental body or any third-party is required to be obtained by it, nor is any filing or registration required to be made therewith by it for the consummation by it of the transactions contemplated under this Agreement. 12 7.3 Intellectual Property Matters. (1) Licensor represents and warrants to Licensee that (i) it owns, free and clear of all liens and encumbrances, patents related to the Coal Technology (including, but not limited to, United States Patent Numbers 5,599,361, 5,487,764 and 5,453,103) and has developed and to the best of its knowledge exclusively owns the Coal Technology, including, but not limited to, printed and not printed technical data, know-how, trade secrets, copyrights, and other intellectual property rights and all other scientific or technical information in whatever form relating to, embodied in or used in the process to produce synthetic coal fuel from waste coal dust, coal fines, run of mine coal and other similar coal feedstock, and, the right to freely make, use, sell and exploit the Coal Technology and Proprietary Reagent Material used in manufacturing synthetic coal fuel from waste coal dust, coal fines, run of mine coal and other similar coal feedstocks, (ii) it has the sole and complete right and power to grant to Licensee the licenses granted herein, and (iii) the sale or use of the rights, Proprietary Reagent Material and Coal Technology and/or licenses granted herein as contemplated by this Agreement do not and will not infringe any third-party's intellectual property rights. (2) Except as otherwise expressly provided in this Agreement, Licensor agrees that it will not take any action or fail to take any action during the term of this Agreement that would negate this Agreement or cause a loss to Licensee of the licenses granted hereunder. (3) If during the term of this Agreement a third party has infringed any intellectual property rights associated with the Coal Technology or otherwise misappropriated any Coal Technology, Licensor shall, at Licensor's expense, institute and conduct legal actions against such third party or enter into such agreements or accord in settlement as are deemed appropriate by Licensor, in which case Licensor shall be entitled to any sums recovered in connection therewith from third parties. If Licensor does not take any action, Licensee shall have the right, but not the obligation, to take action as a plaintiff in the prosecution of any infringement or misappropriation action affecting the Facility, and Licensee shall be entitled to any sums recovered in connection therewith from third parties. If Licensee and Licensor have jointly conducted an infringement or misappropriation action, after each party has been reimbursed for costs and expenses incurred by it in prosecuting the action, any sums recovered in connection therewith from third parties shall be distributed to Licensee and Licensor based on the proportionate amount of damages suffered by Licensee and Licensor. Licensee shall always have the right to be represented at its expense by counsel of its own selection in any action. In no event shall Licensor enter into any agreement or settlement inconsistent with the terms of this Agreement. 13 7.4 Indemnification. Each party agrees to indemnify, defend and hold harmless the other party and its partners, directors, officers, members, agents, representatives, subsidiaries and affiliates from and against any and all claims, demands or suits (by any party, including any governmental entity), losses, liabilities, damages, obligations, penalties (including, but not limited to, for violation of environmental laws), payments, costs (including, but not limited to, costs of remediation) and expenses (including, but not limited to, the costs and expenses of enforcing this indemnification and defending any and all actions, suits, proceedings, demands and assessments, which shall include reasonable attorneys' fees and court costs) resulting from, relating to, arising out of, or incurred in connection with its breach of any of the representations, warranties and/or covenants contained in this Agreement. Section 8. Term. The term of this Agreement will begin on the date of this Agreement and will expire, unless terminated earlier pursuant to Section 9, on the later of: (a) December 31, 2007, (b) the end of the term of Section 29 of the Code, or (c) the last to expire of the U.S. patents referred to under the definition of Coal Technology above or any other U.S. patents in existence at the date of this Agreement that disclose and claim Covol's proprietary Coal Technology. Any extension of this Agreement must be in writing and signed by both parties. Section 9. Events of Default; Remedies. 9.1 Events of Default. The following shall constitute an event of default ("Event of Default") under this Agreement: (1) Licensor shall have breached any of its obligations pursuant to Section 4.8, which breach cannot be or has not been cured within thirty (30) days after the giving of written notice thereof by the non-defaulting party; (2) a party shall have breached in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement (other than as provided in Section 9.1(a)), which breach cannot be or has not been cured within sixty (60) days after the giving of written notice thereof by the non-defaulting party; (3) a party becomes insolvent or is unable to pay its debts as they fall due, seeks protection voluntarily or involuntarily under any law relating to bankruptcy, receivership, insolvency, administration, liquidation, dissolution or similar law of any jurisdiction (other than for the purposes of a 14 reorganization with a view to continuing the business as a going concern under relevant bankruptcy or insolvency proceedings) or enters into a general assignment or arrangement or a composition with or for the benefit of its creditors; or (4) a party takes any step (including the filing or presentation of a petition, the convening of a meeting or the filing of an application or consent) in any jurisdiction for, or with a view to, the appointment of an administrator, liquidator, receiver, trustee, custodian or similar official (other than for the purposes of a reorganization with a view to continuing the business as a going concern under relevant bankruptcy or insolvency proceedings) for such party and/or the whole or any part of the business, undertaking, property, assets, receiver or uncalled capital of such party or any such person is appointed. 9.2 Remedies. (1) Upon the occurrence of an Event of Default, the non-defaulting party may, in addition to exercising any of its remedies at law or equity or any of its other remedies provided for in this Agreement, terminate this Agreement upon written notice thereof to the defaulting party. (2) Upon termination of this Agreement, all rights granted to and future obligations of the parties shall immediately cease; provided, however, that termination shall not relieve either party of its obligations accrued during the term of this Agreement (including, but not limited to, any pre-termination obligation Licensee may have to pay Licensor) which has not been fulfilled, and all representations, warranties, indemnification obligations and confidentiality agreements made herein shall survive termination of this Agreement. (3) If either party terminates this Agreement pursuant to this Section 9.2, Licensee shall promptly return and cause all agents of Licensee to promptly return to Licensor all Confidential Information (except to the extent such Confidential Information is necessary for accounting, tax, regulatory or other similar purposes) and all Coal Technology then in Licensee's possession, and Licensee shall not thereafter use for its own commercial benefit or disclose to any third person any Confidential Information or Coal Technology before the end of the term of Section 29 of the Code. Notwithstanding the foregoing, Confidential Information shall not be subject to the terms of this Section 9.2(c) which (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the Licensee or its respective members, agents, employees, directors or representatives, (ii) was available to the Licensee on a non-confidential basis prior to its receiving disclosure hereunder, (iii) lawfully becomes available to the Licensee on a 15 non-confidential basis from a third party source (provided that such source is not known by the Licensee or its members, agents, employees, directors or representatives to be prohibited from transmitting the information), (iv) the Licensee is compelled by legal process by any court or other authority to disclose or (v) is developed by Licensee independently of (or which does not depend on the use of) Confidential Information received from Licensor; provided, however, that in the case of (iv) above, the Licensee shall give the Licensor prompt written notice of such legal process in order that an appropriate protective order can be sought and Licensee agrees not to oppose Licensor's efforts to prevent the disclosure of Confidential Information. Section 10. Waiver. The failure of any party to enforce at any time any provision of this Agreement shall not be construed as a waiver of such provision or the right thereafter to enforce each and every provision. No waiver by any party, either express or implied, of any breach of any of the provisions of this Agreement shall be construed as a waiver of any other breach of such term or condition. Section 11. Severability. If any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid or unenforceable in any respect for any reason, the validity and enforceability of any such provision in any other respect and of the remaining provisions of this Agreement shall not be in any way impaired. Section 12. Notices. All notices required or authorized by this Agreement shall be effective upon receipt and given to the parties in writing by fax, mail, or courier as follows: To Licensor: Brent M. Cook, President Headwaters Incorporated 11778 South Election Road, Suite 210 Draper, UT 84020 Fax: (801) 984-9410 To Licensee: Premier Elkhorn Coal Company c/o TECO Coal Corporation 200 Allison Boulevard Corbin, Kentucky 40701 Fax: (606) 523-4180 Attn: President 16 With a copy to: TECO Energy, Inc. 702 N. Franklin Street Tampa, Florida 33602 Fax: (813) 228-4811 Attn: General Counsel Section 13. Remedies Cumulative. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided by law or in equity. Section 14. Entire Agreement. This Agreement, together with the Transaction Documents (as defined in the Purchase and Sale Agreement), constitutes the entire agreement of the parties relating to the subject matter hereof. There are no promises, terms, conditions, obligations or warranties other than those contained herein and therein. This Agreement and the Transaction Documents supersede any and all prior communications, representations or agreements, verbal or written, between the parties relating to the subject matter hereof. This Agreement may not be amended except in writing signed by the parties hereto. Section 15. Relocation of the Facility. Licensee shall have the right to relocate the Facility to Pike County, Kentucky or any other site or sites with respect to which Licensor has not as of the date of this Agreement conveyed a conflicting exclusive territorial license to a third party, provided that any such relocation shall not affect the terms of this Agreement which shall remain in full force and effect. As used in this Agreement, the Facility refers to the subject synthetic fuel manufacturing plant regardless of the location or configuration thereof. Section 16. License Status in Bankruptcy. (a) This Agreement shall constitute an executory contract under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. ss. 101 et seq. (the "Bankruptcy Code"). All rights and licenses granted pursuant to this Agreement are, and shall be deemed to be, licenses of and right to "intellectual property" as that term is defined in Section 101(35A), and as used in Section 365, of the Bankruptcy Code. The parties agree that (i) Licensor is a "licensor" under Section 365(n) of the Bankruptcy Code and (ii) Licensee, as licensee under this Agreement, shall possess and may fully exercise all of its rights, remedies and elections afforded by and under the Bankruptcy Code. (b) The parties further agree that, in the event of the commencement of a case by or against Licensor under the Bankruptcy Code, Licensee shall be entitled to all applicable rights under Section 365 of the Bankruptcy Code. Without limiting the foregoing, the parties hereby agree that 17 Licensee has (i) the right to complete duplicate/ or complete access to, as appropriate) any such intellectual property referred to in subsection (a) above and any and all embodiments of such intellectual property upon the written request of Licensee and (ii) the right (unless and until the Agreement is rejected), upon written request of Licensee, (A) to compel the Licensor to perform the Agreement or to provide to Licensee such intellectual property (including any and all embodiments thereof) and (B) to compel Licensor not to interfere with Licensee's rights as provided in this Agreement/or any supplemental agreement) to such intellectual property (including any and all embodiments thereof), including any right to obtain such intellectual property/or any embodiment thereof) from another entity (including without limitation, the escrow referred to in Section 4.7). Section 17. Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW OR ANY SUCCESSOR PROVISION THERETO). (1) Licensor, in respect of itself and its properties, (i) agrees to be subject to (and hereby irrevocably submits to) the nonexclusive jurisdiction of any Federal court located in the Commonwealth of Kentucky or any Kentucky state court in the event of any dispute arising out of or relating to this Agreement or the transactions contemplated hereby, (ii) agrees that it shall not attempt to deny or defeat such jurisdiction by motion or other request for leave from any such court and irrevocably waives, to the fullest extent it may effectively do so under applicable Law, any objection to the laying of the venue of any such action in any such court and any claim that any such action brought in any such court has been brought in an inconvenient forum, (iii) agrees that it shall not bring any action arising out of or relating to this Agreement or any transactions contemplated hereby in any court other than a Federal or state court sitting in the Commonwealth of Kentucky and (iv) irrevocably agrees that all disputes arising out of or relating to this Agreement and the transactions contemplated hereby may be determined in any Federal or state court sitting in the Commonwealth of Kentucky. 18 (2) Licensee, in respect of itself and its properties, (i) agrees to be subject to (and hereby irrevocably submits to) the nonexclusive jurisdiction of any Federal court located in the State of Utah or any Utah state court in the event of any dispute arising out of or relating to this Agreement or the transactions contemplated hereby, (ii) agrees that it shall not attempt to deny or defeat such jurisdiction by motion or other request for leave from any such court and irrevocably waives, to the fullest extent it may effectively do so under applicable Law, any objection to the laying of the venue of any such action in any such court and any claim that any such action brought in any such court has been brought in an inconvenient forum, (iii) agrees that it shall not bring any action arising out of or relating to this Agreement or any transactions contemplated hereby in any court other than a Federal or state court sitting in the State of Utah and (iv) irrevocably agrees that all disputes arising our of or relating to this Agreement and the transactions contemplated hereby may be determined in any Federal or state court sitting in the State of Utah. (3) Either party may make service on the other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 12, provided that nothing in this Section 17, shall affect the right of any party to serve legal process in any other manner permitted by law or in equity. (4) EACH OF THE PARTIES IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF, OR IN CONNECTION WITH, THIS AGREEMENT OR THE TRANSACTION DOCUMENTS OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. Section 18. Assignment. This Agreement may not be assigned, in whole or in part, by any party without the prior written consent of the other party, which consent shall not be unreasonably withheld, except that each party shall have the right to assign their respective rights and obligations under this Agreement without the prior consent of the other party to (i) any affiliate or any entity which controls, is controlled by or is under common control with such party, where "control" by an entity is established by the ownership, directly or indirectly, of at least fifty percent (50%) of each class of the outstanding securities of the controlled entity, provided that no such assignment shall release such party from their respective obligations hereunder or (ii) in the case of Licensee, to any transferee or purchaser of the Facility, provided that no such attempted assignment of rights or delegation of duties by Licensee shall be valid unless 19 the putative transferee shall have agreed unqualifiedly to assume the obligations of Licensee under this Agreement. Licensee covenants not to transfer or sell ownership of the Facility except on condition that the Licensee, as a part of such transfer, assigns its obligations under this Agreement to the transferee or purchaser. Section 19. Further Assurances. Each party agrees, at the request of the other party, at any time and from time to time, to execute and deliver all such further documents, and to take and to forbear from all such action, as may be reasonably necessary or appropriate in order to more effectively carry out the provisions of this Agreement. Section 20. Interpretation. Unless the context requires otherwise: (1) When a reference is made in this Agreement to an article or section, such reference shall be to an article or section of this Agreement. (2) Whenever the words "include", "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." (3) The words "hereof", "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and exhibit references are to the sections and exhibits of this Agreement. (4) The meaning assigned to each term defined herein shall be equally applicable to both the singular and the plural forms of such term, and words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning. (5) A reference to any party to this Agreement or any other agreement or document shall include such party's successors and permitted assigns. (6) A reference to any legislation or to any provision of any legislation shall include any amendment to, and any modification or re-enactment thereof, any legislative provision substituted therefor and all regulations and statutory instruments issued thereunder or pursuant thereto. (7) All references to contracts, agreements, leases or other understandings or arrangements shall refer to oral as well as written matters. 20 (8) The specificity of any representation or warranty contained herein shall not be deemed to limit the generality of any other representation or warranty contained herein. (9) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 21 IN WITNESS WHEREOF, each party has caused the License and Reagent Purchase Agreement to be executed by the duly authorized representative of the parties on the date and year first above written. PREMIER ELKHORN COAL CO. HEADWATERS INCORPORATED By: /s/ J.J. Shackleford By: /s/ Brent M. Cook -------------------------- ------------------------- Name: J.J. Shackleford Name: Brent M. Cook Title: President Title: President 22 EX-10.65.4 10 ex10654k093002.txt AMENDED LICENSE AND REAGENT PURCHASE AGREEMENT Exhibit 10.65.4 AMENDED AND RESTATED LICENSE AND REAGENT PURCHASE AGREEMENT THIS AMENDED AND RESTATED LICENSE AND REAGENT PURCHASE AGREEMENT (the "Agreement"), is made and entered into as of July 1, 2002, by and between Clintwood Elkhorn Mining Company, a Kentucky corporation (the "Licensee"), and Headwaters Incorporated, a Delaware corporation, formerly known as Covol Technologies, Inc. (the "Licensor"). RECITALS WHEREAS, Licensor has developed and owns a proprietary process to produce synthetic coal fuel qualifying for tax credits under Internal Revenue Code Section 29 from waste coal dust, coal fines, run of mine coal and other similar coal derivatives (collectively, "Coal Feedstock"), and Licensor is entitled to license the Coal Technology (as defined below) to Licensee; WHEREAS, Pocahontas Synfuel, L.L.C., a Utah limited liability company and wholly owned affiliate of Licensor ("Subsidiary"), sold a solid synthetic fuel manufacturing plant (the "Facility") to Premier Elkhorn Coal Company, a Kentucky corporation ("Premier"), an affiliate of Licensee, as set forth in that certain Asset Purchase Agreement dated as of January 18, 2000, by and between Licensor, TECO Coal Corporation, a Kentucky corporation, Premier, Subsidiary and Synfuel Investments, Inc., a Utah corporation (the "Purchase Agreement"), which Facility was subsequently sold and conveyed by Premier to Licensee on January 19, 2000; and WHEREAS, in connection with the Purchase Agreement, Premier and Licensor entered into a License and Binder Purchase Agreement dated January 18, 2000 ("Original License") for Premier's use of the Coal Technology; and WHEREAS, Premier desires to assign its rights and obligations in the Original License to Licensee and Licensor consents to such assignment and Licensee and Licensor wish to amend certain terms and restate their agreement herein. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Licensor and Licensee each agree as follows: Section 1. Definitions. Capitalized terms used herein shall have the meanings specified in the Purchase Agreement, unless otherwise specified below: 1.1 "Bankruptcy Code" has the meaning set forth in Section 16. 1.2 "Claimant" has the meaning set forth in Section 3.2. 1.3 "Coal Technology" means all intellectual property, patents (including, but not limited to, United States Patent Numbers 5,599,361; 5,487,764; and 5,453,103) and applications therefor, printed and not printed technical data, know-how, trade secrets, copyrights and other intellectual property rights, inventions, discoveries, techniques, works, processes, methods, plans, software, designs, drawings, schematics, specifications, communications protocols, source and object code and modifications, test procedures, program cards, tapes, disks, algorithms and all other scientific or technical information in whatever form including "Developed Technology" relating to, embodied in or used in the process to produce synthetic coal fuel from Coal Feedstock, including all such information in existence as of the date of this Agreement as well as related information later developed by Licensor; provided, however, that the defined term "Coal Technology" shall not include the proprietary process/method or other Reagent material or composition developed by Licensor to produce synthetic coke briquettes from coke breeze, iron revert materials, or any technology used in any application other than the processing and production of synthetic coal fuel. Nothing in this Agreement is intended to grant to Licensee the right to apply the Coal Technology to produce anything other than synthetic coal fuel intended to qualify for tax credits under Section 29(c)(1)(C) of the Code. 1.4 "Code" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. 1.5 "Confidential Information" has the meaning set forth in Section 2.4. 1.6 "Developed Technology" means any inventions, "Improvement" or technology that Licensor may conceive, make, invent or suggest in connection with or related to the Coal Technology; provided, however, that "Developed Technology" shall not include (i) coal fines recovery, coal fines washing, material handling or product marketing techniques or technologies conceived, made, invented or suggested by Licensee that are generally applicable to the coal industry but which are used at the Facility in connection with the Coal 2 Technology or (ii) any inventions, "Improvement" or technology that Licensee may conceive, make, invent or suggest in connection with or related to the Coal Technology. 1.7 "Dow Agreement" means that certain agreement between Dow Chemical Company and Licensor, effective January 1, 1998. 1.8 "Facility" has the meaning set forth in the Recitals. 1.9 "Hazardous Substances" means (a) any petrochemical or petroleum products (provided that for purposes of this Agreement, the Proprietary Reagent Material shall not be considered to be a petrochemical or petroleum product), oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain polychlorinated biphenyls, (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants" or words of similar meaning and regulatory effect under any applicable environmental law and (c) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any applicable environmental law. 1.10 "Increased Cost of Manufacture" has the meaning set forth in Section 4.2. 1.11 "Improvement" means an alteration or addition to an invention or discovery which may enhance performance or economics while maintaining a product's, device's or method's essential identity and character; provided, however, that "Improvement" shall not include (i) coal fines recovery, coal fines washing, material handling, or product marketing techniques or technologies conceived, made, invented or suggested by Licensee that are generally applicable to the coal industry but which are used at the Facility in connection with the Coal Technology or (ii) any alteration or addition to an invention or discovery which was conceived, made, invented or suggested by Licensee. An "Improvement" may comprise alterations or additions to either patented or unpatented inventions, discoveries, technology or devices and may or may not be patentable. 1.12 "Licensee" has the meaning set forth in the preamble. 1.13 "Licensor" has the meaning set forth in the preamble. 3 1.14 "Proprietary Reagent Material" means and refers to the chemical reagent compound supplied by Licensor and used for the production of synthetic coal by the Facility. 1.15 "Purchase Agreement" has the meaning set forth in the Recitals. 1.16 "Reduced Cost of Manufacture" has the meaning set forth in Section 4.2. Section 2. License Grant. 2.1 General. Licensor hereby grants to Licensee a non-exclusive license to use the Coal Technology, including Developed Technology relating to the Coal Technology, for the term of this Agreement, for the purpose of commercial exploitation, including the non-exclusive right to make, have made or use at the Facility and to offer to sell and to sell or otherwise transfer products that have been manufactured with the Coal Technology, subject to the terms and conditions of this Agreement. Licensee hereby accepts the license on the terms hereof. Licensee shall not have the right to sublicense the Coal Technology, except to any assignee, transferee or purchaser in accordance with Section 18. Licensee further agrees to use the Coal Technology only under authority of this Agreement with Licensor. 2.2 Licensor's Ownership of Developed Technology. All Developed Technology is and shall become Licensor's absolute property, subject to the terms of this Agreement. 2.3 Non-licensed Technology. Licensor retains the absolute right to fully exploit its technologies including, but not limited to, the application of such technology embodied in the Coal Technology to produce, market and use synthetic coke briquettes from coke breeze, iron revert materials and any other materials to which Licensor's technology can be applied. 2.4 Confidentiality. Each of the parties hereby agree to maintain the Coal Technology confidential and not to disclose the Coal Technology, or any aspect thereof, including, but not limited to, the Developed Technology (collectively, the "Confidential Information"). Notwithstanding the foregoing, information which (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the parties or their respective 4 agents, employees, directors or representatives, (ii) was available to the party receiving disclosure on a non-confidential basis prior to its receiving disclosure hereunder, (iii) lawfully becomes available to the party receiving disclosure on a non-confidential basis from a third party source (provided that such source is not known by the party receiving disclosure or its agents, employees, directors or representatives to be prohibited from transmitting the information), (iv) a party is compelled by legal process by any court or other authority to disclose or (v) is developed by Licensee independently of (or which does not depend on the use of) Confidential Information received from Licensor, shall not be subject to the terms of this Section 2.4. In the case of (iv) above, the compelled party shall give the other party prompt written notice of such legal process in order that an appropriate protective order can be sought and each party agrees not to oppose the other party's efforts to prevent the public disclosure of Confidential Information. At the termination of this Agreement, each party receiving Confidential Information shall use commercially reasonable efforts to return all copies of such Confidential Information (including, without limitation, any reports or memoranda), except to the extent such Confidential Information is necessary for accounting, tax, regulatory or other similar purposes. Nothing in this Agreement shall prohibit Licensee from disclosing the Confidential Information to affiliates or to others as may be reasonably necessary for Licensee to exploit Licensee's rights under the Purchase Agreement and/or this Agreement, provided that the recipient of any such Confidential Information executes a confidentiality agreement restricting further disclosure of the Confidential Information. 2.5 Know-How and Assistance. To enable Licensee to benefit fully from the license of the Coal Technology, Licensor shall provide access to all relevant documentation, drawings, engineering specifications and other know-how in its possession, reasonable access to its employees or agents who are familiar with the Coal Technology, including, but not limited to, Developed Technology, and shall provide such technical assistance and training as is requested by Licensee. If Licensor does not have responsibility for the operation of the Facility, Licensee shall reimburse Licensor for reasonable travel and other similar out-of-pocket expenses of Licensor in performing services under this Section 2.5; provided, however, that Licensor shall obtain the prior approval of Licensee for any expenditures in excess of $5,000. Section 3. Royalty. 3.1 Royalty Payments. Subject to Section 18 below, during the term of this Agreement, Licensee shall pay to Licensor a royalty in an amount equal to $**** per ton of synthetic fuel produced at the Facility and sold during the period commencing on the date of this Agreement and ending upon the expiration of the term (or earlier termination) of this Agreement. Such royalty shall be paid quarterly on the last business day of January, April, July and October of 5 each calendar year for the synthetic fuel produced at the Facility and sold during the previous calendar quarter (commencing with the calendar quarter which includes the date of this Agreement), regardless of whether all or any part of the Coal Technology is used. 3.2 Royalty Set-off. If any person ("Claimant") asserts a claim that all or any part of the Coal Technology is not the property of Licensor and is instead the property of Claimant, Licensee may, pending resolution of such claim, withhold from the royalty payment otherwise due Licensor pursuant to Section 3.1, amounts equal to such licensee fees as Claimant may demand for the use by Licensee of the Coal Technology allegedly owned by Claimant. Any amounts so withheld will be placed in escrow by Licensee. Upon entrance of a final non-appealable order by a court of competent jurisdiction that the Coal Technology is the property of Licensor or upon receipt of a release of Licensee from liability by Claimant, Licensee shall pay to Licensor any amounts withheld pursuant to this Section 3.2. If a court of competent jurisdiction enters a final non-appealable order that all or any portion of the Coal Technology is the property of the Claimant, Licensee may pay to Claimant a reasonable license fee and set off any amounts so paid against any amount withheld pursuant to this Section 3.2 and/or any other royalty otherwise due Licensor without any further liability with respect thereto. Nothing in this Section 3.2 shall be construed as limiting in any respect Licensee's rights and remedies related to a breach by Licensor of the representations and warranties contained in Section 7.3. 1.1 Section 4. Sales of Reagent. 4.1 Sale and Purchase. Licensor shall sell to Licensee, and Licensee shall purchase from Licensor, the Facility's full requirements of chemical reagent to produce synthetic fuel, provided, that Licensee's obligation hereunder shall be reduced or eliminated if, after written notice from Licensee to Licensor, and reasonable opportunity for Licensor to cure (not to exceed thirty (30) days from receipt of said notice) (i) Licensor fails to deliver a chemical reagent that when properly applied to Coal Feedstock produces a "qualified fuel" for purposes of Section 29 of the Code; (ii) Licensor fails to deliver on the terms and conditions set forth in this Agreement the Facility's full requirements of chemical reagent to produce synthetic fuel; (iii) customers of synthetic fuel produced at the Facility provide Licensor with objective, verifiable evidence that either (A) an alternative available chemical reagent makes Licensor's chemical reagents obsolete, or (B) the customer's operating conditions preclude the use of synthetic fuel produced with Licensor's chemical reagents; or (iv) it is necessary to do so to comply with applicable environmental agency rulings, orders, or regulations. Each calendar month 6 Licensor shall deliver an invoice to Licensee for the chemical reagent delivered to Licensee during the immediately preceding calendar month. Payments for chemical reagent delivered by Licensor to Licensee during any calendar month shall be due and payable to Licensor within fifteen (15) days following receipt of an invoice from Licensor with respect to such chemical reagent. 4.2 Price. The price which Licensee shall pay for any Proprietary Reagent Material delivered by Licensor to Licensee shall be an amount equal to (a) $**** per dry pound of Covol 298 Proprietary Reagent Material, or (b) $**** per dry pound of Covol 298-1 Proprietary Reagent Material. If during the term of this Agreement, Licensor's direct and actual costs (including, but not limited to, material, labor and transportation costs) incurred in connection with the manufacture and sale of the Proprietary Reagent Material delivered by Licensor to Licensee pursuant to this Agreement shall exceed the price set forth in clauses (a) or (b) in the preceding sentence (such price, the "Increased Cost of Manufacture"), then the parties hereto agree that the price which Licensee shall pay for Proprietary Reagent Material delivered by Licensor to Licensee pursuant to this Agreement shall be automatically increased to an amount equal to such Increased Cost of Manufacture. Licensee shall be entitled to receive volume pricing general discounts on Proprietary Reagent Material that Licensor receives under the Dow Agreement, as the same may be amended from time to time. 4.3 Licensor Representations, Warranties and Covenants. Licensor represents, warrants and covenants as follows: (1) Licensor shall convey to Licensee good, valid and marketable title to all Proprietary Reagent Material purchased by Licensee from Licensor hereunder, free and clear of any and all liens, claims and encumbrances of any type whatsoever. (2) Proprietary Reagent Material purchased by Licensee from Licensor hereunder shall not be a Hazardous Substance and its sale, delivery and use to produce solid synthetic fuel at the Facility, in each case, as contemplated by this Agreement shall comply with all applicable laws and governmental regulations (including, but not limited to, environmental laws and regulations). (3) Licensor represents and warrants to Licensee that the Proprietary Reagent Material when properly applied to Coal Feedstock produces a "significant chemical change" for purposes of Section 29 of the Code. 7 (4) Licensor agrees that it shall not substitute other monomers or polymers for the Dow carboxylated styrene/butadiene/acrylate/acetate latex formulations currently being used by Licensor to produce Proprietary Reagent Material without the prior written consent of Buyer and without first providing Buyer with a written report of a third party fuels expert reasonably acceptable to the Licensor and Licensee to the effect that (in such third party's professional judgment) the monomers or polymers so to be substituted will achieve the results set forth in Section 4.3(c). (5) Licensor agrees that all Proprietary Reagent Material delivered to Licensee shall be in accordance with the specifications set forth in Exhibit A attached hereto. (6) At Licensee's request, Licensor shall replace, or refund the purchase price of, all non-conforming Proprietary Binding Material. In addition, Licensor shall (i) pay all of Licensee's costs and expenses incurred to return, remove or dispose of non-conforming Proprietary Reagent Material and (ii) indemnify, defend and hold harmless Licensee and its partners, directors, officers, members, agents, representatives, subsidiaries and affiliates from and against any and all claims, demands or suits (by any party, including any governmental entity), losses, liabilities, damages, obligations, penalties, payments, costs and expenses (including the costs and expenses of enforcing this indemnification and defending any and all actions, suits, proceedings, demands and assessments, which shall include reasonable attorneys' fees and court costs) resulting from, relating to, arising out of, or incurred in connection with any products liability claim resulting from, relating to, arising out of, or incurred in connection with the delivery to and use by Licensee of Proprietary Reagent Material delivered by Licensor; provided, however, that in no event shall Licensor's liability under this Section 4.3(f)(ii) exceed the greater of (i) the proceeds received from insurance provided for in Section 4.8 and (ii) the proceeds received under the Dow Agreement and/or any of its other vendor or Reagent manufacturing agreements which Licensor may enter into from time to time. (7) Licensor agrees that there will be available at the Facility from time to time as reasonably requested by Licensee sufficient quantities of the Proprietary Reagent Material to supply the Facility's full requirements from the date hereof until at least December 31, 2007. 4.4 Order Procedure. Licensee shall deliver all purchase orders for chemical Reagent at least thirty (30) days in advance of the first day of the month in which delivery of such chemical Reagent is required under such purchase order. (For example, Licensee shall deliver a purchase order for December 8 delivery by no later than November 1st). Each such purchase order shall be delivered either (i) in writing (including by fax) or (ii) orally by telephone by an authorized agent of Licensee (subject to the condition that it is followed by a written purchase order within twenty-four (24) hours). Such purchase orders shall be sent to Licensor at such address as Licensor shall direct in writing from time to time. 4.5 Delivery and Acceptance. All Proprietary Reagent Material purchased hereunder shall be delivered F.O.B. the Facility. Licensor shall arrange for any necessary transportation of the Proprietary Reagent Material to the Facility and shall deliver or cause to be delivered to Licensee a material safety data sheet in respect of each delivery of Proprietary Reagent Material to Licensee. Licensee shall bear the expense of unloading Proprietary Reagent Material from the trucks. Licensee shall have a reasonable opportunity to sample Proprietary Reagent Material delivered to it hereunder to confirm that such Proprietary Reagent Material conforms to the terms and requirements hereof (including, but not limited to, the specifications set forth in Exhibit A attached hereto), and Licensee shall not be deemed or required to accept any such Proprietary Reagent Material prior to the completion of such sampling. From time to time as requested by Licensee, Licensor shall certify in writing to Licensee that the representations and warranties in Section 4.3 are true and complete with respect to the Proprietary Reagent Material delivered to Licensee pursuant to this Agreement. 4.6 Grant of License. Licensor hereby grants to Licensee a nonexclusive license for the term of this Agreement (or such shorter period as provided in the proviso hereto) to use the technology used to manufacture the Proprietary Reagent Material, to manufacture the Proprietary Reagent Material in sufficient quantities to operate the Facility to full capacity, and such technology shall be deemed "Coal Technology" for the purposes of this Agreement; provided, however, that Licensee shall not be permitted to use, and Licensee agrees that it shall not use, such license unless and until Licensor has given notice to Licensee of its inability to deliver the Proprietary Reagent Material to Licensee (which Licensor shall give to Licensee not less than ninety (90) days before its ability to deliver the Proprietary Reagent Material to Licensee will be interrupted or terminated for any reason, including Licensor's insolvency, bankruptcy or liquidation) or, in the absence of such notice, the actual failure by Licensor to deliver the Proprietary Reagent Material to Licensee for at least five (5) calendar days after Licensee gives written notice of non-delivery to Licensor. Upon the occurrence of the events described in the immediately proceeding proviso, Licensor agrees to coordinate and arrange for, and does hereby authorize and permit, Licensee, its sublicensees or assignees, to purchase the Proprietary Reagent Material directly from Licensor's Proprietary 9 Reagent Material manufacturer or other sources. The license granted to Licensee under this Section shall cease (subject to reinstatement upon the reoccurrence of the events contemplated above) and sales of Proprietary Reagent Material under the terms of this Agreement shall be reinstated, in each case, on a date not less than ninety (90) days after Licensor gives notice to Licensee, together with evidence reasonably satisfactory to Licensee, that Licensor is able to deliver the Proprietary Reagent Material to Licensee in accordance with this Agreement. No additional fee or royalty shall be payable to Licensor in connection with the license granted pursuant to this Section and Licensor shall be responsible for any additional out-of-pocket costs incurred by Licensee in connection with the production of Proprietary Reagent Material pursuant to this Section. 4.7 Required Insurance. (1) Types. Licensor shall obtain and maintain, at its own cost, from reputable insurers at all times during the term of this Agreement, general third party liability insurance, including product liability coverage, with a $10,000,000 coverage limit, which may be comprised of a $1,000,000 per occurrence primary policy and a $10,000,000 umbrella policy. (2) "Occurrence" Basis Coverage. To the extent available on commercially reasonable terms at commercially reasonable rates the liability coverage required in this Section 4.7 shall be written on an "occurrence" basis. (3) Named Insured. Licensor shall cause Licensee to be named as an additional insured on all the insurance policies required under this Section 4.7. (4) Subrogation Waiver. Licensor shall cause all the insurance policies required under this Section 4.7 to contain a waiver of subrogation by the insurer in favor of Licensee. (5) Notice of Cancellation/Coverage Reduction. Licensor shall insure that each insurance policy required under this Section 4.7 shall contain a "notice of cancellation/coverage reduction" provision requiring the insurer to give at least thirty (30) days prior written notice to Licensee of the cancellation of and/or material change to (including, but not limited to, a reduction in coverage under such insurance policy) its insurance policy. 10 (6) Default. If Licensor fails duly to perform it obligations to effect and maintain any of the insurance required pursuant to this Section 4.7, Licensee may, but shall not be obligated to, upon written notice to Licensor, in the name of and on behalf of Licensor effect and maintain such insurance, and all costs and expenses thereby incurred by Licensee shall be paid by Licensor within ten (10) days of written demand. (7) Certificates of Insurance. Licensor shall cause its insurers under each insurance policy required under this Section 4.7 to provide Licensee with certificates of insurance evidencing the insurance policies and endorsements required by this Section 4.7. Failure of the Licensee to receive such certificates shall not relieve Licensor of its obligation to obtain and maintain insurance in accordance with this Section 4.7. Failure to obtain insurance pursuant to this Section 4.7 shall in no way relieve or limit Licensor's obligations and liabilities under this Agreement. Section 5. Records; Inspection; Confidentiality. 5.1 Records. Each party hereto shall keep accurate records containing all data reasonably required for the computation and verification of the amounts to be paid by the respective parties under this Agreement (including, but not limited to, any Reduced Cost of Manufacture or Increased Cost of Manufacture), and shall permit each other party or an independent accounting firm designated by such other party to inspect and/or audit such records during normal business hours upon reasonable advance notice. All costs and expenses incurred by a party in connection with such inspection shall be borne by it. 5.2 Confidentiality. Each party agrees to hold confidential from all third parties all information contained in records examined by or on behalf of it pursuant to this Section 5; provided, however, that information shall not be subject to the terms of this Section 5 which (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the parties or their respective agents, employees, directors or representatives, (ii) was available to the party receiving disclosure on a non-confidential basis prior to its receiving disclosure hereunder, (iii) lawfully becomes available to the party receiving disclosure on a non-confidential basis from a third party source (provided that such source is not known by the party receiving disclosure or its agents, employees, directors or representatives to be prohibited from transmitting the information), (iv) a party is compelled by legal process by any court or other authority to disclose, or (v) is developed by the party independently of (or which does not depend on the use of) disclosure hereunder. In the case of (iv) above, the compelled party shall give the other party prompt 11 written notice of such legal process in order that an appropriate protective order can be sought and each party agrees not to oppose the other party's efforts to prevent the public disclosure of such information. At the termination of this Agreement, each party receiving copies of such information (including, without limitation, any reports or memoranda) shall use commercially reasonable efforts to return all such copies, except to the extent such information is necessary for accounting, tax, regulatory or other similar purposes. Nothing in this Agreement shall prohibit Licensee from disclosing such information to affiliates or to others as may be reasonably necessary for Licensee to exploit Licensee's rights under the Purchase Agreement and/or this Agreement, provided that the recipient of any such information executes a confidentiality agreement restricting further disclosure of such information. Section 6. Enforcement Of Proprietary Rights. Licensee shall cooperate in good faith, with Licensor's efforts to enforce its proprietary patent and trade secret rights at Licensor's sole expense. Section 7. General Representations, Warranties and Covenants. 7.1 Authority. Each party represents and warrants to the other party that (a) the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby (i) have been duly authorized on its behalf by all requisite action, corporate or otherwise, (ii) does not and will not result in any violation of, conflict with or default under the terms of any of its organizational documents (nor, to its knowledge, does there exist any condition which upon the passage of time or the giving of notice would cause such violation, conflict or default), and (iii) does not and will not result in any violation of, conflict with or default under any collective bargaining agreement, permit, lease, venture, indenture, mortgage, agreement, contract, judgment, order or other obligation or restriction to which it or its assets may be bound or encumbered (nor, to its knowledge, does there exist any condition which upon the passage of time or the giving of notice would cause such violation, conflict or default), (b) it has the full right, power and authority to enter into this Agreement and to carry out the terms of this Agreement, (c) it has duly executed and delivered this Agreement, and (d) this Agreement is its valid and binding obligation, enforceable in accordance with its terms (subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium, and similar laws from time to time in effect relating to the rights and remedies of creditors as well as to general principles of equity). 7.2 No Consent. Each party represents and warrants to the other party that no approval, consent, authorization, order, designation or declaration of 12 any court or regulatory authority or governmental body or any third-party is required to be obtained by it, nor is any filing or registration required to be made therewith by it for the consummation by it of the transactions contemplated under this Agreement. 7.3 Intellectual Property Matters. (1) Licensor represents and warrants to Licensee that (i) it owns, free and clear of all liens and encumbrances, patents related to the Coal Technology (including, but not limited to, United States Patent Numbers 5,599,361, 5,487,764 and 5,453,103) and has developed and to the best of its knowledge exclusively owns the Coal Technology, including, but not limited to, printed and not printed technical data, know-how, trade secrets, copyrights, and other intellectual property rights and all other scientific or technical information in whatever form relating to, embodied in or used in the process to produce synthetic coal fuel from waste coal dust, coal fines, run of mine coal and other similar coal feedstock, and, the right to freely make, use, sell and exploit the Coal Technology and Proprietary Reagent Material used in manufacturing synthetic coal fuel (1) from waste coal dust, coal fines, run of mine coal and other similar coal feedstocks, (ii) it has the sole and complete right and power to grant to Licensee the licenses granted herein, and (iii) the sale or use of the rights, Proprietary Reagent Material and Coal Technology and/or licenses granted herein as contemplated by this Agreement do not and will not infringe any third-party's intellectual property rights. (2) Except as otherwise expressly provided in this Agreement, Licensor agrees that it will not take any action or fail to take any action during the term of this Agreement that would negate this Agreement or cause a loss to Licensee of the licenses granted hereunder. (3) If during the term of this Agreement a third party has infringed any intellectual property rights associated with the Coal Technology or otherwise misappropriated any Coal Technology, Licensor shall, at Licensor's expense, institute and conduct legal actions against such third party or enter into such agreements or accord in settlement as are deemed appropriate by Licensor, in which case Licensor shall be entitled to any sums recovered in connection therewith from third parties. If Licensor does not take any action, Licensee shall have the right, but not the obligation, to take action as a plaintiff in the prosecution of any infringement or misappropriation action affecting the Facility, and Licensee shall be entitled to any sums recovered in connection therewith from third parties. If Licensee and Licensor have jointly conducted an infringement or misappropriation action, after each party has been reimbursed for costs and expenses incurred by it in prosecuting the action, any sums recovered in connection therewith from third parties shall be distributed 13 to Licensee and Licensor based on the proportionate amount of damages suffered by Licensee and Licensor. Licensee shall always have the right to be represented at its expense by counsel of its own selection in any action. In no event shall Licensor enter into any agreement or settlement inconsistent with the terms of this Agreement. 7.4 Indemnification. Each party agrees to indemnify, defend and hold harmless the other party and its partners, directors, officers, members, agents, representatives, subsidiaries and affiliates from and against any and all claims, demands or suits (by any party, including any governmental entity), losses, liabilities, damages, obligations, penalties (including, but not limited to, for violation of environmental laws), payments, costs (including, but not limited to, costs of remediation) and expenses (including, but not limited to, the costs and expenses of enforcing this indemnification and defending any and all actions, suits, proceedings, demands and assessments, which shall include reasonable attorneys' fees and court costs) resulting from, relating to, arising out of, or incurred in connection with its breach of any of the representations, warranties and/or covenants contained in this Agreement. Section 8. Term. The term of this Agreement will begin on the date of this Agreement and will expire, unless terminated earlier pursuant to Section 9, on the later of: (a) December 31, 2007, (b) the end of the term of Section 29 of the Code, or (c) the last to expire of the U.S. patents referred to under the definition of Coal Technology above or any other U.S. patents in existence at the date of this Agreement that disclose and claim Covol's proprietary Coal Technology. Any extension of this Agreement must be in writing and signed by both parties. Section 9. Events of Default; Remedies. 9.1 Events of Default. The following shall constitute an event of default ("Event of Default") under this Agreement: (1) Licensor shall have breached any of its obligations pursuant to Section 4.8, which breach cannot be or has not been cured within thirty (30) days after the giving of written notice thereof by the non-defaulting party; (2) a party shall have breached in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement (other than as provided in Section 9.1(a)), which breach cannot be or 14 has not been cured within sixty (60) days after the giving of written notice thereof by the non-defaulting party; (3) a party becomes insolvent or is unable to pay its debts as they fall due, seeks protection voluntarily or involuntarily under any law relating to bankruptcy, receivership, insolvency, administration, liquidation, dissolution or similar law of any jurisdiction (other than for the purposes of a reorganization with a view to continuing the business as a going concern under relevant bankruptcy or insolvency proceedings) or enters into a general assignment or arrangement or a composition with or for the benefit of its creditors; or (4) a party takes any step (including the filing or presentation of a petition, the convening of a meeting or the filing of an application or consent) in any jurisdiction for, or with a view to, the appointment of an administrator, liquidator, receiver, trustee, custodian or similar official (other than for the purposes of a reorganization with a view to continuing the business as a going concern under relevant bankruptcy or insolvency proceedings) for such party and/or the whole or any part of the business, undertaking, property, assets, receiver or uncalled capital of such party or any such person is appointed. 9.2 Remedies. (1) Upon the occurrence of an Event of Default, the non-defaulting party may, in addition to exercising any of its remedies at law or equity or any of its other remedies provided for in this Agreement, terminate this Agreement upon written notice thereof to the defaulting party. (2) Upon termination of this Agreement, all rights granted to and future obligations of the parties shall immediately cease; provided, however, that termination shall not relieve either party of its obligations accrued during the term of this Agreement (including, but not limited to, any pre-termination obligation Licensee may have to pay Licensor) which has not been fulfilled, and all representations, warranties, indemnification obligations and confidentiality agreements made herein shall survive termination of this Agreement. (3) If either party terminates this Agreement pursuant to this Section 9.2, Licensee shall promptly return and cause all agents of Licensee to promptly return to Licensor all Confidential Information (except to the extent such Confidential Information is necessary for accounting, tax, regulatory or other similar purposes) and all Coal Technology then in Licensee's possession, and Licensee shall not thereafter use for its own commercial benefit or disclose 15 to any third person any Confidential Information or Coal Technology before the end of the term of Section 29 of the Code. Notwithstanding the foregoing, Confidential Information shall not be subject to the terms of this Section 9.2(c) which (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the Licensee or its respective members, agents, employees, directors or representatives, (ii) was available to the Licensee on a non-confidential basis prior to its receiving disclosure hereunder, (iii) lawfully becomes available to the Licensee on a non-confidential basis from a third party source (provided that such source is not known by the Licensee or its members, agents, employees, directors or representatives to be prohibited from transmitting the information), (iv) the Licensee is compelled by legal process by any court or other authority to disclose or (v) is developed by Licensee independently of (or which does not depend on the use of) Confidential Information received from Licensor; provided, however, that in the case of (iv) above, the Licensee shall give the Licensor prompt written notice of such legal process in order that an appropriate protective order can be sought and Licensee agrees not to oppose Licensor's efforts to prevent the disclosure of Confidential Information. Section 10. Waiver. The failure of any party to enforce at any time any provision of this Agreement shall not be construed as a waiver of such provision or the right thereafter to enforce each and every provision. No waiver by any party, either express or implied, of any breach of any of the provisions of this Agreement shall be construed as a waiver of any other breach of such term or condition. Section 11. Severability. If any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid or unenforceable in any respect for any reason, the validity and enforceability of any such provision in any other respect and of the remaining provisions of this Agreement shall not be in any way impaired. Section 12. Notices. All notices required or authorized by this Agreement shall be effective upon receipt and given to the parties in writing by fax, mail, or courier as follows: To Licensor: Brent M. Cook, President Headwaters Incorporated 11778 South Election Road, Suite 210 Draper, UT 84020 Fax: (801) 984-9410 16 To Licensee: Clintwood Elkhorn Mining Company c/o TECO Coal Corporation 200 Allison Boulevard Corbin, Kentucky 40701 Fax: (606) 523-4180 Attn: President With a copy to: TECO Energy, Inc. 702 N. Franklin Street Tampa, Florida 33602 Fax: (813) 228-4811 Attn: General Counsel Section 13. Remedies Cumulative. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided by law or in equity. Section 14. Entire Agreement. This Agreement, together with the Transaction Documents (as defined in the Purchase Agreement), constitutes the entire agreement of the parties relating to the subject matter hereof. There are no promises, terms, conditions, obligations or warranties other than those contained herein and therein. This Agreement and the Transaction Documents supersede any and all prior communications, representations or agreements, verbal or written, between the parties relating to the subject matter hereof. This Agreement may not be amended except in writing signed by the parties hereto. Section 15. Relocation of the Facility. Licensee shall have the right to relocate the Facility to Pike County, Kentucky or any other site or sites with respect to which Licensor has not as of the date of this Agreement conveyed a conflicting exclusive territorial license to a third party, provided that any such relocation shall not affect the terms of this Agreement which shall remain in full force and effect. As used in this Agreement, the Facility refers to the subject synthetic fuel manufacturing plant regardless of the location or configuration thereof. Section 16. License Status in Bankruptcy. (a) This Agreement shall constitute an executory contract under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. ss. 101 et seq. (the "Bankruptcy Code"). All rights and licenses granted pursuant to this Agreement are, and shall be deemed to be, licenses of and right to "intellectual property" as that term is defined in Section 101(35A), and as used in Section 365, of the Bankruptcy Code. The parties agree that (i) Licensor is a "licensor" under Section 365(n) of the Bankruptcy Code 17 and (ii) Licensee, as licensee under this Agreement, shall possess and may fully exercise all of its rights, remedies and elections afforded by and under the Bankruptcy Code. (b) The parties further agree that, in the event of the commencement of a case by or against Licensor under the Bankruptcy Code, Licensee shall be entitled to all applicable rights under Section 365 of the Bankruptcy Code. Without limiting the foregoing, the parties hereby agree that Licensee has (i) the right to complete duplicate/ or complete access to, as appropriate) any such intellectual property referred to in subsection (a) above and any and all embodiments of such intellectual property upon the written request of Licensee and (ii) the right (unless and until the Agreement is rejected), upon written request of Licensee, (A) to compel the Licensor to perform the Agreement or to provide to Licensee such intellectual property (including any and all embodiments thereof) and (B) to compel Licensor not to interfere with Licensee's rights as provided in this Agreement/or any supplemental agreement) to such intellectual property (including any and all embodiments thereof), including any right to obtain such intellectual property/or any embodiment thereof) from another entity (including without limitation, the escrow referred to in Section 4.7). Section 17. Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW OR ANY SUCCESSOR PROVISION THERETO). (1) Licensor, in respect of itself and its properties, (i) agrees to be subject to (and hereby irrevocably submits to) the nonexclusive jurisdiction of any Federal court located in the Commonwealth of Kentucky or any Kentucky state court in the event of any dispute arising out of or relating to this Agreement or the transactions contemplated hereby, (ii) agrees that it shall not attempt to deny or defeat such jurisdiction by motion or other request for leave from any such court and irrevocably waives, to the fullest extent it may effectively do so under applicable Law, any objection to the laying of the venue of any such action in any such court and any claim that any such action brought in any such court has been brought in an inconvenient forum, (iii) agrees that it shall not bring any action arising out of or relating to this 18 Agreement or any transactions contemplated hereby in any court other than a Federal or state court sitting in the Commonwealth of Kentucky and (iv) irrevocably agrees that all disputes arising out of or relating to this Agreement and the transactions contemplated hereby may be determined in any Federal or state court sitting in the Commonwealth of Kentucky. (2) Licensee, in respect of itself and its properties, (i) agrees to be subject to (and hereby irrevocably submits to) the nonexclusive jurisdiction of any Federal court located in the State of Utah or any Utah state court in the event of any dispute arising out of or relating to this Agreement or the transactions contemplated hereby, (ii) agrees that it shall not attempt to deny or defeat such jurisdiction by motion or other request for leave from any such court and irrevocably waives, to the fullest extent it may effectively do so under applicable Law, any objection to the laying of the venue of any such action in any such court and any claim that any such action brought in any such court has been brought in an inconvenient forum, (iii) agrees that it shall not bring any action arising out of or relating to this Agreement or any transactions contemplated hereby in any court other than a Federal or state court sitting in the State of Utah and (iv) irrevocably agrees that all disputes arising our of or relating to this Agreement and the transactions contemplated hereby may be determined in any Federal or state court sitting in the State of Utah. (3) Either party may make service on the other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 12, provided that nothing in this Section 17, shall affect the right of any party to serve legal process in any other manner permitted by law or in equity. (4) EACH OF THE PARTIES IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF, OR IN CONNECTION WITH, THIS AGREEMENT OR THE TRANSACTION DOCUMENTS OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. Section 18. Assignment. This Agreement may not be assigned, in whole or in part, by any party without the prior written consent of the other party, which consent shall not be unreasonably withheld, except that each party shall have the right to assign their respective rights and obligations under this Agreement without the prior consent of the other party to (i) any affiliate or any entity which controls, is controlled by or is under common control with such party, where "control" by an entity is established by the ownership, directly or indirectly, 19 of at least fifty percent (50%) of each class of the outstanding securities of the controlled entity, provided that no such assignment shall release such party from their respective obligations hereunder or (ii) in the case of Licensee, to any transferee or purchaser of the Facility, provided that no such attempted assignment of rights or delegation of duties by Licensee shall be valid unless the putative transferee shall have agreed unqualifiedly to assume the obligations of Licensee under this Agreement. Licensee covenants not to transfer or sell ownership of the Facility except on condition that the Licensee, as a part of such transfer, assigns its obligations under this Agreement to the transferee or purchaser. Section 19. Further Assurances. Each party agrees, at the request of the other party, at any time and from time to time, to execute and deliver all such further documents, and to take and to forbear from all such action, as may be reasonably necessary or appropriate in order to more effectively carry out the provisions of this Agreement. Section 20. Interpretation. Unless the context requires otherwise: (1) When a reference is made in this Agreement to an article or section, such reference shall be to an article or section of this Agreement. (2) Whenever the words "include", "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." (3) The words "hereof", "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any particular provision of this Agreement, and section and exhibit references are to the sections and exhibits of this Agreement. (4) The meaning assigned to each term defined herein shall be equally applicable to both the singular and the plural forms of such term, and words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning. (5) A reference to any party to this Agreement or any other agreement or document shall include such party's successors and permitted assigns. 20 (6) A reference to any legislation or to any provision of any legislation shall include any amendment to, and any modification or re-enactment thereof, any legislative provision substituted therefor and all regulations and statutory instruments issued thereunder or pursuant thereto. (7) All references to contracts, agreements, leases or other understandings or arrangements shall refer to oral as well as written matters. (8) The specificity of any representation or warranty contained herein shall not be deemed to limit the generality of any other representation or warranty contained herein. (9) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 21 IN WITNESS WHEREOF, each party has caused the License and Reagent Purchase Agreement to be executed by the duly authorized representative of the parties on the date and year first above written. CLINTWOOD ELKHORN MINING COMPANY By: /s/ J.J. Shackleford -------------------------- Name: J.J. Shackleford Title: President HEADWATERS INCORPORATED By: /s/ Brent M. Cook -------------------------- Name: Brent M. Cook Title: President 22 EX-10.67.2 11 ex10672k093002.txt AMENDED PROPRIETARY REAGENT SUPPLY & LICENSE Exhibit 10.67.2 AMENDED AND RESTATED PROPRIETARY REAGENT SUPPLY AND LICENSE AGREEMENT THIS AMENDED AND RESTATED PROPRIETARY REAGENT SUPPLY AND LICENSE AGREEMENT (the "Agreement"), is made and entered into as of June 6, 2002 by and between DTE Smith Branch, LLC, a Delaware limited liability company (the "Vendee"), and Headwaters Incorporated, a Delaware corporation (the "Vendor"). WHEREAS Vendor has developed a proprietary reagent to produce synthetic fuel from waste coal dust, coal, coal fines, and other coal derivatives, and Vendor is entitled to supply and license the use of the Proprietary Reagent Material (as defined below) to Vendee. WHEREAS Vendee wishes to obtain and Vendor wishes to grant to Vendee a license for the use of Proprietary Reagent Material to produce synthetic fuel at Vendee's synthetic fuel manufacturing facilities under the terms and conditions set forth in this Agreement, and Vendee wishes to obtain and Vendor wishes to sell the Vendee the Proprietary Reagent Material (as defined below) for use in the operation of the Vendee's synthetic fuel manufacturing facilities as identified on the attached Exhibit A. WHEREAS Vendor and Vendee entered into a Proprietary Reagent Supply and License Agreement dated as of March 28, 2002 and the parties wish to amend and restate their agreement on the terms set forth herein. NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Vendor and Vendee each agree as follows: Section 1: Definitions "Developed Technology" means any inventions, "Improvement," or technology that Vendor may conceive, make, invent, or suggest in connection with Vendor's disclosure to Vendee regarding the use of Proprietary Reagent Material for production of synthetic fuel, all of which the parties hereto acknowledge and agree constitutes the sole and exclusive property of Vendor. "Effective Date" means the date of this Agreement set forth above. "Facility" or "Facilities" refers to those synthetic fuel manufacturing facilities currently located or with plans to relocate to the sites described in Exhibit A. 1 "Improvement" means an alternation or addition to an invention or discovery which enhances, to some extent, performance or economics without changing or destroying a product's, device's or method's basic identity and essential character. An Improvement may compromise alterations or additions to either patented or unpatented inventions, discoveries, technology, or devices, and may or may not be patentable. "Vendee" has the meaning set forth in the preamble. "Vendor" has the meaning set forth in the preamble. "Proprietary Reagent Material" means and refers to the reagent compound provided by the Vendor for the production, by Vendee, of synthetic fuel, and which fuel is reasonably expected to constitute "qualified fuels" pursuant to the terms of Section 29 (c) (i) (C) of the Internal Revenue Code of 1986, as amended. Section 2. License Grant 2.1 General. Subject to the terms and conditions of this Agreement, Vendor hereby grants to Vendee, for the full term hereof, a non-exclusive license to use the Proprietary Reagent Material for manufacture of synthetic fuel at the facilities. Vendee shall not have the right to sublicense. All Developed Technology and/or Improvements relating directly to the Proprietary Reagent Material shall become Vendor's absolute property. 2.2 Confidentiality. Each of the parties hereby agree to maintain the Proprietary Reagent Material confidential and not to disclose the Proprietary Reagent Material, or any aspect thereof, or the developed Technology or Improvements, or any aspect thereof (collectively, the "Confidential Information"). Notwithstanding the foregoing, information which (i) is or becomes generally available to the public other than as a result of an unauthorized disclosure by the parties or their respective agents, employees, directors or representatives, (ii) was available to the party receiving disclosure on a non-receiving disclosure hereunder, (iii) lawfully becomes available to the party receiving disclosure on a non-confidential basis from a third party source (provided that such source is not known by the party receiving disclosure on a non-disclosure or its agents, employees, directors or representatives to be prohibited from transmitting the information), or (iv) a party is compelled by legal process by any court or other authority to disclose shall not be subject to the terms of this Section 1.5. In the case of (iv) above, the compelled party shall give the other party prompt written notice of such legal process in order that an appropriate protective order can be sought and each party agrees not to oppose the other party's efforts to prevent the disclosure of confidential Information. At the termination of this Agreement, all copies of any Confidential Information (including without limitation any reports or memoranda) shall be returned by the party receiving disclosure. 2 Section 3. Sale of Reagent 3.1 Sale and Purchase. Vendor shall sell to Vendee, and Vendee shall purchase from Vendor Proprietary Reagent Material in an amount equal to Vendee's requirements of chemical reagent required to operate the facilities to produce synthetic fuel regardless of the ownership or location of the Facilities. These requirements may be (i) determined periodically by Vendee based upon chemical operating conditions, Proprietary Reagent Material performance in producing a "qualified fuel", effect of the Proprietary Reagent Material on material handling, and by customer/agency requirements or (ii) reduced or eliminated if Vendee's annual cost of Proprietary Reagent Material escalates more than 4% per year. Vendor shall deliver the Proprietary Reagent Material to Vendee on the terms specified herein. Vendor shall invoice Vendee for Proprietary Reagent Material monthly. Payments for the Proprietary Reagent Material delivered by Vendor during any calendar month shall be due and payable to Vendor in 30 days. Payments after the application due dates shall accrue interest at the rate of one and one-quarter percent per month. 3.2 Price. The price which Vendee shall pay for the Covol 298 Proprietary Reagent Material delivered (F.O.B. facility location) by Vendor (the "Reagent Base Price") shall be $**** per lb. of dry Covol 298 Reagent delivered; provided, however, that the price which Vendee shall pay for Covol 298-1 Proprietary Reagent Material shall be the Reagent Base Price plus $**** per dry lb. The Reagent Base Price shall be subject to adjustment to reflect any actual increase or decrease in Vendor's cost. 3.3 Representative and Warranties. Vendor represents, warrants and covenants as follows: (a) Vendor shall convey to Vendee good title to all Proprietary Reagent Material purchased by Vendee from Vendor hereunder, free and clear of any and all liens, claims, and encumbrances of any type whatsoever. (b) All Proprietary Reagent Material shall be delivered in compliance with applicable environmental laws and governmental regulations. (c) Specifications and Quality Standards attached as Exhibit B. 3.4 Order Procedure. Vendee shall deliver all purchase orders for Proprietary Reagent Materials at least ten (10) days in advance of the day for which delivery of the Proprietary Reagent Material is required under such purchase orders, and all such purchase orders received by Vendor during the term of this Agreement shall be deemed to have been accepted by Vendor. Each such purchase order shall be delivered either (i) in writing (including by fax), or (ii) orally by telephone by an authorized agent of Vendee (subject to the condition that it is followed by a written purchase order within 24 hours). Such purchase orders shall be sent to Vendor at such address as Vendor shall direct. 3 3.5 Delivery and Acceptance. All Proprietary Reagent Material purchased hereunder shall be delivered F.O.B. the Facility. Vendor shall arrange for any necessary transportation of the Proprietary Reagent Material to the Facility. Vendee shall bear the expense of unloading of Proprietary Reagent Material from the trucks. Vendor will ensure that a certificate of analysis will accompany each delivered load of Proprietary Reagent Material. Vendee shall have a reasonable opportunity to sample Proprietary Reagent Material delivered to it hereunder to confirm that such Proprietary Reagent Material conforms to the terms and requirements hereof in Exhibit B, and Vendee shall not be deemed or required to accept any such Proprietary Reagent Material thereafter until such time that Vendor warrants that quality problems associated with the load are resolved. 3.6 Conditional License to Manufacture. If Vendee's ability to deliver the Proprietary Reagent Material to Vendee will be interrupted or terminated for any reason, Vendor shall give not less than ninety (90) days notice to Vendee. Subject to giving notice of its inability to deliver the Proprietary Reagent material to Vendee (or, m the absence of such notice, the actual failure to deliver the Proprietary Reagent Material for at least twenty (20) days after Vendee gives written notice of non-delivery to Vendor), Vendor hereby grants to Vendee a nonexclusive license for the term of this Agreement (or such shorter period as provided in the proviso hereto) to use the technology used to manufacture the Proprietary Reagent Material, and the copy of the Formula delivered in escrow pursuant to Section 3.7, to manufacture the Proprietary Reagent Material in sufficient quantities to operate the Facility to full capacity; provided however, that the license granted to Vendee under this Section 3.6 shall cease (subject to reinstatement upon reoccurrence of the events contemplated above) and sales of Proprietary Reagent Material under the terms of this Agreement shall be reinstated, in each case, on a date not less than ninety (90) days after Vendor gives notice to Vendee, together with evidence reasonably satisfactory to Vendee that Vendor is able to deliver the Proprietary Reagent Material in accordance with this Agreement. Vendee shall pay Vendor a fee of $1.00 per ton of synthetic fuel produced and sold in connection with the License granted pursuant to this Section 3.6 and Vendee shall be responsible for any costs incurred by Vendee in connection with the production of Proprietary Reagent Material pursuant to this Section 3.6. 3.7 Escrow of Reagent Material Formula. Vendor agrees to place in escrow with Vendee the formula and technology used to manufacture the Proprietary Reagent Material (the "Formula") as provided herein. In connection therewith, Vendor agrees to deposit with Vendee, within ten (10) days of the date of this Agreement, a copy of the Formula. During the term of this Agreement, Licensor shall keep the Formula in escrow fully current by depositing all updates and revision thereto and related materials, as the Formula may be updated or revised from time to time. Such supplemental deposit will be completed no later than ten (10) days after the date of us of such revised Formula by Vendor. Title to the Formula shall remain in Vendor, but title to the copy thereof to be deposited in escrow hereunder shall, in the event the Formula shall be released for use to Vendee as provided in Section 3.6, pass to and vest in Licensee. Vendee shall hold such copy of the Formula and any supplements in a 4 safe-deposit box at a financial institution located in the Detroit/Ann Arbor, Michigan region designated by Vendee and reasonably approved by Vendor. Notwithstanding its ownership of a copy of the Formula in such event, Vendee's use of the Formula shall remain subject to the terms of this Agreement. Section 4. General Representations and Warranties. 4.1 Authority. Each of Vendee and Vendor represents and warrants that (i) the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized in its behalf by all requisite action, corporate or otherwise, (ii) it has the full right, power and authority to enter into this Agreement and to carry out the terms of this Agreement, (iii) it has duly executed and delivered this Agreement, and (iv) this Agreement is a valid and binding obligation of it enforceable in accordance with its terms. 4.2 Intellectual Property Matters. Vendor represents and warrants to its best knowledge and good faith belief that it (i) owns, free and clear of all liens and encumbrances, intellectual property, patents (including but not limited to United States Patent Numbers 5,599,361, 5,487,764, and 5,453,103) and applications therefor, printed and not printed technical data, know-how, trade secrets, copyrights and other intellectual property rights and all other scientific or technical information in whatever form relating to, embodied in or used in the proprietary process to produce synthetic coal fuel briquettes from waste coal dust, coal fines and other similar coal derivatives, (ii) has the right and power to grant to Vendee the licenses granted herein, (iii) has not made and will not make any agreement with another in conflict with the rights granted herein, and (iv) has no knowledge that the sale or use of the rights, Proprietary Reagent Material and/or licenses granted herein as contemplated by this Agreement would infringe any third-party's intellectual property rights. 4.3 Hazardous Material. Vendor represents and warrants that the Proprietary Reagent Material delivered to Vendee shall not be a hazardous material under applicable environmental laws. 4.4 Indemnification. Each party agrees to indemnify, defend and hold harmless the other party and its partners, directors, officers, members, agents, representatives, subsidiaries and affiliates from and against any and all claims, demands or suits (by any party, including any governmental entity), losses, liabilities, damages, obligations, payments, costs and expenses (including the costs and expenses of defending any and all actions, suits, proceedings, demands and assessments which shall include reasonable attorneys' fees and court costs) resulting from such party's breach of any representations, warranties and/or covenants contained in this Agreement. 5 Section 5 Term. The Term of this Agreement is for the period commencing on the effective date of this Agreement and ending on 31 December 2007. Section 6 Termination. This Agreement shall terminate upon the termination date set forth in Section 5, unless the Agreement is terminated sooner pursuant to this Section 6. 6.1. Termination for Cause. In addition to any other remedies that may exist, either party may terminate this Agreement for cause (i.e. , in the event either party commences a material breach of any provision of this Agreement) at any time by giving the other party at least sixty (60) days prior written notice of such termination unless such default or breach is cured within said sixty (60) days. If either party terminates this Agreement pursuant to this Section 6, Vendee shall promptly return and cause all agents of Vendee to promptly return to Vendor all Confidential Information then in Vendee's possession, and Vendee shall not thereafter use for its own commercial benefit or disclose to any third person any Confidential Information during the period ending five (5) years from the date of such termination in accordance with Section 2.2. 6.2 Termination or Insolvency or Ceasing Business. This Agreement may be terminated by Vendor if: (a) Vendee becomes insolvent or is unable to pay its debts as they fall due, seeks protection voluntarily or involuntarily under any law relating to bankruptcy, receivership, insolvency, administration, liquidation, dissolution or similar law of any jurisdiction (other than for the purposes of a reorganization with a view to continuing the business as a going concern under relevant bankruptcy or insolvency proceedings) or enters into a general assignment or arrangement or a composition with or for the benefit of its creditors; or (b) Vendee takes any step (including the filing or presentation of a petition, the convening of a meeting or the filing of an application or consent) in any jurisdiction for, or with a view to, the appointment of an administrator, liquidator, receiver, trustee, custodian or similar official (other than for the purposes of a reorganization with a view to continuing the business as a going concern under relevant bankruptcy or insolvency proceedings) for Vendee and/or the whole or any part of the business, undertaking, property, assets, or capital of Vendee or any such person is appointed. 6.3 Effect of Termination. Upon termination of this Agreement, all rights granted and future obligation to the parties shall immediately cease; however termination shall not relieve either party of its obligations accrued during the Term of Agreement (including any pre-termination obligation Vendee may have to pay Vendor) which has been fulfilled, and all representations, warranties, obligations and confidentiality agreements made herein shall survive termination of this Agreement. 6 Section 7. Waiver. The failure of any party to enforce at any time any provision of this Agreement shall not be construed as a waiver of such provision or the right thereafter to enforce each and every provision. No waiver by any party, either express or implied, of any breach of any of the provisions of this Agreement shall be construed as a waiver of any other breach of such term or condition. Section 8 Severability. If any provision of this Agreement shall be held by a court of competent jurisdiction to be invalid or unenforceable in any respect for any reason, the validity and enforceability of any such provision in any other respect and of the remaining provisions of this Agreement shall not be in any way impaired. Section 9 Notices. All notices required or authorized by this Agreement shall be effective upon receipt and given to the parties in writing by fax, mail, or courier as follows: To Vendor: Brent M. Cook, President Headwaters Incorporated 3280 N. Frontage Road Lehi,UT 84043 Fax (801) 768-4483 To Vendee: Kent McCarger DTE Smith Branch, LLC 414 South Main Street, Suite 600 Ann Arbor, MI 48104 Fax (734) 302-5326 Section 10 Remedies Cumulative. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided by law or in equity. Section 11 Entire Agreement. This Agreement constitutes the entire agreement of the parties relating to the subject matter hereof. There are no promises, terms, conditions, obligations, or warranties other than those contained herein. This Agreement supersedes any and all prior communications, representations, or agreements, verbal or written, between the parties relation to the subject matter hereof. This Agreement may not be amended except in writing signed by the parties hereto. Section 12. Governing Law. This Agreement shall be governed in accordance with the laws of the State of New York, exclusive of its conflict of law rules. Section 13. Assignments. This Agreement may not be assigned, in whole or in part, by any party without the written consent of the other party, which consent shall not be unreasonably withheld. 7 Executed by the duly authorized representatives of the parties on the date and year first above written. HEADWATERS INCORPORATED DTE SMITH BRANCH, LLC By: /s/ Brent M. Cook By: /s/Kent L. McCargar - ------------------------ ------------------------------- Name: Brent M. Cook Name: Kent L. McCargar Title: President Title: Vice President and Chief Executive Officer 8 EX-10.78 12 ex1078k093002.txt ISG REPLACEMENT AGREEMENT FOR MANAGEMENT OF ASH Exhibit 10.78 REPLACEMENT AGREEMENT FOR MANAGEMENT OF ASH AND OTHER BYPRODUCTS GENERATED AT NAVAJO GENERATING STATION TABLE OF CONTENTS 1.0 PARTIES 2.0 RECITALS 3.0 DEFINITIONS 4.0 MANAGEMENT OF ASH AND OTHER BYPRODUCTS 5.0 CONSTRUCTION AND OPERATION OF NEW FACILITIES 6.0 USE OF WATER IN PROCESSING 7.0 COMPENSATION SCHEDULE 8.0 INTELLECTUAL PROPERTY RIGHTS 9.0 EFFECTIVE DATE, SUCCESSION OF PRIOR AGREEMENT, TERM, AND TERMINATION 10.0 RISK OF LOSS 11.0 AUDIT 12.0 FIRE PROTECTION 13.0 HAZARDOUS MATERIALS AND WASTE 14.0 SAFETY 15.0 FORCE MAJEURE 16.0 INDEMNIFICATION 17.0 LIENS 18.0 OTHER BUSINESS OPPORTUNITIES, OTHER BYPRODUCTS 19.0 ALLOWANCES, CREDITS AND OTHER BENEFITS 20.0 DISPUTE RESOLUTION, ARBITRATION 21.0 INSURANCE 22.0 NAVAJO NATION ECONOMIC DEVELOPMENT 23.0 INDIAN PREFERENCE AND EQUAL OPPORTUNITY 24.0 ARCHAEOLOGICAL RESOURCE PROTECTION 25.0 NON-WAIVER 26.0 COMPLETE AGREEMENT 27.0 PAYROLL TAXES 28.0 NOTICES AND REPRESENTATIVES 29.0 CONFIDENTIALITY 30.0 SEVERABILITY 31.0 SUCCESSORS AND ASSIGNS 32.0 SUBCONTRACTS 33.0 GOVERNING LAW AND VENUE 34.0 ATTORNEYS FEES 35.0 HEADINGS EXHIBITS Exhibit A Ash Disposal Area Map Exhibit B Plant Site Map Exhibit C Equipment Lease Exhibit D ISG Initial Designated Work Areas Exhibit E Minimum Wage Scale Page 2 of 44 REPLACEMENT AGREEMENT FOR MANAGEMENT OF ASH AND OTHER BYPRODUCTS GENERATED AT NAVAJO GENERATING STATION 1.0 PARTIES This Agreement is entered into this _____ day of September, 2002 by the Salt River Project Agricultural Improvement and Power District (SRP), a political subdivision of the State of Arizona, as Operating Agent of the Navajo Generating Station ("NGS"), a steam electric generating station and facilities or structures related thereto located on the Navajo Reservation near Page, Arizona; and ISG Resources, Inc. ("ISG"), a Utah corporation having offices at 136 East South Temple, Salt Lake City, Utah, 84111. This Agreement replaces, succeeds, and supercedes the Coal Combustion Products Management Agreement entered into by the Parties on February 9, 2000 and all exhibits and addendums thereto (collectively, the "2000 CCP Contract"). 2.0 RECITALS 2.1 Under an Indenture of Lease dated September 29, 1969 and a Grant of Rights-of-Way and Easements dated September 30, 1969 ("NGS Lease and Rights-of-Way"), the Navajo Nation and the United States granted SRP and the other participants in NGS (the "NGS Participants") the right to occupy and use lands on the Navajo Reservation to construct and operate NGS. 2.2 SRP is the operating agent of the NGS and enters into this Agreement on behalf of all of the NGS Participants. 2.3 All rights granted to the NGS Participants under the NGS Lease and Rights-of-Way extend to the NGS Participants' respective officers, agents, licensees, representatives, contractors, successors, and assigns. 2.4 The NGS Lease and Rights-Of-Way govern, among other matters, the disposal of Ash and Other Byproducts resulting from the operation of NGS, and allow construction, installation, Page 3 of 44 major modification, or removal of facilities for the management or disposal of Ash and Other Byproducts with the prior written approval of the Secretary of Interior. 2.5 Rights granted to SRP and the NGS Participants under the NOS Lease and Rights of Way expire upon termination or expiration of the NOS Lease and Rights-of-Way, and the terms of those agreements govern disposition of facilities and improvements at that time. 2.6 SRP represents that it has rights to use water from the Colorado River at NOS pursuant to Water Service Contract No. 14-06-400-5003 between SRP and the United States; Arizona Revised Statutes 45166; Certificate of Water Right No. 4050; and Permits No. A3224 and A3224.001 issued by the Arizona Department of Water Resources. 2.7 SRP represents that it is entitled to use the water at NOS for thermal generation of electric energy and all other purposes related to the operation of NOS, specifically including the disposal of Ash and Other Byproducts. 2.8 SRP and ISO want to take advantage of technological advances in the processing, use and disposal of Ash and Other Byproducts and to provide for environmentally preferable management of Ash and Other Byproducts. 2.9 ISO is in the business of developing and using processes and equipment to process, sell, and dispose of Ash in ways that are environmentally preferable to disposal in landfills. 2.10 ISO has acquired certain technologies that enhance the sales of Ash and ISO is willing to expend capital to maximize the sales. 2.11 The Parties' goal is for ISO to market Ash and products made from Ash, to maximize the sale of Ash for beneficial reuse, to minimize disposal of Ash in the Ash Disposal Area, and to identify new markets for Ash and Other Byproducts. 2.12 As operating agent of NOS, SRP's primary business is to generate and sell electricity, and management and disposal of Ash and Other Byproducts are an integral part of this process. 2.13 The methods of management and disposal of Ash and Other Byproducts must not interfere with the generation and sale of electricity. Page 4 of 44 2.14 Efficient management of Ash and Other Byproducts is critical to the continuation of NGS operations. 2.15 If, for any period of time, management of Ash and Other Byproducts generated at NGS were interrupted or suspended, SRP would be unable to continue operation of NGS for that period 2.16 The management of Ash and Other Byproducts generated at NGS requires certain specialized equipment. 2.17 Through this Agreement, ISG will provide the specialized equipment necessary to manage Ash and Other Byproducts generated at NGS and SRP will no longer maintain equipment for this purpose. 2.18 If SRP must resume management of Ash and Other Byproducts, either because of the termination of this Agreement or for any other reason, SRP must have immediate access to the ash management equipment used by ISG at NGS. 3.0 DEFINITIONS 3.1 "Ash" means Bottom Ash, Cenospheres, economizer Ash, Fly Ash (including Marketable Fly Ash), Scrubber Byproduct, and any other materials resulting from the combustion of coal that are identified and included in this definition by agreement of the Parties. 3.2 "Ash Disposal Area" means the area identified in Exhibit 4 to the NGS Lease, which is attached to this Agreement as Exhibit A. 3.3 "Bottom Ash" means the coarse, solid, non-combustible particles resulting from the combustion of pulverized coal in steam electric generating plants, which is collected in furnace bottoms. 3.4 "Cenosphere" means a lightweight, inert, hollow sphere comprised largely of silica and alumina and filled with air and gases, which is a naturally occurring byproduct of the coal combustion process. 3.5 "Crystallizer Salt" means the solid byproduct from the treatment process of the crystallizer, Page 5 of 44 3.6 "Fly Ash" means the fine solid particles of non-combustible material resulting from the combustion of coal in steam electric generating units, which are removed from the combustion gas by means of electrostatic collectors. Fly Ash includes Marketable Fly Ash. 3.7 "Hazardous Materials" means any substance or material that is or may in the future be defined as a hazardous or toxic substance or material by any Hazardous Materials Laws. 3.8 "Hazardous Materials Laws" means all laws, ordinances, rules, decrees, orders, or regulations of any federal, state, or local governmental authority relating to hazardous substances, hazardous materials, hazardous waste or toxic substances. 3.9 "Marketable Fly Ash" means Fly Ash that conforms to the most current ASTM C-618, Class F Fly Ash specification, including Tables lA and 2A, except that loss on ignition (LOI) may not exceed 1%, S03 may not exceed 1.5% and color may not be darker than "6" on a Munsell ten year color chart for columns 1 and 2. 3.10 "Limestone" means, for purposes of this Agreement, the limestone purchased by SRP under separate contract from an Apex, Nevada limestone mine operated by Chemical Lime Company of Scottsdale, Arizona. 3.11 "Other Byproducts" means Crystallizer Salt and Primary Water Treatment Solids. 3.12 "Plant Site" means the plant site and switchyard facilities for NGS, the area and location of which are shown and described on Exhibit 2 to the NGS Lease, which is attached to this Agreement as Exhibit B. 3.13 "Primary Water Treatment Solids" means the solid product resulting from the primary treatment of water at NGS. 3.14 "Scrubber Byproduct" means the solid byproduct produced from a flue gas desulfurization process. 4.0 MANAGEMENT OF ASH AND OTHER BYPRODUCTS ISG shall manage all Ash and Other Byproducts generated at NGS through the sale of the Ash and Other Byproducts to third parties, processing of the Ash and Other Byproducts into products, or disposal of the Ash and Other Byproducts in the NGS Ash Disposal Area and Page 6 of 44 Crystallizer Salt Retention Basins, as provided in the following subparagraphs. In performing its work under this Agreement, ISG shall operate as an independent contractor, and shall not act as an agent or employee of SRP. As an independent contractor, ISG is solely responsible for determining the manner and means for performing its work, and has complete charge and responsibility for persons engaged in the performance of its work. ISG shall have an exclusive right to use, promote, sell, market, anal manage Ash and Other Byproducts during the term of this Agreement, except that SRP shall have first right to use Ash in its operations, as provided for in Subparagraph 4.9.2.2. 4.1 Receipt of Ash and Other Byproducts. ISG shall manage, be responsible for and bear the cost of handling all Ash and Other Byproducts generated at NGS from the point of receipt by ISG. The point of receipt of Bottom Ash and Ash from the economizer is at the ash gate located at the bottom of the Bottom Ash dewatering bins. The point of receipt of Fly Ash is at the discharge chute of the rotary feeders at the bottom of the Fly Ash bins. The point of receipt of Scrubber Byproduct is at the storage area located below the belt filter system. The point of receipt of Crystallizer Salt is the discharge chute of the crystallizer, and the point of receipt of Primary Water Treatment Solids is at the point of discharge from the water treatment centrifuge. 4.2 Loading and Transportation. 4.2.1 Loading at NGS. ISG shall load all trucks for delivery of Ash and Other Byproducts to its customers or to its processing facilities. ISG shall weigh all trucks for delivery of Ash and Other Byproducts to its customers or to its processing facilities and complete weight tickets showing the certified weight of each shipment. SRP shall load all trucks for delivery of Ash to the Ash Disposal Area. ISG shall load all trucks for delivery of Other Byproducts to the Ash Disposal Area or the salt retention basins. 4.2.2 Loading Operation. SRP shall provide a dedicated operator(s) to load Ash for delivery to the Ash Disposal Area as necessary to comply with a load out schedule provided by ISG, and approved by SRP, 24 hours in advance. If, at any time, SRP determines that ISG's system of operations for the loading, transportation, or disposal of Ash or Other Byproducts Page 7 of 44 creates a threat to the generation of electricity at NGS, SRP may require ISG to operate on a 24 hours per day basis until SRP determines that the threat is eliminated. 4.2.3 Maintenance of Loading Equipment. In order to preclude load out delays, SRP shall maintain all load out equipment including the Fly Ash unloading and Bottom Ash systems at NGS, above and including the point of receipt, as well as the belts, filters, and other similar equipment. SRP shall keep an inventory of spare parts adequate to make necessary repairs to the equipment, and shall have manpower resources adequate to allow load out to proceed on schedule. SRP shall allow ISG, under SRP's direction, to assist with expediting efforts to return NGS systems to service whenever those systems fail. 4.2.4 Transportation. ISG shall haul Limestone from Apex, Nevada, to NGS, and Fly Ash from NGS to ISG's Apex, Nevada, rail transload facility. The terms of the agreement between SRP and ISG for transportation of Limestone and Fly Ash between NGS and ISG's Apex, Nevada, transload facility are as follows: 4.2.4.1 ISG shall continue to use Chance Corporation ("Chance") as a subcontractor carrier to haul Limestone and Fly Ash with ISG's trailers, for so long as Chance continues to comply with the terms of its subcontract with ISG. 4.2.4.2 ISG shall haul all Limestone ordered by SRP from Apex, Nevada to meet the requirements of the NGS sulfur dioxide scrubbers. ISG shall coordinate deliveries of Limestone so that SRP has sufficient inventory of limestone in the NGS Limestone system hoppers and silos to operate the scrubbers at all times. 4.2.4.3 For transportation of Limestone from Apex, Nevada to NGS, SRP shall pay ISG as follows: A. SRP shall pay ISG ton of Limestone transported during the year 2002. B. In January of 2003, and at the beginning of each quarter thereafter, the Operating Representatives shall adjust the base price for increases or decreases in the cost of diesel fuel, which represents : of the base price. The Page 8 of 44 Diesel Fuel component of the base price shall be adjusted up or down based on the most recent Lundberg Index (Yellow sheets) representative of the region in which ISG purchases fuel. All other components of the base price, including labor and equipment costs, shall remain fixed throughout the term of this Agreement. C. If Limestone must be moved from SRP's reserve pile for use in the scrubbers because of late deliveries caused by ISG or its subcontractors, ISG shall either move the Limestone and restock the reserve pile or reimburse SRP for the actual costs SRP incurred in handling the Limestone from the reserve pile and restocking the reserve pile, based on direct costs from NGS's work management cost accounting system and 80% of the applicable national average equipment rental rate listed in the then-current AED Green Book. D. SRP shall notify ISG if Limestone deliveries get so far behind schedule that in the judgment of SRP it becomes necessary to hire additional trucks to maintain scrubber operation and reserve pile inventory. ISG shall either cure the delivery delays within 24 hours or reimburse SRP for the cost of those trucks. E. All payments and reimbursements accruing during a month under this Subparagraph must be included in the invoice prepared under Subparagraph 7.11 for that month, and paid or credited within 60 days after the end of the month. 4.2.4.4 ISG shall backhaul Ash to ISG's Apex Nevada transload facility at ISG's sole expense. Page 9 of 44 4.3 Marketing and Sale of Ash and Other Byproducts. 4.3.1 ISG Marketing Responsibilities. 4.3.1.1 Marketing of Ash. ISG shall provide all labor, equipment, logistics, transportation and business coordination to market and sell Ash, and products made from Ash, as set forth in this Agreement. 4.3.1.2 Markets for Other Byproducts; Future Agreements. ISG shall manage Other Byproducts through disposal as set forth in this Agreement, but shall notify SRP if it becomes aware of new markets for Other Byproducts, or products made from these substances. If new markets are identified by ISG, the Parties may negotiate an agreement providing for the marketing and sale of Other Byproducts generated at NGS. 4.3.2 Schedule of Annual Purchases. For each year that this Agreement is in effect, ISG shall provide SRP with an annual schedule of anticipated purchases of Ash and Other Byproducts. The schedule will include 12 individual months. ISG shall revise the schedule whenever a material change can be reasonably anticipated by ISG, and shall provide a revised copy to SRP. The operating Representatives shall agree on due dates for the schedule. 4.4 Disposal. 4.4.1 Disposal Responsibility. ISG shall furnish all supervision, labor, services, and equipment, and perform all operations required to haul, handle, and permanently store Ash and Other Byproducts, as follows: 4.4.1.1 Transportation. ISG shall transport Ash and Other Byproducts, other than Crystallizer Salt, to the NGS Ash Disposal Area. 4.4.1.2 Deposit. ISG shall dispose of all Ash and Other Byproducts, other than Crystallizer Salt, that are not used by SRP or sold to ISG by placing them within the NGS Ash Disposal Area, as has been the historical practice of SRP and its contractors during the term of the NGS Lease. If the deposition material is comprised of Bottom Ash and Fly Ash, the Fly Ash should be laid down to a thickness of 2 feet with a 6-inch cap of Bottom Ash on top. If the deposition material is comprised of Bottom Ash and Scrubber Page 10 of 44 Byproduct, the Bottom Ash should be laid down to a thickness of 2 feet with a one-foot cap of Scrubber Byproduct on top. The surface layer of each embankment face and surface contour must be comprised of a 6 inch layer of Bottom Ash over a 2 foot layer of Fly Ash or, if there is insufficient Fly Ash available to complete a 2 foot layer, a 2 foot layer of Scrubber Byproduct over a 2 foot layer of Bottom Ash. 4.4.1.3 Site Preparation. ISG shall prepare the site before placement of material. Before placing material in outcropping Navajo sandstone, ISG shall excavate and remove all existing vegetation and debris in the area, inspect all exposed areas, and fill all wide cracks and fractures in the exposed bedrock with properly compacted Fly Ash fill. Before placing material in native dune sand ISG shall excavate and remove all existing vegetation and debris in the area. The dune sand foundation should then be compacted prior to placing Fly Ash by pre-wetting the surface by sprinkling with water. Intensive sprinkling will be required to thoroughly wet the dune sands in order that the densification of deeper sand layers by vibratory methods will be effective. ISG shall then compact the dune sand with the vibratory roller "RayGo-Rascal" - Model 600A operating at a speed of approximately 2.0 to 2.5 feet per second, using a minimum of 5 passes. Any other vibratory roller that will produce equivalent dynamic compactive effort can be used to compact the dune sand. 4.4.1.4 Comp action. ISG shall compact the material deposited in the Ash Disposal Area, as it is deposited. Prior to the placement of material in an Ash lift, the areas should be rolled with a Caterpillar D-4 dozer or equivalent tracked machine to create a rough surface. The rolled surface should be sprinkled with water. Two passes of water spraying immediately preceding the placing of an ash lift is considered adequate. The Ash should be spread using appropriate equipment in a manner to achieve the thicknesses specified in Subparagraph 4.4.1.2. Any tracked or pneumatic equipment may be used to spread the Ash; however, light tracked equipment has been found to be very satisfactory for this operation. The dumping operation should be continued in such a Page 11 of 44 manner to provide a storage area for the surface water run-off within the compacted Ash embankment. Immediately following the spreading of Ash, the Ash should be compacted with three passes of pneumatic equipment. The "Clark Michigan dozer Model 380" large frontend loader is recommended for compaction. Any other roller can be used to compact the Ash. Equipment speed during compaction may not be greater than 5 miles per hour. For each lift the rolling process should be accomplished in a manner so as to overlap the adjacent compacted tread areas of the rolled surface and thus cover the entire width of a particular run. All additional lifts should be placed and compacted in accordance with the aforementioned operations. The embankment must be constructed as a series of small terraced fills. Maximum height of each embankment must not exceed 15 feet. The face slope of the embankment should be 2.5 horizontal to 1 vertical (2-1/2:1). The back slope of the embankment should be (-)1.5%. The toe of each successive embankment must be set back 60 feet from the peak of the previous embankment. The fills are to be sloped in the manner shown on drawing A-665-C217 so as to provide storage for the surface water runoff. The runoff is to be contained within the ash disposal embankment itself, and the fill slopes must be satisfactorily maintained at all times. ISG shall keep current with placement, and ISG shall conduct its compaction operations in accordance with engineering drawings A-665-C216/1 Ash Disposal Area Development and Monitoring Plan, and A-665-C217 Ash Disposal Area Sections and Details. 4.4.1.5 Cover. ISG shall cover the deposited material in the engineered fill of the Ash Disposal Area using slope cover from the canyons located inside the Ash Disposal Area. As soon as practical after completion of each of the terraced fills, but in no event later than eight months after completion, the completed embankment face and 60 foot set back area must be covered with at least a two foot thick layer of native soils (dune sand) from the canyons located inside the Ash Disposal Area. After the canyon sand has been depleted, the stored sand in front of the starter dike can be used. If the Page 12 of 44 assigned sand is depleted, SRP shall either provide slope cover to the Ash Disposal Area or compensate ISG for loading and transporting slope cover to the Ash Disposal Area. 4.4.1.6 Storm Water. ISG shall ensure proper handling of storm runoff in the Ash Disposal Area by constructing slopes in compliance with the engineering drawings shown on Exhibit A. The Ash must be deposited in such a manner that storm water runoff will be contained within the Ash embankment. The 60-foot wide benches with the 1-1/2 percent slope will contain the 100-year storm runoff falling directly on the bench and its uphill slope. The final area must be sloped so that all upstream runoff will be contained. 4.4.1.7 Dust Control. ISG shall control and mitigate wind-blown dust on the haul road and in the Ash Disposal Area through the application of water and adherence to sound dust mitigation practices. All haul roads and exposed ash fill must be sprinkled with water so that dust will not blow from the areas. Alternately, environmentally approved dust palliatives may be used. 4.4.1.8 Erosion Control. ISG shall control erosion of the slopes of the Ash Disposal Area by constructing slopes in compliance with the engineering drawings shown on Exhibit A and promptly filling any gullies and channels. 4.4.1.9 Design, Engineering, Closure. ISG is not responsible for design or engineering of any portion of the Ash Disposal Area, or for closure of the Ash Disposal Area under state or federal law. 4.4.1.10 Maintenance of Haul Road and Retention Basins. ISG shall maintain the Ash haul road by periodically grading to the predetermined profile established-in the following engineering drawings: * A-665-C200 Ash Haul Road On-Site Plan A-665-C201 * Ash Haul Road On-Site ProfileA-665-C204 * Ash Haul Road Sections and Details Sheet 1A-665-C101 * Location and Vicinity Plan A-665-C202 Page 13 of 44 * Ash Haul Road Off-Site Plan & Profile ISG shall maintain associated drainage retention basins, which have been created to prevent any materials from being transported to natural drainage courses by any storm or maintenance water runoff. The location of these retention basins are shown on drawing A-665-C 1002/3 Ash Haul Road Development and Surface Drainage Map Storm Water Pollution Prevention Plan. SRP shall identify and provide ISG, at no cost to ISG, aggregate necessary for ISG's maintenance activities. 4.4.1.11 Crystallizer Salt. ISG shall transport Crystallizer Salt to lined salt retention basins maintained by ISG at the Plant Site and dispose of the Crystallizer Salt in the lined salt retention basins. 4.4.2 Termination of Disposal Responsibility. SRP, at its sole discretion, may terminate ISG's responsibility to dispose of unsold or unprocessed Ash and Other Byproducts generated at NGS. To the extent that ISG has purchased any disposal-related equipment from SRP, SRP shall re-purchase the equipment from ISG. SRP is entitled to buy any of ISG's other disposal-related equipment. SRP is entitled to take possession of all purchased equipment immediately upon notice of termination of disposal responsibilities to ISG. SRP shall pay ISG the appraisal or market value of any equipment taken into SRP's possession, provided that the amount paid may never exceed the original cost to ISG plus the cost of any capital additions. 4.5 Facilities and Equipment. 4.5.1 Responsibility for ISG Facilities and Equipment: Loss, Damage Caused by Operation. ISG assumes full responsibility for the care, custody, and control of its facilities and equipment. This responsibility for all loss occasioned by any persons, including SRP's personnel, includes, but is not limited to, responsibility for loss of, damage to, or theft of material, equipment, work in progress, or completed work. All damage caused by the operation of ISG's equipment or facilities to the work and property of ethers, whether public or private, must be repaired at ISG's expense to the reasonable satisfaction and approval of SRP. Page 14 of 44 4.5.2 Necessary Facilities and Equipment. SRP grants to ISG, its agents, employees, and subcontractors, access to and use of existing NGS facilities used in management of Ash and Other Byproducts, including scales, silos, loading facilities, and offices; and grants them ingress and egress to NGS via designated haul roads that will bear the weight of all vehicles reasonably required to perform ISG's services. SRP shall provide parking for ISG's employees in designated parking lots. ISG shall procure or provide, and maintain, the following facilities and equipment, at its cost: * Two scales at the SRP loading site capable of weighing all trucks used by ISG to transport Ash and Other Byproducts from NGS. * All equipment and tools necessary to load and transport Ash and Other Byproducts to ISG's Ash processing facilities, to end consumers, and to the Ash Disposal Area. * All equipment or tools necessary to dispose of Ash and Other Byproducts in the Ash Disposal Area, or, with respect to Crystallizer Salt, in lined salt retention basins dedicated for that purpose. * All equipment and tools necessary to maintain those NGS facilities identified in Subparagraph 4.6.3. * A rail load-out terminal in Nevada or Arizona capable of loading out 10 to 15 rail cars per day. 4.5.3 Equipment Lease. ISG shall lease from SRP four Caterpillar model 773B haul trucks under the equipment lease attached to this Agreement as Exhibit C, which lease expires on October 14, 2005. Upon the expiration of this lease, ISG shall continue to lease four Ash haul trucks from SRP under terms and conditions to be negotiated by the parties prior to expiration of the current lease. After October 14, 2005, the Ash haul trucks shall be replaced as reasonably necessary for the efficient management of Ash and Other Byproducts generated at NGS. Replacement of any trucks shall be at a cost and specification acceptable to both SRP and ISG, with the lease amount calculated based upon SRP's weighted average cost of capital. Page 15 of 44 4.5.4 Maintenance of Scales. ISG shall arrange for calibration of the existing SRP scale and all other scales ISG installs at least twice annually, and keep the scales sealed and in good operating condition. The Parties shall share the cost of calibration equally. The scales must be calibrated to Arizona State "legal for trade" tolerance. Either Party, at its expense, may calibrate the weight scales more frequently than twice annually. In the event that any scale used to weigh Ash falls outside of the abovereferenced tolerance, the Parties agree to meet and reconcile the discrepancy for the applicable period, and to adjust the financial impact of the discrepancy. The meeting and reconciliation of the discrepancy must be conducted under the dispute resolution provisions provided for in this Agreement. ISG shall pay for any scale re-certification resulting from a broken seal or maintenance. 4.5.5 Maintenance Facilities for ISG Equipment. SRP shall provide ISG with use of a steel building adjacent to the NGS contractor parking lot, and use of a bay in the NGS heavy equipment building for maintenance of ISG's vehicles and equipment used in management of Ash and Other Byproducts. 4.5.6 Storage Buildings or Areas for ISG Materials. SRP shall identify an area at the NGS Plant Site for the storage of ISG materials. ISG shall confine its equipment, the storage of materials, and the operations of its workers in compliance with law, ordinance, permits, this Agreement or other directions of SRP. ISG shall not store equipment or materials at the Plant Site other than as specified by SRP, and shall exclude all ISG workers from all parts of the Plant Site not used for ISG's operations. 4.5.7 SRP Purchase of Equipment Upon Termination. In the event of a termination of this Agreement for any reason, SRP may buy any of ISG's disposal equipment used at NGS, whether. purchased from SRP or supplied by ISG, and take delivery of it immediately. SRP shall pay ISG the appraisal or market value of any equipment taken into SRP's possession; provided that the amount paid, may never exceed the original cost to ISG plus the cost of any capital additions. Page 16 of 44 4.5.8 ISG's Use of SRP Equipment and Labor. From time to time during the term of this Agreement, SRP may allow ISG to use SRP equipment and staff, on a temporary basis, in ISG's management of Ash and Other Byproducts. ISG shall compensate SRP for labor costs associated with the use of SR-P's staff, as collected in SRP's work management cost accounting system. ISG shall compensate SRP for the use of SRP equipment by paying 80% of the applicable national average rental rate listed in the then-current AED Green Book. 4.6 Maintenance of Facilities. 4.6.1 Responsibility. ISG and its subcontractors shall, from day to day, clean up its designated work areas and remove all waste materials and rubbish. leaving the work areas and adjacent areas used by ISG clear of all obstructions. ISG shall also maintain the NGS facilities identified in Subparagraph 4.6.3. 4.6.2 ISG Work Areas. ISG's current designated work areas are the fenced small warehouse and storage yard east of the contractor parking lot; the NGS doublewide trailer; the SRP scale house east of the NGS chemical warehouse; one bay, as needed, in the heavy equipment building: ISG's office at the Fly Ash silo: and the scale installed by ISG. These six designated work areas are shown on the map attached to this Agreement as Exhibit D. ISG may request, and SRP may designate, additional ISG work areas in the future. 4.6.3 Facilities To Be Maintained. Except as otherwise provided elsewhere in this Agreement, ISG shall maintain the following NGS facilities: * Ash haul road * Ash loading area (cleaning only) * Lined Crystallizer Salt retention basins * Two reactivator byproduct retention ponds * Ash area drainage ditch * Loading facilities downstream of points of receipt * Offices occupied by ISG. Page 17 of 44 4.7 Quality Control. 4.7.1 Quality of Performance by ISG. The quality of ISG's work, cleanliness, reliability, maintenance of all equipment and materials retained for spare parts must be maintained at a level that is equivalent to or greater than that maintained by SRP as of the effective date of this Agreement and consistent with those standards of care, skill, diligence, and customarily accepted practices and procedures normally provided by a professional in the performance of the same or similar work. To facilitate compliance with this subparagraph, ISG and SRP shall inspect monthly all equipment and facilities used by ISG in performance of its obligations under this Agreement and note any deficiencies, positive performance examples, and any agreed upon corrective measures. The Parties shall use a mutually agreeable form. Payment by SRP to ISG of any money due under this Agreement is not deemed to be acceptance of any work by SRP and does not release ISG from its responsibility to fully perform its obligations under this Agreement. 4.7.2 Quality Assurance. ISG shall be responsible for all quality assurance and quality control programs required for ISG's customers, including quality assurance and quality control programs in connection with management of Ash and other Byproducts, sale of Ash to its customers, its processing of Ash, and any quality assurance facilities or equipment needed in connection with the sale of value added products or Fly Ash. 4.7.3 Cooperative Ash Quality Improvement. During any time period when ISG requests a price reduction under Subparagraphs 7.2.2 or 7.8.1 or 7.8.3, ISG shall conduct daily testing of Fly Ash determined by the Operating Representatives to be necessary to identify whether it is possible to alter NGS operations in order to maximize Fly Ash quality. This testing shall be conducted at ISG's expense. SRP shall consider any alterations identified by ISG that would maximize Fly Ash quality without adversely impacting SRP's operation of NGS or causing SRP expense. Page 18 of 44 4.8 Schedule for ISG Services; NGS Schedule for Operations. 4.8.1 ISG shall provide all Ash management services during normal business hours, or on a mutually agreed upon schedule, subject to the provisions of paragraph 4.2.2. 4.8.2 SRP shall provide ISG with an advance annual schedule of anticipated generating unit outages, and provide updated schedules when updates are available. 4.9 Schedule of Anticipated Production of Ash; Changes in Operations Affecting Generation. 4.9.1 Schedule of Anticipated Production of Ash. SRP shall provide ISG with an annual schedule of anticipated generation of electricity and resultant Ash to be purchased by ISG. The schedule shall include twelve individual months, and SRP shall revise the schedule when it reasonably anticipates material changes to the schedule. The Operating Representatives shall determine the cycle and the dates for the schedule. SRP shall provide information to ISG regarding anticipated monthly Ash production volume using the formula FA = C x A x .8, where FA is Fly Ash produced, C is coal burned, in tons, for the month, and A is the percent of Ash in the coal burned for the month based on sample analysis used for coal price calculation. 4.9.2 Changes in NGS Operations. 4.9.2.1 Changes in NGS Fuel Source or Operations. SRP may modify operations at NGS at any time, which may change the type and quantity of Ash generated there. SRP shall notify ISG as soon as possible of any intent to evaluate changes in its fuel sources, operations, or facilities at NGS that may have an impact on the quantity or quality of the Ash generated at NGS. At ISG's expense, ISG shall consult with SRP regarding the impact that any fuel or operational change may have on the quality of Ash generated at NGS. SRP agrees to involve ISG's Executive Representative in discussions involving the possibility of any fuel or operational change. SRP shall provide notice at least 90 days prior to the testing of or implementation of such a change, or as soon as possible if 90 days notice is not feasible. 4.9.2.2 Use of Ash by SRP. During the tern of this Agreement, SRP reserves the right to utilize Ash for its own construction and maintenance. If SRP elects to Page 19 of 44 use Ash as provided in this subparagraph, SRP will provide ISG with at least 15 days advance written notice of its intent to do so. If possible, SRP shall also communicate with ISG as to the timing of its use of Ash pursuant to this Subparagraph so as to minimize the impact of SRP's use of Ash on ISG's sales commitments. 4.9.2.3 No Minimum Quantity. Nothing in this Agreement shall be construed as requiring SRP to generate a minimum quantity of Ash at NGS. 4.10 Title to Ash. Title to and risk of loss for Ash purchased by ISG, whether processed or unprocessed, used by ISG in any block manufacturing facility, any bagging facility, or any other manufacturing facility or business venture, or sold by ISG to its customers, passes to ISG upon loading of the Ash into or onto equipment utilized for the purpose of transporting the Ash off of the NGS Plant Site. Title to and risk of loss for Ash and Other Byproducts not purchased by ISG or removed from NGS remains with SRP. 4.11 No Warranty. ISG shall conduct its own independent tests of the Ash to assure itself that the Ash is satisfactory for a particular purpose. Any Ash to which ISG takes title under Subparagraph 4.10 is accepted "as is" and "with all faults." SRP makes no warranties, either express or implied, by operation of law or otherwise, related to the fitness of Ash for any purpose. SRP disclaims all implied warranties of merchantability or fitness for a particular purpose. 4.12 Order of Performance of Work. SRP and other contractors and subcontractors will be working at NGS during the performance of this Agreement. SRP may direct ISG to schedule or reschedule the order of performance of ISG's work in order to reasonably avoid interference with the performance of work by SRP or other contractors or subcontractors, and ISG is not entitled to additional compensation or damages as a result thereof, 5.0 CONSTRUCTION AND OPERATION OF NEW FACILITIES ISG shall submit plans to SRP and gain SRP's approval for construction of new processing facilities for Ash or Other Byproducts at the Plant Site. If SRP is unable to secure the Secretary of Interior's approval for new facilities at the Plant Site, ISG shall use reasonable Page 20 of 44 efforts to identify alternative sites acceptable to both parties and submit plans for construction of new processing facilities for Ash or Other Byproducts at those sites. 5.1 Approval of United States. SRP shall seek the approval of the Secretary of Interior, or an authorized delegates, for any new Ash management facilities the parties agree to construct at the Plant Site and for the modification of NGS Ash disposal operations to include the operation of any new facilities, as required by the NGS Lease and Rights-of-Way. Construction of new Ash management facilities at the Plant Site is contingent upon any approvals required under the NGS Lease and Rights-of-Way. 5.2 Permits and Licenses. SRP shall apply for, and make every reasonable effort to secure, any necessary permits or licenses for any new Ash management facilities to be located at the NGS Plant Site. 5.3 Cost of Construction. ISG shall be responsible for the construction of any new Ash management facilities used to perform its obligations under this Agreement, and SRP is not responsible for any of the costs of construction of any such facilities. 5.4 Reimbursement of Capital Contributions Upon Termination. If this Agreement is terminated, SRP will pay ISG the net book value of its investment in any new Ash management facilities constructed on the NGS Plant Site using 10-year straight-line depreciation with no residual value. 5.5 Title. SRP holds title to any Ash management facilities constructed at the Plant Site, after SRP's acceptance of the completed construction. 5.6 Operation of New Facilities. SRP shall provide electricity, potable water, process water, and sewer service to any new Ash Management facilities used by ISO at the NGS Plant Site in its performance of this Agreement. The cost of utility service such as water, electricity, and sewer for new facilities at NGS will be borne by SRP. ISG shall pay for extending the infrastructure to supply those utilities. Page 21 of 44 6.0 USE OF WATER IN PROCESSING SRP's entitlement to water from the Colorado River, described in Subparagraphs 2.6 and 2.7 hereof, must first be utilized by and available to SRP for the generation of electricity at NGS. Any remaining entitlement may be available for purposes of processing and disposal of Ash and Other Byproducts and for other purposes permitted by applicable law. If at any time it becomes necessary for SRP to use all water available to NGS for the generation of electricity, SRP may, without penalty, curtail water use by ISG for processing of Ash and Other Byproducts. In that event, ISG may curtail performance of any obligations for which water is necessary, and the Parties shall negotiate in good faith to adjust ISG's obligations under this Agreement for the duration of the curtailment. 7.0 COMPENSATION SCHEDULE Page 22 of 44 Page 23 of 44 Page 24 of 44 Page 25 of 44 Page 26 of 44 Page 27 of 44 (purchase of equipment on termination of Agreement) and 5.4 (reimbursement for ISG capital contributions). 8.0 INTELLECTUAL PROPERTY RIGHTS 8.1 To the extent that any item or process supplied or produced by ISG as part of this Agreement is produced or performed to designs not originated by SRP, ISG represents that the production, sale and use of the item or process will not infringe any patent or copyright or constitute the unlawful use of trade secrets. ISG shall indemnify, defend and hold harmless SRP, members of its governing bodies, its officers, agents, and employees against all claims, damages, costs, attorneys' fees, fines, profits and liabilities, including any compromise or settlement, for actual or alleged infringement of any United States or foreign patent or copyright, or for claims arising from unlawful use of trade secrets, related to the production, sale or use of the item or process. 8.2 If the production, sale or use of all or any part of the item or process referred to in Subparagraph 8.1 hereof is held to constitute an infringement of any patent or copyright or the unlawful use of trade secrets, and the use of all or any part of the item or process is enjoined, ISG shall, at its own expense: (a) procure for SRP a license for continued use of the item or process; (b) replace the item or process with a substantially equal-but-non-infringing item or process; (c) modify the item or process so that it becomes non-infringing; or (d) remove the item or process and pay all costs incurred by SRP in connection with the removal and replacement of the item or process and refund any amount paid by SRP for any such item or process, if applicable. 9.0 EFFECTIVE DATE. SUCCESSION OF PRIOR AGREEMENT. TERM OF AGREEMENT. AND TERMINATION 9.1 Effective Date and Initial Term: Succession of Prior Agreement. This Agreement shall be covering the subject matter of this Agreement, with the exception of Section VIII of that 2000 CCP Page 28 of 44 Contract, which sets forth payment obligations arising before execution of this Agreement that remain fully enforceable after the execution of this Agreement. The payment obligations between the Parties established by Paragraph 7.0 of this Agreement are effective and fully enforceable as of April 1, 2002. 9.2 Termination Based on New Regulation. Either Party may notify the other Party in writing within 60 days of the enactment of new federal, state, local, or tribal governmental programs, rules, regulations or legislation that prevent the Party from fulfilling its obligations under this Agreement in the manner contemplated, materially increase the Party's cost of fulfilling its obligations in the manner contemplated, or significantly and negatively impact the quality or quantity of Ash generated at NGS. If the Parties cannot agree on an amendment to this Agreement that would address the problem, ISG or SRP may terminate this Agreement, in whole, or only with respect to the affected Ash, by giving the other Party 90 days advance written notice. 9.3 Termination for Breach; Failure to Cure Breach. This Agreement may be terminated by a nonbreaching Party if the other Party breaches any of the terms, becomes insolvent, makes an assignment for benefit of creditors, is the subject of a voluntary or involuntary bankruptcy, or commits an act of bankruptcy. A non-breaching party is not entitled to terminate this Agreement if, no later than 90 days after receiving written notice of the specific deficiency from the non-breaching party, the breaching party either: (a) cures the deficiency or; (b) implements steps to cure the deficiency within a time acceptable to the non-breaching party. 9.4 Renewal. This Agreement will automatically renew for a five-year period each time the Parties agree on a revised compensation schedule prior to the expiration of the previous term. 10.0 RISK OF LOSS ISG bears the risk of loss and damage with respect to the value of any work accomplished, any equipment procured, and any facility constructed under this Agreement by ISG until the acceptance of the work by SRP. 11.0 AUDIT Page 29 of 44 11.1 SRP Audit. SRP has the right, at its own expense, to designate its own employee representative or contracted representative of a certified public accounting firm to have the right to audit and examine any cost, payment, settlement, or supporting documentation resulting from any items set forth in this Agreement without ISG's written consent. SRP shall conduct any audits at reasonable times and in conformance with generally accepted auditing standards. ISG shall fully cooperate with any audits. This right to audit extends for a period of three years following the date of each payment under this Agreement. ISG shall retain all necessary records documentation during this three-year audit period. 11.2 Audit Exceptions. SRP shall notify ISG in writing of any exception taken as a result of an audit, and ISG shall respond in writing to the notice of exceptions within 60 days. Upon resolution of any exception, ISG or SRP shall directly refund the amount of any exception to the other Party within 30 days, with interest calculated from the date of the original statement to the date of payment. The interest rate to be used shall be the most recently available interest rate on commercial paper published in the Federal Reserve Statistical Release H-15 or the maximum legal rate, whichever is less, compounded monthly from the date of the audit exception until payment is received. If the Parties are unable to resolve any exception resulting from an audit after engaging in the informal dispute resolution process provided for in Subparagraph 20.1, SRP may submit the matter to arbitration as provided in Paragraph 20.0 hereof, and utilize any and all other legal remedies available to it under applicable law. 11.3 Setoff. Each Party has the right to setoff any amounts that are owed to the other party against any of its money in the other Party's possession. The right of setoff may be exercised without demand or advance notice to the other Party. The right is not waived by any conduct of the other Party, or by any failure to exercise the right. 12.0 FIRE PROTECTION ISG shall collect and remove combustible debris and waste materials from the work area each day. ISG shall store fuels, solvents and other volatile or flammable materials at designated ISG Page 30 of 44 work areas away from power plant and storage areas in well-marked, safe containers. ISG shall properly store and label any chemicals used in the ISG scale house or Ash lab, keeping only the minimum useful amounts of chemical at those locations. Good housekeeping is essential to fire protection, and ISG shall practice good housekeeping at all times. 13.0 HAZARDOUS MATERIALS AND WASTE 13.1 SRP Requirements. ISG shall comply with SRP's hazardous material and hazardous waste requirements related to procurement, transportation, use, cleanup, and disposal and maintain compliance with all applicable local, state, tribal and federal regulations. 13.2 Environmental Laws and Regulations. ISG shall strictly comply with all applicable environmental laws and regulations relating to its activities under this Agreement. ISG is responsible for any costs incurred in complying with environmental and related laws and regulations. ISG shall strictly adhere to environmental measures required by any governmental authority having regulatory jurisdiction over the activities of ISG. 13.3 SRP Approval. ISG shall not allow any Hazardous Material to be used, generated, released, stored, transported onto, or disposed of at NGS without the prior written approval of SRP. 13.4 Release or Discharge. ISG shall notify SRP in writing as soon as possible after any release or discharge by ISG of any Hazardous Materials in quantities reportable to a public agency, or receipt of any notice of violation by ISG of any Hazardous Materials Laws, any order requiring remedial work, or any claims made by any third party against ISG relating to ISG's use of Hazardous Materials at NGS. 13.5 Remediation. ISG shall perform at its sole expense any monitoring, investigation, clean up, removal and other remedial work required as a result of any release or discharge of Hazardous Materials by ISG at NGS, or any violation of Hazardous Materials Laws by ISG. 13.6 Survival. The provisions of GS Paragraph 13, and tile indemnification provisions of Paragraph 16, survive ay expiration or termination of this Agreement. Page 31 of 44 13.7 Contamination. If ISG discovers subsurface soil contamination, underground storage tanks (USTs), drams, or other containers, ISG shall immediately notify SRP and cooperate in performing any mitigation measures SRP may direct, consistent with SRP's policy and State and Federal statutes. SRP shall treat ISG's performance of any mitigation measures that result in costs to ISO, excluding costs due to delays that are caused by ISG, as changes to the scope of ISO work under this Agreement. ISG shall make all reasonable efforts to maintain the integrity of any containers or tanks that are encountered, to otherwise take any actions necessary to limit the spread of or the severity of the contamination, and to refrain from any acts that would contribute to the spread or severity of the contamination. SRP shall show ISG any soil contamination, USTs, drums or other containers in ISG's work area, of which SRP is aware. If applicable, SRP's representative will advise ISG of the status of any schedule for excavation or removal so that ISG can make any appropriate claim for damages. 14.0 SAFETY 14.1 Safety Program. ISG shall establish an accident prevention and loss control program that gives high priority to job safety and fosters a safety conscious attitude throughout performance of work. ISO has sole responsibility for all accident prevention and loss control on or adjacent to the job site, with any subcontractors and suppliers being directly responsible to ISG for these functions. All work is to be done wholly at the risk of ISG; and during its progress, ISG shall take all precautions for its proper and safe performance. ISG shall exercise reasonable care and caution to prevent accidents, injuries or damage to its employees and to all other persons or property on, about or adjacent to the job site. SRP assumes no responsibility for ISG's safety program; however, ISG shall allow SRP and its safety personnel to enter the job site and shall cooperate with them to implement any necessary safety program improvements. SRP has the right to suspend ISO's activities, if, in SRP's opinion, unsafe conditions exist. 14.2 Removal of Personnel. In the event of a violation of safety rules, SRP may require ISG to rectify the problem by removing any of ISG's personnel, Page 32 of 44 14.3 Defective Tools or Equipment. In the event that use of defective tools or equipment creates a hazardous situation, SRP may require ISG to rectify the situation by removing the tools or equipment from the Plant Site. 14.4 Responsibility. By taking the actions permitted by Subparagraphs 14.2 and 14.3 hereof, SRP does not assume any responsibility for project safety or the manner in which ISG manages Ash and Other Byproducts as required by this Agreement. 15.0 FORCE MAJEURE Neither ISG nor SRP shall be liable for failure to perform due to causes beyond their reasonable control such as acts of God; acts of civil or military authorities having jurisdiction; fires; strikes; floods; epidemics; quarantine restrictions; war; riot; unavoidable delays in transportation; rail car shortages; action or inaction by any governmental agency or authority, including refusal of a governmental agency to issue any necessary permit or approval; and inability due to causes beyond its reasonable control to obtain necessary labor, materials, or manufacturing facilities. In the event of delay by either Party attributable to any of the foregoing causes, the date of completion or performance, or the payment of money, whichever is applicable, shall be extended for a period equal to the time lost by reason of the delay. The extension shall be each Party's sole remedy and neither Party shall have any responsibility or liability for cost or expense to the other arising out of the delay. 16.0 INDEMNIFICATION ISG shall indemnify, defend and hold harmless SRP, members of SRP's governing bodies, and SRP's officers, agents and employees for, from and against any and all claims, demands, suits, costs of defense, attorney's fees, witness fees of any type, losses, damages, expenses and liabilities for injury to or death of any person or persons, including but not limited to employees and subcontractors of SRP or ISG, or damage to property for contractual claims, and for civil or criminal fines or penalties against SRP, to which SRP or members of its governing bodies, its officers, agents or employees may be put or subjected to the extent resulting from any failure by ISG to fulfill its obligations under this Agreement, or to the extent Page 33 of 44 resulting from any act, omission, negligence or default on the part of ISG, its subcontractors, suppliers, directors, officers, partners, agents, servants or employees. 17.0 LIENS If any of ISG's subcontractors or suppliers files, or threatens to file, a lien against NGS or any facility or equipment at NGS, ISG shall promptly, and at its own expense, take all action necessary to prevent the filing of the lien, or cause the lien to be released, discharged or bonded over. 18.0 OTHER BUSINESS OPPORTUNITIES; OTHER BYPRODUCTS 18.1 Future Business Opportunities. The Parties acknowledge that unique or specific business opportunities may arise that are not specifically addressed in this Agreement or contemplated by the Parties, and that these opportunities may avoid the need for on-site disposal of Ash The Parties shall review any new opportunities that come to their attention and consider written amendment of this Agreement to provide for the new opportunities, as allowed by the Lease, the Rights-of-Way, and by applicable law. 18.2 Other Byproducts and Wastes. Byproducts and wastes not covered by this Agreement are generated at NGS. If ISG learns of a new method of managing these byproducts, it may notify SRP, and SRP shall review the method. If SRP determines that any new method identified by ISG would reduce the cost of management, generate revenue, or provide environmental benefits, SRP shall allow ISG the first right to provide an acceptable proposal for the new method at marrket based rates. 19.0 ALLOWANCES, CREDITS AND OTHER BENEFITS. Any current or future allowances, credits, setoffs, or other similar benefits that are available to the Parties as a result of recycling, reuse, or sale of Ash or other Byproducts, or of otherwise not returning Ash or other Byproducts to the environment via air or landfill, will be shared between SRP and ISG as provided for in this Paragraph 19.0: Page 34 of 44 19.1 Benefits Retained By SRP. SRP shall retain any benefit related to environmental regulations, limits, or requirements that results in a direct or indirect benefit related to operating capacity for NGS, or that can be transferred to other generation facilities owned by the participants of NGS. 19.2. Shared Benefits. The parties shall share equally any credit, allowance, setoff, or other similar benefit that is not covered by Subparagraphs 19.1 or 19.3 of this Paragraph and that may be sold, traded, or used in any other way to generate revenue. 19.3 Expenditure and Revenue Sharing. Neither Party is required to invest capital or spend funds to secure or utilize a credit, allowance, setoff, or other similar benefit. If the Parties voluntarily spend funds to secure or utilize a benefit, the Parties share the revenue from the benefit on a pro rata basis. If the Parties cannot agree on the appropriate pro rata distribution, SRP may hold the revenue, without payment of interest, until the parties reach agreement, or until an arbitrator's decision is rendered under Paragraph 20. If the parties cannot agree on an expenditure of funds, either Party may voluntarily spend the necessary funds and retain any resulting revenue. 20.0 DISPUTE RESOLUTION; ARBITRATION 20.1 Good Faith Attempt to Resolve Disputes. The Parties shall meet and diligently attempt to resolve any dispute under this Agreement. If the Parties are unable to agree after the Executive Representatives identified in Subparagraph 28.2 have communicated at least three times regarding the dispute, either party may submit the matter to final and binding arbitration under the rules of the American Arbitration Association ("AAA") by giving the other Party written notice that it requests arbitration. 20.2 Selection of Arbitrator. The arbitration must be held before one arbitrator selected by AAA in accordance with the AAA rules. A decision rendered by the arbitrator under the procedures established by the AAA is binding on the Parties. 20.3 Location. Any arbitration must take place in Phoenix, Arizona, unless the Parties agree in writing to another location. Page 35 of 44 20.4 Deadline. Notice of the request for arbitration must be given within that time period after accrual of the claim on which the notice is based during which the applicable law would have allowed a court action to be brought on the claim. If a Party does not provide timely notice, the Party is deemed to have waived its claim, and is barred from arbitration. 20.5 Costs and Fees. The arbitrator may allocate costs and fees as between the Parties. 20.6 Award Final. The award rendered by the arbitrator shall be final, and judgment may be entered in accordance with applicable law in any court having jurisdiction. 20.7 Other Remedies. A Party's use of, or failure to use, the arbitration procedures set forth in this Paragraph 20.0 shall not be construed under the doctrines of laches, waiver or estoppel to adversely affect the rights of any Party. The Parties may seek interim relief including, but not limited to, temporary restraining orders and preliminary injunctions, in any court with jurisdiction for the purpose of preventing serious and irreparable injury. The Parties may not seek interim relief as a means to avoid or stay arbitration. 21.0 INSURANCE 21.1 Required Insurance. During the entire term of this Agreement, ISG shall maintain the following types of insurance with limits of liability not less than those shown below: 21.1.1 Workers' Compensation insurance to cover obligations imposed by applicable federal and state statutes and employer's liability insurance with a minimum limit of $1,000,000. 21.1.2 Commercial general liability insurance with a minimum combined single limits of $1,000,000 each occurrence. The policy shall include coverage for bodily injury liability, property damage liability, personal injury liability, contractual liability assumed under this Agreement or other associated contracts, owner's and contractor's protective liability, and broad form property damage. The policy shall contain a severability of interests provision. 21.1.3 Comprehensive automobile liability insurance with a combined single limit for bodily injury and property damage of not less than $1,000,000 each occurrence with respect to Page 36 of 44 ISG's vehicles, whether owned, hired or non-owned, assigned to or used in the performance of work under this Agreement. 21.1.4 Motor Carrier insurance provided by subcontractors of ISG used for the hauling of limestone, ash or other byproducts on behalf of ISG with a limit of $1,000,000 unless otherwise required by law. Coverage shall be provided for anyone liable for the conduct of the subcontractor but only to the extent of that liability. 21.2 SRP as Additional Insured- The policies provided for in this Agreement, except for the worker's compensation insurance, shall be endorsed to include SRP, members of its governing bodies, its officers, agents and employees as additional insureds, and shall stipulate that the insurance is the primary insurance and that any insurance carried by SRP, members or its governing bodies, its officers, agents and employees is excess and not contributory insurance. 21.3 Waiver of Subrogation. ISG shall waive and require its insurers providing the required coverage to waive all rights of subrogation against SRP, members of its governing bodies, its officers, agents and employees. 21.4 Certificates of Insurance. Prior to commencing any work, ISG shall furnish SRP with Certificates of Insurance as evidence that policies providing the required coverage, conditions and limits are effective. The certificates must provide that notice shall be sent directly to the SRP Operating Representative at least 30 days in advance of cancellation, termination or alteration. 21.5 Insurance for Subcontractors. If ISG subcontracts any part of the work, services, or operations awarded to ISG under this Agreement as provided in Paragraph 32.0, other than for the transportation of limestone, Ash or Other Byproducts, or for emergency repairs of equipment necessary for normal business activities, then ISG shall require its subcontractor(s) to purchase and maintain, for the benefit of SRP at all times during the performance of the work under this Agreement: (a) Workers' Compensation coverage, as required by law; (b) an Owner's and Contractor's Protective Liability insurance policy for bodily injury and property damage with a minimum limit of ONE MILLION DOLLARS ($1,000,000) each occurrence; and (c) comprehensive automobile liability insurance with a combined single limit for bodily injury and Page 37 of 44 property damage of not less than ONE MILLION DOLLARS ($1,000,000) each occurrence with respect to Subcontractor's vehicles, whether owned, hired or non-owned, assigned to or used in the performance of work under this Agreement. In addition, if a subcontractor is constructing a structure at NGS, ISG shall require "all risk" builders' risk insurance coverage for the work including the interest of SRP, with limits adequate to cover the value of the work installed and items while in transit and while stored at the jobsite, and with coverage from the time the work is commenced until acceptance. If ISG does not require a subcontractor to maintain the insurance required by this Paragraph, ISG shall closely supervise the subcontractor and ensure that the subcontractor meets all statutory requirements for subcontractors, follows all plant procedures, complies with all legal requirements including the requirements of OSHA, and adheres to all applicable requirements of this Agreement. 21.6 Certified Copies. SRP may request and receive certified copies, at its expense, of any of the policies or endorsements. 22.0 NAVAJO NATION ECONOMIC DEVELOPMENT SRP and ISG agree that as opportunities related to ISG's sale and marketing of Ash and Other Byproducts become available, the Parties will cooperate with each other to advance the interests of the Navajo Nation and community through Navajo Nation economic development projects. This Paragraph is not intended to, and may not be construed to, confer upon or give to the Navajo Nation or any individual Navajo Indian any rights or remedies under or by reason of this Agreement. 23.0 INDIAN PREFERENCE AND EQUAL OPPORTUNITY 23.1 Preference. When performing services at NGS, ISG shall give preference in employment, to the extent allowed by law, to Qualified Local Navajo Indians, in accordance with SRP's policy. For purposes of this Subparagraph, "Local Navajo Indians" means members of the Navajo Tribe having an assigned census number, and "Qualified" means meeting the general employment requirements as well as the specific job descriptions of ISG. If sufficient local Navajo labor is not available or the quality of available labor is not acceptable, ISG may Page 38 of 44 then employ other labor to meet the requirements of the job. ISG shall incorporate the terms, covenants and conditions of this Paragraph 23.0 into all of ISG's subcontracts, and enforce them. 23.2 Record keeping. ISG shall maintain proper documentation of all recruiting, hiring and employment activities associated with Navajo preference. ISG shall provide to SRP a quarterly report on the number and percentage of local Navajos employed on the project at the commencement of the project, and as frequently thereafter as instructed by SRP. 23.3 Minimum Wage Scale. ISG shall adhere to the minimum wage scale that has been established for work being performed at NGS. The minimum wage scale is attached as Exhibit E. 23.4 Equal Opportunity. To the extent applicable, the Equal Opportunity Clause provided for in the Regulations issued under Executive Order 11246; the Affirmative Action Clause for Handicapped Workers provided for in the Regulations issued under the Rehabilitation Act of 1973; and the Affirmative Action Clause for Disabled Veterans and Veterans of the Vietnam era provided for in the Regulations issued under the Vietnam Veterans Adjustment Act of 1974, are incorporated by this reference. The provisions of this Paragraph 23.0 must be included in any subcontract unless exempted therefrom. 24.0 ARCHAEOLOGICAL RESOURCE PROTECTION 24.1 SRP Notice. SRP shall advise ISG of any archaeological sites known to be present at NGS, and of the status and schedule for excavation or removal, so that ISG can make any necessary or appropriate provisions in its work. 24.2 ISG Discovery. If ISG discovers any archeological site at NGS, ISG shall immediately stop working, inform SRP, and cooperate in performing any archeological measures required by SRP's policy and federal statutes. Any archeological measures that result in costs to ISG must be treated as changes in the Scope of Work. ISG shall make reasonable efforts to prohibit the collection of artifacts on or near NGS. 25.0 NON-WAIVER Page 39 of 44 Failure of either Party to insist upon strict performance of any of the terms and conditions hereof, or failure to or delay in the exercise of any rights or remedies provided in this Agreement or by law, or failure to properly notify the other Party in the event of a breach, or the acceptance of any payment provided for in this Agreement, or approval of any design, does not release the other Party from any warranties or obligations and is not deemed to be either a waiver of any rights of a Party to insist upon strict performance hereof or a waiver of any rights or remedies hereof. The single or partial exercise by either Party of any right hereunder does not preclude or prejudice any other or further exercise thereof or the exercise of any other right. 26.0 COMPLETE AGREEMENT The Recitals set forth in Paragraph 2.0 hereof are specifically incorporated in and constitute part of this Agreement. This Agreement and the Exhibits constitute the entire agreement between ISG and SRP. No other terms or conditions, or prior negotiations, representations or agreements are binding upon either of the Parties unless accepted by both Parties in writing or identified in this Agreement. 27.0 PAYROLL TAXES ISG is fully and exclusively liable for payment of all contributions, taxes and assessments for unemployment insurance, old age retirement, and survivor's insurance annuities and pensions now or hereafter imposed by the United States or any state, or any political subdivision, agency or department of either, measured by or resulting from wages, salaries, or other remuneration paid to persons employed by ISG. 28.0 NOTICES AND REPRESENTATIVES 28.1 Notices. All notices required or permitted by this Agreement must be in writing, and may be delivered to the other Party by hand delivery, certified mail, telex, Telecopy, or telegraph. Notice shall be deemed served on the date of mailing, delivery, or, where applicable, on the date sent by telex, telecopy or telegraph. Notices shall be addressed to the Parties at the addresses specified below or to other addresses that the Parties may from time to time designate: SRP: ISG: Page 40 of 44 SRP-Navajo Generating Station ISG Resources, Inc. 6 Miles East on State Highway 98 136 East South Temple P.O. Box 850 Suite 1300 Page, Arizona 86040 Salt Lake City, Utah 84111 Attn: Michael A. Woods Attn: General Counsel Voice (928) 645-6242 Voice (801) 236-9704 Fax No (928) 645-7298 Fax No. (801) 236-9791 And: ISG Resources, Inc Attn: V.P. Western Region 950 Andover Park East Suite 24 Tukwila, Washington 98188 Voice (206) 394-1364 Fax No. (206) 394-1366 28.2 Executive and Operating Representatives. 28.2.1 Selection. Each Party shall have one Operating Representative, one Alternate Operating Representative, and one Executive Representative to administer this Agreement, oversee performance of the Parties, and negotiate renewals or revisions as necessary. 28.2.1.1 Executive Representative. A. The initial Executive Representatives are: SRP Glen Reeves Voice (602) 236-4310 Fax No. (602) 236-3809 ISG R Steve Creamer Voice (801) 236-9700 Fax No. (801) 236-9730 B. The Executive Representatives' duties shall include: * Attempting to resolve any issue referred to them by either Party's Operating Representative. * Coordinating with their respective Boards of Directors as required or needed for the Parties to expand or revise their business relationship. * Negotiating, in at least three discussions or meetings, to attempt to resolve any dispute as a prerequisite to filing of a request for arbitration or any other legal remedy. Page 41 of 44 * Reviewing any request for arbitration, and approving a request by a Party that has satisfied the prerequisites under this Agreement. 28.2.1.2 Operating Representatives. A. The initial Operating Representatives are: SRP ISG Michael A. Woods Clinton Kurtz Voice (928) 645-6242 Voice (206) 394-1364 Fax No. (928) 645-7298 Fax No. (206) 394-1366 B. The Operating Representatives' duties shall include: * Administering the Agreement. * Resolving billing disputes. * Interpreting scale issues. * Creating and implementing addendum or other Agreements. * Administering and approving purchase orders or provisions for other services. * Negotiating renewal or revision of the Agreement. * Assisting and coordinating with the other Party. * Coordinating arbitration. * Handling issues involving third parties. * Handling other issues required by the Agreement or approved by the Executive Representative. 28.2.1.3 Alternate Operating Representatives. A. The initial Alternate Operating Representatives are: SRP ISG Scott D. Kyle Chip Everest Voice (928) 645-6482 Voice (801) 236-9700 Fax No. (928) 645-6234 Fax No. (801) 236-9730 B. The Alternate Operating Representatives' duties shall include: * Serving as a secondary contact for the other Party. * Participating in discussions, written exchanges, and problem solving. * Signing when the Primary Operating Representative is absent, but officially required notices may only be sent to the Alternate Operating Representative as a courtesy copy. Page 42 of 44 28.2.2. Change of Representatives. The Executive Representative, Operating Representative or Alternate Operating Representative may be changed by written notice at any time during the Agreement. 29.0 CONFIDENTIALITY To the fullest extent permitted by law, each Party shall retain in confidence the contents of this Agreement and any information obtained as a result of negotiation and performance of this agreement that either Party identifies in writing to the other as being proprietary and confidential in nature. 30.0 SEVERABILITY If any part of this Agreement is unenforceable, the unenforceability does not extend beyond the part affected. The rest of the Agreement is effective, and is binding upon the Parties. 31.0 SUCCESSORS AND ASSIGNS If SRP consents in writing, ISG may assign its rights or delegate its duties under this Agreement to a parent, subsidiary, affiliate company, or a successor by merger, acquisition, or consolidation, provided that the assignee or delegatee assumes in writing all of ISG's obligations. 32.0 SUBCONTRACTS If SRP consents in writing, ISG may subcontract with third parties to perform any of ISG's duties under this Agreement, provided that the subcontractor agrees in writing to abide by all of the terms and conditions of this agreement that are applicable to the duty. ISG shall submit the final written agreement between ISG and ISG's subcontractor to SRP for review and approval. 33.0 GOVERNING LAW AND VENUE This Agreement shall be governed by and construed according to the laws of the State of Arizona. Any action or proceeding relating to this Agreement shall be commenced and prosecuted in a state court or federal court with appropriate jurisdiction located in Maricopa County, Arizona. 34.0 ATTORNEYS' FEES Page 43 of 44 If it becomes necessary for either Party to employ an attorney to enforce compliance with the terms and conditions of this Agreement, the Party, if successful in enforcing its rights, shall be entitled to reimbursements from the other Party for reasonable attorneys' fees, as determined by the court or arbitrator, and costs and expenses incurred in such enforcement. 35.0 HEADINGS Headings are used in this Agreement for convenience of reference only and shall be given no weight in the interpretation of this Agreement. IN WITNESS WHEREOF this Agreement has been duly executed by the Parties as of the date first above written. SALT RIVER PROJECT ISG RESOURCES, INC. By: /s/ David G. Areghini By: /s/ Clinton A. Kurtz - -------------------------- --------------------------------- Its: Associate Gen. Mgr. Its: Vice President - West Region APPROVED AS TO FORM: /s/ Karen S. Gaylord Salmon Lewis & Weldon, PLC Oct. 14, 02 SRP Legal Services Counsel for SRP Page 44 of 44 EX-10.79 13 ex1079k093002.txt ISG AGREEMENT FOR FLY ASH DATED MAY 22, 2001 Exhibit 10.79 AGREEMENT FOR FLY ASH; RESTATED CONTRACT NO. 3804-983 AMENDMENT NO. 12 THIS AMENDMENT NO. 12 TO "AGREEMENT FOR FLY ASH" is entered into this 22th day of May 2001. WHEREAS, Purchaser and Company have entered into a contract for sale by Company of fly ash produced at Company's Centralia Plant dated March 1, 1977, as amended by amendments 1 through 11 (the "Agreement"); and WHEREAS, THE PURCHASER AND COMPANY DESIRE TO AMEND THE TERMS OF THE AGREEEMENT, THE PARTIES DO HEREBY AGREE AS FOLLOWS: 1. Change Company name to TransAlta Centralia Generation LLC. 2. Change Purchaser's name to ISG Resources, Inc. 3. Purchaser will obtain eight <$) knife gates to be installed by Company on top of flyash bins for better segregation of flyash. 4. * Purchaser will provide all design, equipment, material and hire Company approved contractor to install a carbon fixation systems in the flyash unloading room (per attachment A). * Company will provide electricity for new equipment operation. * The Purchaser will retain ownership and maintenance of the equipment and the Company will bear no liability for equipment damage. * The Company will retain ongoing review of equipment and it will be removed at the Company's request. * The Company will not participate in the cost of flyash treatment. All costs will be paid by Purchaser. * Purchaser will report monthly the tons of ash treated and maintain flow meter readin for audit purposes. PURCHASER COMPANY ISG RESOURCES, INC. TRANSALTA CENTRALIA GENERATION LLC By /s/ Clinton A. Kurtz By /s/ Darrel Webster for --------------------------- ----------------------------- Name Clinton A. Kurtz Name JEFF D WILLEY Title V. President - W. Region Title CONTRACT ADMINSTRATOR June 26, 2001 June 28, 2001 - ------------------------ ------------------------ Date Executed Date Executed AMENDMENT NO. 11 TO CENTRALIA PLANT AGREEMENT FOR FLY ASH; CONTRACT NO. 3804-983 This Amendment No. 11 to Centralia Plant ("Centralia Plant") Agreement for Fly Ash (Contract No. 3804-983) is entered into this 5th day of August, 1997 between Pozzolanic Northwest, Inc. ("Purchaser") and PacifiCorp ("Company"). RECITALS WHEREAS, Purchaser and Company have entered into a contract for sale by Company of fly ash produced at Company's Centralia Plant dated March 1, 1977, as amended by amendments 1 through 10 (the "Agreement"); and WHEREAS, THE PURCHASER AND COMPANY DESIRE TO AMEND THE TERMS OF THE AGREEMENT, THE PARTIES DO HEREBY AGREE AS FOLLOWS: 1. The combustion of coal at the Centralia Plant produces certain residual wastes in the form of ash collected by electrostatic precipitators (herein called "fly ash" or "reject ash") and other by-products. Considerable quantities of fly ash, reject ash and other by-products must be removed and disposed of by Company at their expense. 2. Purchaser has explored the possibility of using or commercially marketing, or both, the fly ash at its sole expense. Purchaser in consideration for - an extension to the Restated Agreement, dated January 20, 1992, in Amendment No. 9, a revision to the Company's residual value percentage at the expiration of this Agreement; and other incentives to use, market or _ sell all the fly ash produced by Company - agrees to: increase the price paid to Company, eliminate additional transportation expenses by purchasing the fly ash FOB the spout, revise the exclusive right to a right of first refusal and other incentives to make the Agreement easier to administer. Purchaser desires to obtain the right, title and interest to those amounts of fly ash it may require from time to time for its own use or for dolivery to customers that it may develop, together with rights to have installed and maintained certain equipment on the Centralia Plant site for such purpose. Installation of certain equipment is further defined in Article . 3, Equipment at Centralia Plant Site and Article 4, Maintenance and Operation. WHEREAS, the parties desire to continue their basic relationship whereby Purchaser buys from Company fly ash produced at Company's Centralia Plant; and Page 1 of 9 WHEREAS, fly ash means ash collected by electrostatic precipitators at the Centralia Plant that meets the color, fineness, LOI and other quality requirements to be mixed with Portland Cement and considered as meeting industry standards; WHEREAS, reject ash means ash collected by electrostatic precipitators at the Centralia Plant that does not meet the standards for fly ash or fly ash rejected by Purchaser that is transferred to silos 13 and 14. Bottom ash, economizer ash, cenospheres, scrubber sludge and other related products are by-products resulting from operation of the Centralia Plant and are neither fly ash nor reject ash. However, Purchaser may explore using or marketing these related products under separate agreements; WHEREAS, Purchaser's rights, title and interest for exclusive right to fly ash shall pertain to fly ash in Company's silos 11 and 12. All fly ash shall initially go into silo 11. All ash transferred to Companys silos 13 and 14 from Company's silos 11 and 12 is considered reject fly ash (whether it is fly ash or reject ash) for the purposes of this Agreement. Reject ash in silos 13 and 14 may be marketed or sold to others by Company provided the reject ash is not marketed or sold to current customers of Purchaser. Company may sell to a competitor of Purchaser as long as the competitor does not sell the reject ash to Purchaser's customers. Purchaser shall provide a list of customers when requested by Company, in order for Company to determine if the marketing or sale of reject ash is to a customer of Purchaser, WHEREAS, the intent of this Amendment No. 11 is to give both parties incentives to work harmoniously and cooperatively towards reducing Company's disposal costs and increasing the revenue derived from fly ash sales for both parties, and ultimately using, marketing or selling all the fly ash; WHEREAS, Purchaser and Company therefore desire to amend the terms of the Agreement. AGREEMENT NOW,THEREFORE, the parties do hereby further agree as follows: 1. Definitions and References. The capitalized terns used herein shall have the same meanings as those defined in the Fly Ash Agreement between PacifiCorp Electric Operations and Pozzolanic Northwest, Inc., dated January 20, 1992 (the "Restated Agreement"), unless otherwise defined above or herein. All references to section numbers herein refer to the Restated Agreement. From and after the date of this Amendment N0.11, the terms "fly ash" and "reject ash" shall have the meanins defined in this Amendments Recitals. Page 2 of 9 2. Extension of Agreement. The parties agree to extend the term of the Agreement from February 28, 2002, to __________________ with options to extend the Agreement in 5 year terms beginning in ______________ in order for Purchaser to have a continuous ___________________ year term, provided Purchaser's performance is in accordance with the Agreement. 3. Right to Fly ash. Section 2.1 of the Restated Agreement is deleted in its entirety and replaced with: 2.1 Purchaser, for the price specified in Section 5 to be paid to the Company shall have the right to remove, market for sale, sell and otherwise dispose of any or all fly ash it may now or hereafter require, subject to this Agreement, either acting alone or in conjunction with others, from Company's silos 11 and 12; provided however, that the Company may at its own discretion retain any amount of fly ash which it may desire for its own use, including but not limited to the blending of fly ash with scubber sludge or any other byproducts of the Centralia Plant; and provided further that the Company shall have the right to market for sale and sell all fly ash or reject ash at any time that Purchaser transfers ash to Company's silos 13 and 14 or at any time Purchaser does not remove available quantities of fly ash from the Centralia Plant, including fly ash in Company's silos 11 and 12 as specified below. Purchaser will have right of first refusal to all fly ash as it enters Company's silo 11 or is classified and placed in Company's silo 12. After Purchaser exercises its right of first refusal, Company may remove, market for sale, sell and otherwise dispose of any and all reject ash in silos 13 and 14 it may now or hereafter require, subject to this Agreement, either acting alone or in conjunction with others; provided, however, that the Company may at its own discretion retain any amounts of reject ash which it may desire for its own use. Company reserves the right to sell any or all reject ash to third parties independent of Purchaser if the Company, in its sole discretion, deems the terns offered by the third party to be more favorable than offered by Purchaser. Company, however, agrees not to soil any fly ash or reject ash to customers of Purchaser. Company may sell fly ash or reject ash to a competitor of Purchaser as long as the competitor does not sell the fly ash or reject ash to Purchaser's customers. Purchaser shall provide a list of fly ash customers and reject ash customers when requested by Company. Any new customers obtained after March 1, 1997 that Purchaser adds to the original lists will not be considered customers if Page 3 of 9 Purchaser has not sold the customer fly ash or reject ash within 12 months. Pre March 1,1997 customers of Purchaser will not be subject to this 12 month requirement. If Company is contacted by a competitor or customer for fly ash or reject ash and the ultimate customer is not on the respective list, Purchaser will have 48 hours to exercise its right of first refusal before the fly ash or reject ash is sold to the customer or competitor or before any fly ash is disposed of or before being transferred to silos 13 and 14 as reject ash. In the unlikely event that Purchaser does not exercise its first right of refusal and fly ash needs to be loaded into others trucks or rail cars out of silos 11-14; Purchaser agrees to reasonably accommodate this loading and charge Company Purchaser's actual loading costs (exclusive of overheads), as they relate to this activity. 4. Equipment at Centralia Plant Site add the following 3.4 and 3.5 to section 3 of the Agreement 3.4 Purchaser will submit a list of equipment annually to Company for consideration in Company's budget process. If budget requests are justifiable, Company will use best efforts to get them approved. Approved capital costs at the Centralia Plant are to be at Company's sole expense. 3.5 Reacting quickly to market conditions is important, and therefore, unbudgeted capital equipment items, that Company and Purchaser are in agreement with, can be initially paid for by Purchaser and Company will true up this expenditure the following year with a capital project to reimburse Purchaser. 5. Maintenance and Operation add the following 4.6 to Section 4 of the Agreement. Page 4 of 9 6. Sales Price Sections 5.1, 5.2, 5.4, 5.5 of the Restated Agreement shall be deleted in their entirety and replaced with the following: Page 5 of 9 Page 6 of 9 8. Indemnification Section 9 of the Restated Agreement shall be deleted in its entirety and is replaced. Page 7 of 9 9.1 Purchaser specifically and expressly agrees to indemnify, defend, and hold harmless Company and its directors, members of Company's Pacific Board, Utah Board, and Wyoming Board, officers, employees and agents (hereinafter collectively "Indemnitees") against and from any and all claims, demands, suits, losses, costs and damages of every kind and description, including attorneys' fees and/or litigation expenses, brought or made against or incurred by any of the Indemnitees resulting from, arising out of, or in any way connected with any act, omission, fault or negligence of Purchaser, its employees, agents, representatives or subcontractors of any tier, their employees, agents or representatives in the performance or nonperformance of Purchaser's obligations under this Agreement or in any way related to this Agreement. The indemnity obligations under this Section shall include without limitation. 1. Loss of or damage to any property of Company, Purchaser or any third party; 2. Bodily or personal injury to, or death of any person(s), including without limitation employees of Company, or of Purchaser or its subcontractors of any tier, and 3. Claims arising out of Workers' Compensation, Unemployment Compensation, or similar such laws or obligations applicable to employees of Purchaser or its subcontractors of any tier. 9.2 Purchaser's indemnity obligations under this Section for death, bodily injury or property damage (collectively "Damages") caused in part by the negligence of Comapany shall be limited to the extent the Damages arise out of the negligence or willful acts of Purchaser, its employees, agents, representatives or subcontractors of any tier, their employees, agents or representative. 9.4 For work performed in the State of Washington, and to the extent applicable, Purchaser specifically and expressly, waives any immunity under Industrial Insurance, Title 51, RCW, and acknowledges that this waiver was mutually negotiated by the parties herein. 9. Exhibit A shall be deleted in its entirety and shall no longer be applicable. 10. Effect of Amendment. Except as otherwise amended by this Amendment No. 11, the Agreement remains in full force and effect as amended. Page 8 of 9 IN WITNESS HEREOF, this Amendment No. 11 has been executed by the parties and is effect as of March 1, 1997. POZZOLANIC NORTHWEST, INC. PACIFICORP for itself and as agent for COMPANYS By: /s/ Clinton A. Kurtz By: /s/ Russell Davidson --------------------------- ----------------------------- Its: Secretary/Treasurer Its: Procurement Manager Page 9 of 9 AGREEMENT FOR FLY ASH; RESTATED CONTRACT NO. 3804-983 AMENDMENT NO. 10 THIS AMENDMENT NO. 10 TO "AGREEMENT FOR FLY ASH" is entered into this 26the day of June 1995. WHEREAS, the undersigned parties have entered into a Contract dated March 1, 1977, for Sale by OWNERS to POZZOLANIC NORTHWEST, INC., ("Purchaser") of fly ash produced at Owner's Centralia Steam Electric Generating Plant; and WHEREAS, the parties desire by this instrument to amend the terms of said Agreement to reduce the disposing of reject fly ash, NOW, THEREFORE, the parties do hereby further agree as follows: 1. Purchaser shall engineer, construct, and provide all equipment necessary to install an auger-unloader for No. 14 Fly Ash Tailings Bin, including electrical work, auger and knife gate valve. 2. Purchaser shall install the equipment on Company's No. 14 Fly Ash Bin located at the Centralia Steam Electric Generating Plant's Fly Ash Loading Facility. 3. Company will compensate Purchaser for the installation of the recon auger loading station for the Firm Lump Suns price of _____________ __________________________________________________________________. Purchaser shall receive payment by deducting the _________________ from monthly payments to Company for future Fly Ash Sales. The amount may be deducted in total or inpart until the Firm Lump Sum Amount is satisfied. 4. Contractor shall provide itemized accounting for sales of reject ash on the monthly sales report for tarcking payback of the cost for the recon auger loading station. 5. All other terms and conditions of the Agreement shall remain in effect. PURCHASER COMPANY POZZOLANIC NORTHWEST, INC. PACIFICORP for itself and as agent for the Owners of the CENTRALIA STEAM ELECTRIC GENERATING PLANT By /s/ Clinton A. Kurtz By /s/ Michael O. Scriners, for ---------------------------- ---------------------------------- Name Clinton A. Kurtz Name Zack B. Brewer, Jr. (Type or Print) Title Secretary/Treasurer Title Lead Contract Administrator 8/7, 1995 8-9, 1995 - ------------------------- -------------------------------- Date Executed Date Executed CENTRALIA STEAM ELECTRIC GENERATING PLANT AGREEMENT FOR FLY ASH: CONTRACT NO. 3804-983 AMENDMENT No. 9 THIS AMENDMENT NO. 9 to "AGREEMENT FOR FLY ASH" is entered into this 20th day of January, 1992. WHEREAS, the undersigned parties have entered into a Contract dated March 1, 1977 for sale by OWNERS to POZZOLANIC NORTHWEST, INC. ("Purchaser") of fly ash produced at Owner's Centralia Steam Electric Generating Plant: and WHEREAS, the parties desire by this instrument to amend. the terms of said agreement and to resolve and settle certain concerns arising out of. said Agreement and incorporate Amendments 1-8 of said Agreement into a Restated Agreement for clarification of said Agreement, NOW, THEREFORE, the parties do hereby further agree as follows: 1. RESTATED AGREEMENT ASATTACHED. PURCHASER COMPANY POZZOLANIC NORTHWEST, INC. PACIFICORP ELECTRIC OPERATIONS for itself and as agent for OWNERS By /s/ Gerald A. Peabody By /s/ Zack B. Brewer, Jr. -------------------------- --------------------------------- Name Gerald A. Peabody Name Zack B. Brewer, Jr. Title President Title Lead Contract Administrator 20 Jan 1992 January 20, 1992 - -------------------------- ------------------------------------ Date Executed Date Executed RESTATED FLY ASH AGREEMENT BETWEEN PACIFICORP ELECTRIC OPERATIONS AND POZZOLANIC NORTHWEST, INC. OF AGREEMENT NO. 3804-983 TABLE OF CONTENTS RESTATED AGREEMENT PAGE 1 1. TERM OF AGREEMENT PAGE 1 2. RIGHT TO FLY ASH PAGE 1 3. EQUIPMENT AT CENTRALIA PLANT SITE PAGE 2 4. MAINTENANCE AND OPERATION PAGE 3 5. SALES PRICE PAGE 4 6. CONDUCT OF OPERATIONS PAGE 9 7. MINIMUM SALES VOLUME PAGE 10 8. DEFAULT-TERMINATION PAGE 13 9. INDEMNIFICATION PAGE 13 10. WORKERS' COMPENSATION PAGE 14 11. INSURANCE PAGE 14 12. NOTICES PAGE 16 13. ARBITRATION PAGE 16 14. UNCONTROLLABLE FORCES PAGE 17 IS. ASSIGNMENT PAGE 17 16. LITIGATION/APPLICABLE LAW PAGE 18 17. COMPLETE AGREEMENT PAGE 18 18. ADDITIONS PAGE 18 19. NONWAIVER PAGE 18 20. MWBE/EQUAL EMPLOYMENT OPPORTUNITY AGREEMENT AND CERTIFICATION PAGE 18 21. LIMITATION OF LIABILITY PAGE 19 22. DAMAGES PAGE 19 23. AUDIT PAGE 19 Attachment A Exhibit A Exhibit B Examples RESTATED AGREEMENT NO. 3804-983 PACIFICORP ELECTRIC OPERATIONS CENTRALIA STEAM ELECTRIC GENERATING PLANT RESTATED AGREEMENT FOR FLY ASH THIS RESTATED AGREEMENT, hereinafter referred to as "AGREEMENT", between PACIFICORP ELECTRIC OPERATIONS, ("Company") acting for itself as operator and as agent for the Owners of the Centralia Steam Electric Generating Plant, Centralia, Washington, to-wit: PACIFICORP ELECTRIC OPERATIONS, THE WASHINGTON WATER POWER COMPANY, CITY OF TACOMA DEPARTMENT OF PUBLIC UTILITIES, PUD NO. 1 OF SNOHOMISH COUNTY, SEATTLE CITY LIGHT, PUGET SOUND POWER & LIGHT COMPANY, PORTLAND GENERAL ELECTRIC, AND PUD NO. 1 OF GRAYS HARBOR COUNTY (collectively "Owners"), and POZZOLANIC NORTHWEST, INC., ("Purchaser"), withnesseth that: WHEREAS, the parties have been signatory to an Agreement or Fly Ash (Agreement No. 3804-983) dated March 1, 1977, with Amendment Nos. 1-8; WHEREAS, THE PARTIES AGREE TO THE FOLLOWING FACTS: a. The combustion of coal at the Centralia Plant produces certain residual wastes in the form of ash collected by electrostatic precipitators (herein called "Fly Ash") , Considerable quantities of Fly Ash must be removed and disposed of by pacific at the owner's b. Purchaser has explored the possiblitiy of using or commercially marketing, or both, the Fly Ash at its sole expense. Purchaser desires to .obtain the right, title and interest to those amounts of Fly Ash it may require from time to time for its own use or for delivery to customers that it may develop, together with rights to have installed and maintained certain equipment on the Centralia Plant site for such purpose. Installation arid maintenance of certain equipment is further defined in Article 3, Equipment at Centralia Plant Site and Article 4, Maintenance and Operation. WHEREAS, the parties desire to continue their basic from Company Fly A relationship whereby Purchaser, buys from Ash, reject ash, economizer ash and cenospheres (herein after referred to as "Fly Ash") produced at owner's Centralia Steam Electric Generating Plant; and Restated Agreement No. 3804-983 NOW, THEREFORE, Company and Purchaser do hereby agree as follows: 1. TERM OF AGREEMENT 1.1 This Agreement shall become effective upon date of its execution by Company, and shall continue uniterrupted with the five consecutive five-year terms as orginally stated in Agreement No. 3804-983, terminating on February 28, 2002, unless earlier termineated in accordance iwth the provisions of this Agreement. Parties agree that Company may, at Company's option, extend the term of the Agreement. 2. RIGHT TO FLY ASH 2.1 Purchaser, for the price specified in Section 5 to be paid to Company, shall have the exclusive right to store, remove, market for sale, sell and otherewise dispose of any or all Fly Ash it may now or hereafter require, subject tot his Agreement, either acting alone or in conjunction with others; provided, however, that Company may at its own discretion retain any amount of Fly Ash which it may desire, for its own use. 2.2 Company makes no representation as to the continued availability, nor quantity, of Fly Ash throughout the life of this Agreement, and rights to Fly Ash granted to Purchaser by this Agreement create no obligation on Company to produce Fly Ash at any minimum rate or volume at any time. 2.3 Company expressly disclaims all warranties and guarantees, whether implied or expressed, including but not limited to warranties of merchantability and fitness for any particalar purpose. 2.4 Purchaser shall not use Company's or the Owners' name in any manner whatsoever in conjunction with the use or sale of Fly Ash. 3. EQUIPMENT AT CENTRALIA PLANT BITE 3.1 All existing equipment and facilities currently associated with the Fly Ash. removal, handling or storage process at the Centralia Plant are property of Company, except as listed on Attachment A, "Purchaser's Equipment." -2- Restated Agreement No- 3804-983 3.2 To the extent Purchaser's costs associated with Company equipment and.facilities as defined in Section 3.1 have been previously credited to the account of Purchaser such costs will continue to be amortized through Fly Ash . purchases at the rate specified in section 5. 3.3 Any new equipment or facilities deemed necessary by Purchaser for Purchaser's Fly Ash needs will be submitted in concept to company for approval. If Company concurs, it will so notify Purchaser in writing. Purchaser will then be responsible for the design and engineering, which shall be subject to Company approval, and Company will construct any new equipment or facilities at Company's expense. said .new facilities or equipment shall be property of Company at all times. Reasonable and actual expenses borne by Purchaser under this Paragraph 3.3 shall be reimbursed by Company. 4. MAINTENANCE AND OPERATION 4.1 Company will be responsible for maintenance of all Fly Ash facilities and equipment at the Centralia Plant Site, including mobile equipment, owned by Company. Purchaser shall be responsible for maintenance of all fly ash facilities and equipment at the plant site including mobile equipment, owned by Purchaser. Each party shall bare the costs of maintaining their own facilities and equipment at plant site. 4.2 Company will maintain on the plant site an adequate supply of spare parts, filters, lubricants, special tools and heavy equipment for the maintenance of Company's facilities. 4.3 Company shall respond. (initiate work) to request by Purchaser for emergency maintenance of Company's facilities within 1/2 hour during regular Company work hours or within 3 hours during non-regular Company work hours. If Company is unable or does not respond within these time frames, Purchaser shall have the right to take reasonable action to secure parts or have maintenance performed by a Company approved contractor or Company approved purchasers personnel. In such cases, Company shall reimburse Purchaser for Purchaser's actual and reasonable costs of parts and contract services. -3- Restated Agreement No. 3804-983 4.4 The hiring and supervision of personnel to provide operation of the facilities and maintenance of purchaser owned equipment shall be the responsibility of Purchaser. The cosh including wages, of providing a staff of competent operators, laboratory supervisors and management personnel shall be borne by Purchaser. 4.5 Purchases, of Fly Ash will be weighed at the Centralia Plant site or the Centralia storage facility. If these . facilities are not available for whatever reason, each truck load will be supported by a public scale weight verification after each pick-up. 5. SALES PRICE 5.1 The price Purchaser will pay for the Fly Ash removed from the Centralia Plant site for sale to others shall be 25 percent of the price Purchaser obtains from the sale of Fly Ash to others, after deducting direct transporting costs, (those costs incurred from point of origin to point of destination) provided, however, that in no event shall Purchaser pay in total for all Fly Ash less than the per ton minimum price for the Minimum Sales Volume of Fly Ash as calculated under Paragraph 7.3 below. Any savings resulting from backhauling will be shared with Company in the same manner as the original haul.. "Transporting costs" as used herein are further defined as the total direct costs incurred in delivering the Fly Ash from the plant site to the customer. It includes all rail costs including freight .charges, surcharges and demurrage costs imposed by the railroads including costs of the rail cars. It includes all truck freight charges, surcharges and highway use taxes. Purchaser-owned or leased trucks are charged at the prevailing tariff rate. Transporting costs do not include the cost of plant site personnel, technical representatives, office costs, Purchaser's equipment listed on Attachment A or any other equipment at the Centralia Plant site or Centralia storage facility that may be used for locating rail cars, except to the extent that such costs are associated with the acquisition of an intermediate silo, storage facility, terminal or barging facility. If an intermediate silo, storage facility, terminal barging facility is required or if personnel or equipment is required far these facilities, then these costs including the associated lease and/or acquisition costs for such intermediate facilities and equipment are treated as transporting costs, as they are incurred in -4- Restated Agreement No. 3804-983 delivering the Fly Ash from the plant site to the customer. For the purpose of determining the associated costs of Purchaseracquired intermediate facilities, the acquisition charge shall be calculated using one of the following methods depending upon whether the acquisition is a lease or purchase: (a) Lease costs shall be costs actually incurred in conjunction with the lease of an intermediate facility for use under this Agreement plus an amount equal to five percent of the lease cost to cover general. and administrative costs associated with the lease. In the event any lease subject to with this provision contains an option to purchase, and m the event of election of said option, the affected asset shall become subject to the provisions of Item (b) of this Paragraph at the time of option election. (b) The charge for purchase of intermediate facilities shall be calculated using the straight-line amortization method over the useful life. This charge shall terminate after the facility has been fully amortized. Intermediate facilities purchased pursuant to this provision shall be treated as having a useful life not exceeding the remaining term of this Agreement (i.e.; through the fifth 5year contract period); provided, if, at the conclusion of the fifth 5-year contract period, a facility shall.have any residual value, Purchaser shall refund to Owners an amount equal to twentyfive percent (25%) of the residual value. The refund shall consist of payment of twenty-five percent (25%) of the residual value after deduction of all facility costs subject to amortization under this Paragraph but which have not previously been . deducted from the price paid Company by reason of the Minimum Sale Price requirement as set forth in Paragraph 5.2. The value of the land will not be included in determining residual value under this Paragraph 5.1.b. In the event of any dispute concerning the residual value, the parties will attempt to resolve the matter through assistance of an independent appraiser prior to any arbitration. -5- Restated Agreement No. 3804-983 The basis for amortizaiton shall be actual cost including interest calculated as described below (Owner's pro rata share of costs in the event a facility is used for purposes in addition ot the sale of Centralia Plant Fly Ash under this Agreement) less any applicable investment tax credits realized by Purchaser. To the extent that Purchaser employs borrowed funds for the acquisition of any facility or refinances previous rate shall be equal to the actual interest rate charged to Purchaser to borrow such funds. However, interest on borrowed funds shall not exceed a commercially reasonable rate. To the extent that Purchaser finances the acquisition of any facility with its own funds, the imputed interest rate shall be equal to the yield on a U.S. Treasury Bond maturing in February 2002, as reported in The Wall Street Journal on the date of asset acquisition. The imputed interest reate shall be applied to the declining loan balance of the asset using the interest method (re: APB Opinion No. 21, 169.108, Amortization of Discount and Premium) and shall be adjusted in three-year intervals to reflect fluctuations inthe above-described Treasury Bond yield rate. For the purposes of this Paragraph, the actual cost of facilities shall include general and administrative costs equal to five percent of asset acquisition costs. (c) The allowable cost of Purchaser-owned land shall be equal to an annually determined, commercially reasonable lease rate as agreed to by the parties for that portion of the land devoted to the sale and handling of Centralia Fly Ash. In the event of any dispute concerning such rate, the parties will attempt to resolve the matter through assistance of an independent appraiser prior to any arbitration. Title to and risk of loss for intermediate facilities shall remain with Pozzolanic throughout the term of this Agreement. In no event shall Company's reimbursement of acquisition costs or any subsequent refund of residual value act to transfer any portion of title, risk of loss or liability for said facilities to Company. -6- Restated Agreement No. 3804-983 This Paragraph 5 shall be effective commencing with original Agreement Year 6 (i.e.; commencing March 1, 1982). 5.2 5.3 Purchaser shall keep and maintain complete and accurate books of account showing all removal of Fly Ash from the Centralia Plant site and the price to be paid for that Fly Ash, which books of account shall be made available to Company upon request. Purchaser, within forty-five -7- Restated Agreement No. 3804-983 days after the last day of each month, shall provide Company with a statement reflecting the Fly Ash removed during said month, sold during said month, the price to be paid for Fly Ash sold, a reasonable estimate of Fly Ash unsold in storage, and all sums due under this Agreement. A reconciliation will also be included, to reflect the total amount of any construction costs and the dollar offset of Fly Ash received by Purchaser during that period. When monies are due, a check made out to Company, will accompany this statement. Purchaser shall true up to actual cost any amounts reflected in these statements which were based on reasonable estimates. The true up may be on a calendar year or contract year at Purchaser's discretion. Company shall have the right to dispute that statement and subject that dispute to arbitration pursuant to Section 13 of this Agreement. 5.4 Reject Fly Ash from the Centralia Plant is subject to all the terms and conditions of the Agreement, with the exception of paragraph 5.1 and 5.2 which set forth the formula for payment by Purchaser to Company for Fly Ash sales and Section 7 in its entirety, which deals with minimum sales volume. 5.5 Purchaser shall pay Company for all reject Fly Ash removed by Purchaser from the Centralia Plant site for sale to others an amount equal to twenty-five percent (25%) of the price Purchaser obtains from the sale of said Fly Ash to others, after deducting transporting costs (as defined in Article 5, Sales Price 5.1). 5.6 Purchaser, by the first of each month, will provide Company with the following month's estimated daily quantities of Fly Ash to be removed from the Centralia Plant site. 5.7 In the event that any sales or use tax is applicable to this Agreement, such tax shall be added to the price and paid by Purchaser. 5.8 Purchaser agrees that if payment for any Fly Ash purchased is not rendered to Company within 30 days of receipt of invoice, this Agreement may be terminated. -8- Restated Agreement No. 3804-983 6. CONDUCT OF OPERATIONS 6.1 Purchaser agrees that in exercising its rights under this Agreement, its contractors, employees, or other agents, will observe any and all safety and operating rules and orders in force at the Centralia Plant, maintain good housekeeping in the working area and comply with all applicable environmental, safety and other laws and regulations. 6.2 Purchaser shall exercise its rights under this Agreement in a manner that permits adequate access at all times by Owners to all structures located on the Centralia Plant site as those structures may from time to time exist, and to permit free and unrestricted movement of Owners' materials and equipment thereon as may be required by them, or any of them, and Purchaser shall use trucks, equipment and work procedures for hauling and loading the Fly Ash designed to prevent spillage and shall confine its hauling activities to such entry and exit routes and portals as may be directed by Company. 6.3 The rights of Purchaser under this Agreement are subject to the rights of Owners, their successors and assigns, to construct, maintain, use, operate, alter, add to, repair, replace, reconstruct and/or remove in, on, over, along, under, through and across the Centralia Plant site, electric generation and related facilities, electric transmission and distribution lines and telephone lines, together with supporting structures and appurtenances, for conveying electric energy for light, heat, power arid telephone purposes and pipelines and appurtenances for the transportation of oil, petroleum, gas, coal, water or other substances, and conduits, building or structures for any and all purposes. 6.4 Purchaser agrees that it will not divulge to third parties, without the written consent of Company, any information obtained from or through Company in connection with the performance of this Agreement at the Centralia Plant. 6.5 Purchaser is an independent contractor and persons employed by Purchaser in connection herewith shall be employees of Purchaser and not employees of Company in any respect. -9- Restated Agreement No. 3804-983 6.6 Purchaser shall perform the work at the Centralia Plant in accordance with its own methods in an orderly and workmanlike manner, enforce strict discipline and order among its employees, and shall not employ on the work any unfit person or anyone unskilled in the work assigned to him. 6.7 Purchaser shall not, without receiving the written approval of Company, conduct any transaction with regard to Centralia Fly Ash, with any subsidiary or other related entity or party during the remaining term of the Agreement. 7. MINIMUM SALES VOLUME 7.1 7.2 7.3 -10- -11- 7.4 -12- 7.5 8. DEFAULT-TERMINATION If Purchaser fails or refuses to comply with and perform any of the terms and covenants on its part in this Agreement within thirty (30) days after Company has given Purchaser written notice of such refusal or failure, the rights granted under this Agreement shall cease at the option of Company and this Agreement shall terminate. 9. INDEMNIFICATION Purchaser specifically and expressly agrees to indemnify, defend and hold harmless Owners and their directors, members of Company's Pacific Board and Utah Power Board, officers, employees and agents (hereinafter collectively "indemnitees") from any and all claims, demands, suits, losses, costs and damages of every kind and description, including attorneys' fees, brought or made against or incurred by any of the indemnitees resulting from, arising out of, or in any way -13- Restated Agreement No. 3804-983 connected with any act, omission, fault or negligence of Purchaser, its employees, agents, representatives or subcontractors of any tier, their employees, agents or representatives in the performance or nonperformance of Purchaser's obligations under this Agreement or in any way related to this Agreement, including the sale of Fly Ash by Purchaser or the use of Fly Ash by Purchaser in it own operations. The indemnity obligations under this article shall include with limitation i) loss of or damage to any property of Owners, Purchaser or any third party; ii) injury, bodily or personal, to or death of any person(s), including without limitation employees of Owners, Purchaser or Purchaser's subcontractors of any tier; and iii) claims arising out of Workers' Compensation, Unemployment Compensation or similar such laws or obligations applicable to employees of Purchaser or its subcontractors of any tier. Purchaser's indemnity obligation under this article shall not extend to any liability caused by the negligence of any of the indemnitees. Where both Purchaser (including its employees, agents or representatives) and indemnitees are liable for the same injury, harm or damage to person or property or same wrongful death, Purchaser and indemnitees shall share the liability based on the relative degree of fault of each. To the extent applicable, Purchaser specifically and expressly waives any immunity under Industrial Insurance, Title 51 RCW and acknowledges that this waiver was mutually negotiated by the parties hereto. 10. WORKERS' COMPENSATION Purchaser shall comply with all applicable Workers' Compensation Acts in the states having jurisdiction and shall furnish proof thereof satisfactory to Company upon request. 11. INSURANCE 11.1 Without limiting any liabilities or any other obligations of Purchaser, Purchaser shall secure and continuously carry with insurers acceptable to Company the following insurance coverage: Employers Liability insurance with a minimum limit of $500,000. Commercial General Liability insurance with a minimum single limit of $1,000,000. The coverage shall include: * Bodily Injury and Property Damage Liability, * Contractual Liability, -14- Restated Agreement No. 3804-983 to protect against and from all loss by reason of injury to persons or damage to property, including Purchaser's own workers and all third persons, and property of Owners and all third parties based upon and arising out of Purchaser's operations hereunder, including the operations of its subcontractors of any tier. Business Automobile Liability insurance with a minimum single limit of $1,000,000 for bodily injury and property damage with respect to Purchaser's vehicles whether owned, hired or non-owned, assigned to or used in the performance of the work. 11.2 Except for Employers Liability insurance, the policies required herein shall include i) provisions or endorsements naming Owners, members of Company's Pacific Power Board and Utah Power Board, their directors, officers and employees as additional insureds, and ii) a cross-liability and severability of interest clause. 11.3 All policies required by this Agreement shall include provisions that such insurance is primary insurance with respect to the interests of Owners and that any other insurance maintained by Owners is excess and not contributory insurance with the insurance required hereunder, and provisions that such policies shall not be cancelled or their limits of liability reduced without i) ten (10) days prior written notice to Company if cancelled for nonpayment of premium, or ii) thirty (30) days prior written notice to Company if cancelled for any reason. A certificate in a form satisfactory to Company certifying to the issuance of such insurance, shall be furnished to Company. For all commercial general liability coverage written on a "claims-made" basis, the certificate shall also identify the retroactive date(s) and all laser endorsements, if any. If requested by Company, a copy of each insurance policy, certified as a true copy by an authorized representative of the issuing insurance company, shall be furnished to Company. 11.4 Company shall be notified by Purchaser of any commercial general liability policies maintained hereunder and written on a "claims-made" form. Such insurance policies written on a "claims-made" basis shall be maintained by Purchaser for a minimum period of five (5) years after the completion of this Agreement and Company may, at its discretion, require Purchaser, at Purchaser's sole expense, to institute other measures to guarantee future coverage for claims as contemplated by this Agreement. -15- Restated Agreement No. 3804-983 11.5 It is understood that the cost of insurance provided by Purchaser hereunder is borne by Purchaser, and Company in reliance thereon, will not otherwise secure insurance for the protection of the indemnitor as may otherwise be required by statute to render enforceable Purchaser's, indemnity herein. 12. NOTICES 12.1 Any formal notice, demand or request provided for in this Agreement shall be in writing and shall be deemed properly served, given or made if delivered in person, or sent by either registered or certified mail, postage prepaid or prepaid telegram, to the persons specified below: PacifiCorp Electric Operations Centralia Steam Electric Operations Attention: Lead Contract Administrator 913 Big Hanaford Rd. Centralia, Washington 98531 Pozzolanic Northwest, Inc. Attention: President 7525 S.E. 24th Street Mercer Island, WA 98040 12.2 The names and addresses set forth in Section 12.1 may be changed by notice given as provided in this Section 12. 13. ARBITRATION Arbitration under this Agreement shall be governed by the following procedures: The party demanding arbitration shall give notice in writing of such demand to the other party. The parties shall meet within ten (10) days thereafter to select an arbitrator by mutual agreement. The arbitrator shall be an individual having demonstrated expertise in the field of the matter or item to be arbitrated. If the parties cannot agree upon an arbitrator, the Chief Judge of the United States District Court of the District of Oregon, or such tribunal as may at the time be the successor of such court, may, upon request of a party, appoint an arbitrator. If, pending any arbitration under this Agreement, the arbitrator or successor substitute arbitrator shall die or for any reason be unable or -16- Restated Agreement No. 3804-983 unwilling to act, his successor shall be appointed as he was appointed and such successor or substitute arbitrator, as to all matters then pending, shall act the same as if he had been originally appointed as an arbitrator. The award of the arbitrator so chosen shall be final as to the parties of this Agreement. The parties shall each bear the expense of preparing its own case, and the expense of the arbitrator, including the expense of any technical studies required by the arbitrator, shall be equally apportioned between the parties. 14. UNCONTROLLABLE FORCES 14.1 A party shall not be considered in default in respect to any obligation under this Agreement if prevented from fulfilling that obligation by reason of scheduled or unscheduled plant shutdowns which result in reduced availability of Fly Ash; nor by reason of uncontrollable forces, the term "uncontrollable forces" being deemed for purpose of this Agreement to be any cause beyond the control of the party affected, including, but not limited to, flood, earthquake, storm, lightning, fire, epidemic, war, riot, civil disturbance, labor disturbance, sabotage, proceeding by court or public authority or act or failure to act by court or public authority which uncontrollable forces, by exercise by due diligence and foresight, such party could not have reasonably expected to avoid. A party rendered unable to fulfill any obligation by reason of uncontrollable forces shall exercise due diligence to remove such inability with all reasonable dispatch. 14.2 In addition, a party shall not be considered in default if the Fly Ash or any portion thereof becomes unusable because of any one or more of the following: The addition of detrimental precipitation aids; enactment of governmental laws regarding the handling and use of hazardous waste; facility access problems or other unforeseen actions that could reasonably deter the use of Fly Ash in concrete. 15. ASSIGNMENT This Agreement shall be binding upon the parties to it, their successors and assigns, provided Purchaser may not assign its right under this Agreement without prior written approval of Company and any unauthorized assignment shall be void. -17- Restated Agreement No. 3804-983 16. LITIGATION/APPLICABLE LAW 16.1 If litigation is brought arising out of this Agreement, the losing party shall reimburse the prevailing party for court costs and attorneys' fees as determined by the court, including costs and fees on appeal. 16.2 This Agreement shall be governed by the laws of the State of OREGON. 17. COMPLETE AGREEMENT This Agreement and any referenced attachments constitute the complete agreement between the parties. It is subject to change only by an instrument in writing, prepared and signed by Company and accepted by Purchaser. 18. ADDITIONS Exhibit A, Schedule of Prices, is an integral part of this Agreement; Exhibit B, Pozzolanic Marketing Program, attached hereto and incorporated herein, is for the purpose of demonstrating Purchaser's marketing plan as the basis for this Agreement and to be used in construing the parties's obligations hereunder, including any additions or deletions on Pages 5 and 9 of Exhibit B by Company. 19. NONWAIVER The failure of Company to insist upon or enforce, in any instance, strict performance by Purchaser of any of the terms of this Agreement or to exercise any right herein conferred shall not be construed as a waiver or relinquishment to any extent of its right to assert or rely upon such terms or rights on any future occasion. 20. MWBE/EQUAL EMPLOYMENT OPPORTUNITY AGREEMENT AND CERTIFICATE The attached PacifiCorp Electric Operations form No. 2421, entitled " Minority and Women Business Enterprise/Equal Opportunity Compliance Certificate," is hereby made a part of this Agreement. The Purchaser shall certify compliance by appropriate execution hereof and agrees to continue such compliance during the life of this Agreement. For purposes of this Agreement, the term "SUPPLIER/CONTRACTOR" used in such form shall mean Purchaser and the term "COMPANY" shall mean Company. -18- Restated Agreement No. 3804-983 21. LIMITATION OF LIABILITY In no event shall Company be liable for any consequential damages or lost profits, whether in tort, contract, strict liability or otherwise, except that in the event Company is found to be liable for breach of the Agreement, Purchaser may receive any actual lost profits directly resulting from the breach for a two-year period after the date of breach. 22. DAMAGES No remedies provided herein for Company upon Purchaser's default shall limit Company to such specified remedies and Company shall be entitled to all remedies provided by law. 23. AUDIT Purchaser will permit Company to examine all records relevant to the computation of amounts due. Company may examine records during normal business hours. Company shall be allowed to reproduce, at its own expense, all or any part of said records which it deems necessary to verify the computation of those amounts. These records shall include but are not limited to ledgers, and supporting schedules. If it is determined by Company's audit of Purchaser's records that a discrepancy exists between amounts paid and amounts owed, the party owing will pay the party owed the appropriate amount within thirty (30) calendar days after announcement of Company of its findings. - Purchaser shall have the right to dispute Company's findings and subject that dispute to arbitration pursuant to Section 13 of this Agreement. This right to audit shall exist during the term of the Agreement and survive for five (5) years after each year of the Agreement. -19- EX-12 14 ex12k093002.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (thousands of dollars) Year Ended September 30, ----------------------------------------------------------------- 1998 1999 2000 2001 2002 ----------------------------------------------------------------- Fixed Charges Computation Interest expensed and capitalized $ 2,220 $ 4,178 $ 3,603 $ 145 $ 417 Amortized premiums, discounts, and capitalized expenses related to indebtedness 2,046 2,075 3,034 79 136 Reasonable approximation of interest within rental expense 47 131 26 20 72 ----------------------------------------------------------------- Total Fixed Charges 4,313 6,384 6,663 244 625 Preferred equity dividends 337 466 378 113 - ----------------------------------------------------------------- Total Fixed Charges and Preferred Equity Dividends $ 4,650 $ 6,850 $ 7,041 $ 357 $ 625 ================================================================= Earnings Computation Pre-tax income (loss) from continuing operations before adjustment for minority interests in consolidated subsidiaries or income or loss from equity investees $(10,916) $(28,402) $ 8,642 $14,468 $ 40,236 Plus Fixed charges 4,650 6,850 7,041 357 625 Minus Interest capitalized 1,390 - - - - ----------------------------------------------------------------- Total Earnings $ (7,656) $(21,552) $15,683 $14,825 $ 40,861 ================================================================= Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends N/A N/A 2.23 41.53 65.38 Dollar amount of Deficiency $(12,306) $(28,402) N/A N/A N/A
EX-21.1 15 ex21k093002.txt LIST OF SUBSIDIARIES OF HEADWATERS Exhibit 21.1 Subsidiaries 1. Headwaters acquired a 100% interest in Hydrocarbon Technologies, Inc. ("HTI") by agreements entered into in May 2001 and that closed in August 2001. HTI's subsidiaries are: a. Chemsampco, Inc. ("Chemsampco"), a New Jersey corporation; b. Hydrocarbon Technologies of Canada, Inc. ("HTC"), a Canadian corporation located in the province of Alberta. 2. Headwaters is a 50% member in Environmental Technologies Group, LLC, a Utah limited liability company of which Headwaters serves as manager. ETG is a special purpose entity that owns and plans to put into operations a synthetic fuel manufacturing facility. 3. Headwaters acquired a 100% interest in Industrial Services Group, Inc. ("ISG") by agreements entered into in July 2002 and that closed in September 2002. ISG's operating subsidiary is ISG Resources, Inc., a Utah corporation. The subsidiaries of ISG Resources, Inc. are: a. ISG Canada Limited, a Canadian corporation located in the Province of New Brunswick; b. ISG Manufactured Products, Inc., a Utah corporation; c. ISG Partner, Inc., a Utah corporation; d. ISG Swift Crete, Inc., a Utah corporation; e. Flexcrete Building Systems, L.C., a Utah limited liability company; f. Best Masonry & Tool Supply, Inc., a Texas corporation; g. Don's Building Supply, L.P., a Texas limited partnership; h. Lewis W. Osborne, Inc., a California corporation; i. Magna Wall, Inc., a Texas corporation; j. Palestine Concrete Tile Company, L.P., a Texas limited partnership; k. United Terrazzo Supply Co., Inc., a California corporation. The following chart illustrates Headwaters' corporate structure. The ownership of each subsidiary is 100%, except in the case of Environmental Technologies Group, LLC, in which Headwaters owns a 50% interest: Headwaters Incorporated ----------------------- Environmental Industrial Services Technologies Hydrocarbon Group, Inc Group, LLC Technologies, Inc ---------- ---------- ----------------- ISG Resources, Inc. Chemsampco, Inc. Hydrocarbon Technologies ISG Canada Limited of Canada, Inc. ISG Manufactured Products, Inc. ISG Partner, Inc. ISG Swift Crete, Inc. Flexcrete Building Systems, L.C. Best Masonry & Tool Supply, Inc. Don's Building Supply, L.P. Lewis W. Osborne, Inc. Magna Wall, Inc. Palestine Concrete Tile Company, L.P. United Terrazzo Supply Co., Inc. EX-23 16 ex23k093002.txt CONSENT OF ERNST & YOUNG LLP Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-34488, 333-67371, 333-76724, 333-79385, 333-96919 and 333-100322) and on Form S-8 (File Nos. 333-39674, 333-39676 and 333-39678) of Headwaters Incorporated of our report dated November 15, 2002 with respect to the consolidated financial statements of Headwaters Incorporated included in this Annual Report (Form 10-K) for the year ended September 30, 2002. /s/ Ernst & Young LLP Salt Lake City, Utah December 18, 2002 EX-23.1 17 ex231k093002.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File Nos. 333-34488, 333-67371, 333-76724, 333-79385, 333-96919 and 333-100322) and the Registration Statements on Form S-8 (File Nos. 333-39674, 333-39676 and 3433-39678) of Headwaters Incorporated of our report dated July 15, 2002 relating to the consolidated financial statements, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Salt Lake City, Utah December 23, 2002 EX-99.2.2 18 ex9922k093002.txt 1996 STOCK OPTION AGREEMENT Exhibit 99.2.2 STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT is made between COVOL TECHNOLOGIES, INC, a Delaware corporation (the "Company"), and Brent M. Cook (the "Optionee"). The Company and the Optionee agree as follows: 1. Option Grant. The Company hereby grants to the Optionee the right and the option (the "Option") to purchase all or any part of 100,000 shares of the Company's Common Stock at a purchase price of $1.50 per share. 2. Grant Date. This Option shall become effective on June 1, 1996 and shall continue in effect until June 1, 2006, unless earlier terminated upon the mutual written agreement of the Executive and the Company as provided in section 4 of the Employment Agreement between the Company and the Executive. 3. Time of Exercise of Option. Subject to the provisions of section 2 of this Agreement, the Option for the entire 100,000 shares shall become exercisable on June 1, 1996. IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate as of the date written above. COVOL TECHNOLOGIES, INC OPTIONEE By: /s/Michael Midgley /s/Brent M. Cook - ----------------------------- ------------------------ Title: President EX-99.2.3 19 ex9923k093002.txt 1998 STOCK OPTION AGREEMENT Exhibit 99.2.3 STOCK OPTION AGREEMENT COVOL TECHNOLOGIES, INC, A. A STOCK OPTION for a total of Two Hundred Fifty Thousand (250,000) Shares of Common Stock, par value $0.001, of Covol Technologies, Inc., a Delaware Corporation (herein the "Company") is hereby granted to Brent M. Cook (herein the "Optionee") on this 21st day of April, 1998. B. The option price as determined by the Board of Directors of the Company is Twelve dollars and thirty-one thirty seconds ($12 31/32) per share. C. This Option may not be exercised if the issuance of shares of Common Stock of the Company upon such exercise would constitute a violation of any applicable Federal or State securities law or other law or valid regulation. The Optionee, as a condition to his exercise of this Option, shall represent to the Company that the shares of Common Stock of the Company that he acquires under this Option are being acquired by him for investment and not with present view to distribution or resale, unless counsel for the Company is then of the opinion that such a representation is not required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. D. This Option may not be transferred in any manner otherwise than by will or the laws of descent and distribution, and may be exercised during the lifetime of the Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors, and assigns of the Optionee. E. The Stock issued pursuant to this Option will vest over a 60 month period on a pro rata basis until it is 100% vested on April 21, 2003. All Stock which has not yet vested will be held in escrow by the Company until the Stock is vested. F. Notwithstanding the vesting provision of Paragraph "E" above, the Stock issued pursuant to this Option shall fully vest upon the occurance of any of the following: a. Any change of control of the Company. A change in control shall be deemed to have taken place if, as the result of a tender offer, merger, consolidation, sale of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of the Company immediately before the transaction shall cease to constitute a majority of the board of directors of the Company or any successor to the Company; or b. Termination of the Optionee's employment with the Company without cause; or c. Upon the death of the Optionee; or d. Upon a vote of the Board of Directors allowing full vesting to the optionee; or e. The Company becomes a controlled entity as defined by IRC Section 1239. G. This Option may not be exercised more than ten (10) years from the date of its grant, and may be exercised during such term only in accordance with the terms of this Agreement. Date of grant: April 21, 1998 COVOL TECHNOLOGIES, INC. By: /s/ Stanley M. Kimball ATTEST: /s/ Stephanie Fowler 2 EX-99.2.4 20 ex9924k093002.txt 2001 STOCK OPTION AGREEMENT Exhibit 99.2.4 STOCK OPTION AGREEMENT NQO 2001-HTI-009 *37,020* Option Number Number of Options A. A STOCK OPTION for a total of 37,020 shares of common stock, par value $0.001 (herein the "Option Shares"), of Headwaters Incorporated, a Delaware corporation (herein the "Company") is hereby granted to Lap-Keung Lee (herein the "Optionee"), subject in all respects to the terms and provisions of the Headwaters Incorporated 1995 Stock Option Plan, effective June 1, 1995 as amended (herein the "Plan"), which has been adopted by the Company and which is incorporated herein by reference. B. The Option price as determined by the Board of Directors of the Company is $0.01 per share and Optionee is hereby granted the Option and right to purchase from the Company said shares at said option price per share and Optionee shall have the right to purchase such shares all at one time or from time to time in Optionee's discretion, but only in multiples of 250 Option Shares unless such exercise is as to the remaining balance of the Option. The Option may be exercised by giving written notice of exercise to the Company specifying the number of Option Shares issuable on exercise to be purchased and the Option Price therefor. The notice of exercise shall be accompanied by payment in full of the Option Price in cash or check. C. Subject to the terms and conditions of the Plan, including section 9 thereof, Optionee's right and option to purchase the Option Shares, as set forth above, is fully vested. D. The Option is intended to be a non-qualified stock option under applicable tax laws and regulations. E. Notwithstanding the vesting provision of Paragraph "C" above, the Option Shares issued pursuant to this Option shall fully vest upon the occurrence of any of the following: (i) Any change of control of the Company. For purposes of this Option, "Change of Control" shall mean the occurrence of any one of the following: (a) the Company enters into an agreement or reorganization, merger or consolidation pursuant to which the Company is not the surviving corporation; (b) the Company sells substantially all its assets; (c) at least 51% of the outstanding securities of the Company are acquired, in one transaction or a series of transactions, by a single purchaser or group of related purchasers; or (ii) Upon the death of the Optionee; or (iii) Upon a vote of the Board of Directors allowing full vesting to the Optionee. F. Subject in all respects to section 9 of the Plan, any unexercised portion of this Option shall automatically and without notice immediately terminate and become forfeited, null and void at the time of the earliest to occur of the following: (i) three months after the date on which the Optionee's employment is terminated for any reason other than by reason of (A) Cause (as defined in the Plan), (B) a mental or physical disability as determined by a medical doctor satisfactory to the Compensation Committee of the Board, or (C) death; (ii) immediately upon termination of Optionee's employment for Cause; (iii) twelve months after the date on which the Optionee's employment is terminated by reason of a mental or physical disability (within the meaning of the Internal Revenue Code section 22(e)) as determined by a medical doctor satisfactory to the Compensation Committee of the Board; or (iv) twelve months after the date of termination of the Optionee's employment by reason of death of the Employee. G. This Option may not be exercised if the issuance of shares of common stock of the Company upon such exercise would constitute a violation of any applicable Federal or state securities or other law or regulation. The Optionee, as a condition to his exercise of this Option, shall represent to the Company that the Option Shares that he acquires under this Option are being acquired by him for investment and not with present view to distribution or resale, unless counsel for the Company is then of the opinion that such a representation is not required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. H. Optionee acknowledges that the Option Shares if and when issued, may be "restricted securities." Prior to exercise, Optionee shall review the Company's current SEC filings and otherwise take such steps as are necessary to become fully informed regarding the Company and its business. The stock certificates representing such shares may include any legend which the Company deems appropriate to reflect any restrictions on transfer. I. This Option may not be exercised after 15 December 2007, and may be exercised until such date only in accordance with the terms of the Plan. J. The Company acknowledges and agrees that the Option hereby granted is in consideration of Optionee's agreement to accept and continue employment with the Company or its subsidiary and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Company. Date of grant: 28 August 2001 HEADWATERS INCORPORATED By: /s/ Kirk A. Benson ------------------------ Kirk A. Benson CEO ATTEST: /s/ Harlan M. Hatfield - ----------------------------- Secretary 2 EX-99.2.5 21 ex9925k093002.txt 2002 STOCK OPTION AGREEMENT Exhibit 99.2.5 HEADWATERS INCORPORATED STOCK OPTION AGREEMENT You have been granted an Option to purchase shares of common stock of Headwaters Incorporated, a Delaware corporation ("Headwaters Incorporated"). The terms and conditions of the Option are set forth in this cover sheet, in the attachment and otherwise governed by, but not issued under the Headwaters Incorporated 2002 Stock Incentive Plan (the "Plan"). Name of Optionee: Craig Hickman Total Number of Shares Granted: 50,000 Exercise Price Per Share: $13.85 Date of Grant: 15 June 2002 Vesting Start Date: 15 June 2003 Vesting Schedule: This Option vests over a three-year period as follows: One-third of the Option vests on each of 15 June 2003, 15 June 2004, and 15 June 2005. Expiration Date: 15 June 2012 By your signature and the signature of Headwaters Incorporated's representative below, you and Headwaters Incorporated agree that this Option is granted under and governed by the terms and conditions described in the attachment and in the Plan. OPTIONEE: Headwaters Incorporated /s/ Craig Hickman By: /s/ Kirk A. Benson - ------------------------- ------------------------- Craig Hickman Title: CEO Print Name HEADWATERS INCORPORATED STOCK OPTION AGREEMENT Tax Treatment This Option is intended to be a nonstatutory option, and will not qualify as an incentive stock option under section 422 of the Internal Revenue Code. Vesting Your Option vests in installments, as provided in the cover sheet of this Agreement. After your Service has terminated for any reason, vesting of your Option immediately stops. Term Your Option will expire in any event at the close of business at Headwaters Incorporated headquarters on the day before the 10th anniversary of the Date of Grant shown on the cover sheet (fifth anniversary for a 10% owner if the Option is an ISO). It will expire earlier if your Headwaters Incorporated service terminates, as described below. Regular Termination If your service as an employee, director, consultant or advisor of Headwaters Incorporated (or any subsidiary) terminates for any reason except death or total and permanent disability, then your Option will expire at the close of business at Headwaters Incorporated headquarters three months after your termination date. Death If you die as an employee, director, consultant or advisor of Headwaters Incorporated or one of its subsidiaries, then your Option will expire at the close of business at Headwaters Incorporated's headquarters on the day before the anniversary of your date of death. During that one-year period, your estate or heirs may exercise your Option. -2- Disability If your service as an employee, director, consultant or advisor of Headwaters Incorporated (or any subsidiary) terminates because of your total and permanent disability, then your Option will expire at the close of business at Headwaters Incorporated's headquarters on the day before the six month anniversary of your termination date. "Total and permanent disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted, or can be expected to last, for a continuous period of not less than 12 months. Leaves of Absence For purposes of this Option, your service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence that was approved by Headwaters Incorporated in writing. However, your service will be treated as terminating 90 days after you went on leave, unless your right to return to active work is guaranteed by law or by a contract. Your service terminates in any event when the approved leave ends, unless you immediately return to active work. Headwaters Incorporated determines which leaves count for this purpose. Restrictions Headwaters Incorporated will not permit you to on Exercise exercise this Option if the issuance of shares at that time would violate any law or regulation. Notice of Exercise When you wish to exercise this Option, you must notify Headwaters Incorporated by submitting the "Notice of Exercise" form provided by Headwaters Incorporated to the address given on the form by mail or facsimile. Your notice must specify how many shares you wish to purchase and how your shares should be registered (in your name only or in your and your spouse's names as community property or as joint tenants with right of survivorship). The notice will be effective when it is received by Headwaters Incorporated, together with the exercise price. If someone else wants to exercise this Option after your death, that person must prove to Headwaters Incorporated' satisfaction that he or she is entitled to do so. -3- Form of Payment When you submit your notice of exercise, you must include payment of the Option price for the shares you are purchasing. Payment may be made in one (or a combination) of the following forms: o Your personal check, a cashier's check or a money order. o Certificates for Headwaters Incorporated stock that you have owned more than six months, along with any forms needed to effect a transfer of the shares to Headwaters Incorporated. The value of the shares, determined as of the effective date of the Option exercise, will be applied to the Option price. Instead of surrendering shares of Headwaters Incorporated stock, you may attest to ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the number of option shares issued to you. Withholding Taxes You will not be allowed to exercise this Option unless you make acceptable arrangements to pay any withholding taxes that may be due as a result of the Option exercise. Restrictions on Resale By signing this Agreement, you agree not to sell any Option shares at a time when applicable laws or Headwaters Incorporated policies prohibit a sale. This restriction will apply as long as you are an employee, director, consultant or advisor of Headwaters Incorporated or a subsidiary of Headwaters Incorporated. Transfer of Option Prior to your death, only you may exercise this Option. You cannot transfer or assign this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option in your will or a written beneficiary designation. Such a designation must be filed with Headwaters Incorporated on the proper form and will be recognized only if it is received at Headwaters Incorporated headquarters before your death. Regardless of any marital property settlement agreement, Headwaters Incorporated is not obligated to honor a notice of exercise from your former spouse, nor is Headwaters Incorporated obligated to recognize your former spouse's interest in your Option in any other way. -4- Retention Rights Your Option or this Agreement do not give you the right to be retained by Headwaters Incorporated or its subsidiaries in any capacity. Headwaters Incorporated and its subsidiaries reserve the right to terminate your service at any time, with or without cause. Stockholder Rights You, or your estate or heirs, have no rights as a stockholder of Headwaters Incorporated until a certificate for your Option shares has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. Adjustments In the event of a stock split, stock dividend or a similar change in Headwaters Incorporated stock, the number of shares covered by this Option and the exercise price per share may be adjusted pursuant to the Plan. Applicable Law This Agreement will be interpreted and enforced under the laws of the State of Delaware. The Plan and Other This Option is not issued under the Plan. However, Agreements the terms and conditions of the Option will be the same as the terms and conditions contained in the Plan. The text of the Headwaters Incorporated 2002 Stock Incentive Plan is incorporated in this Agreement by reference. This Agreement and the Plan constitute the entire understanding between you and Headwaters Incorporated regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. By signing the cover sheet of this Agreement, you agree to all of the terms and conditions described above and in the Plan. -5- EX-99.4 22 ex994k093002.txt AMENDED HEADWATERS 2002 STOCK INCENTIVE PLAN Exhibit 99.4 ________________________________________________________________________________ HEADWATERS INCORPORATED 2002 STOCK INCENTIVE PLAN (As Amended and Restated Effective October 25, 2002) ________________________________________________________________________________ TABLE OF CONTENTS Page SECTION 1. ESTABLISHMENT AND PURPOSE..................................1 SECTION 2. DEFINITIONS................................................1 (a) "Affiliate".......................................1 (b) "Award"...........................................1 (c) "Board of Directors"..............................1 (d) "Change in Control"...............................1 (e) "Code"............................................2 (f) "Committee".......................................2 (g) "Company".........................................2 (h) "Consultant"......................................2 (i) "Employee"........................................2 (j) "Exchange Act"....................................2 (k) "Exercise Price"..................................2 (l) "Fair Market Value"...............................2 (m) "Offeree".........................................3 (n) "Option"..........................................3 (o) "Optionee"........................................3 (p) "Outside Director"................................3 (q) "Parent"..........................................3 (r) "Participant".....................................3 (s) "Plan"............................................3 (t) "Purchase Price"..................................3 (u) "Restricted Share"................................3 (v) "Restricted Share Agreement"......................3 (w) "SAR".............................................4 (x) "SAR Agreement"...................................4 (y) "Service".........................................4 (z) "Share"...........................................4 (aa) "Stock"...........................................4 (bb) "Stock Option Agreement"..........................4 (cc) "Stock Purchase Agreement"........................4 (dd) "Stock Unit"......................................4 (ee) "Stock Unit Agreement"............................4 (ff) "Subsidiary"......................................4 (gg) "Total and Permanent Disability"..................4 SECTION 3. ADMINISTRATION.............................................4 (a) Committee Composition.............................4 (b) Committee for Non-Officer Grants..................4 (c) Committee Procedures..............................5 (d) Committee Responsibilities........................5 SECTION 4. ELIGIBILITY................................................6 (a) General Rule......................................6 (b) Outside Directors.................................6 SECTION 5. STOCK SUBJECT TO PLAN......................................8 (a) Basic Limitation..................................8 (b) Annual Increase in Shares.........................8 (c) Additional Shares.................................8 (d) Dividend Equivalents..............................8 SECTION 6. RESTRICTED SHARES..........................................8 (a) Restricted Share Agreement........................8 (b) Payment for Awards................................8 (c) Vesting...........................................9 (d) Voting and Dividend Rights........................9 SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES..............9 (a) Duration of Offers and Nontransferability of Rights.......................................9 (b) Purchase Price....................................9 (c) Withholding Taxes.................................9 (d) Restrictions on Transfer of Shares................9 SECTION 8. TERMS AND CONDITIONS OF OPTIONS...........................10 (a) Stock Option Agreement...........................10 (b) Number of Shares.................................10 (c) Exercise Price...................................10 (d) Withholding Taxes................................10 (e) Exercisability and Term..........................10 (f) Nontransferability...............................10 (g) Exercise of Options Upon Termination of Service.....................................10 (h) Effect of Change in Control......................11 (i) Leaves of Absence................................11 (j) No Rights as a Stockholder.......................11 (k) Modification, Extension and Renewal of Options...11 (l) Restrictions on Transfer of Shares...............11 (m) Buyout Provisions................................11 SECTION 9. PAYMENT FOR SHARES........................................12 (a) General Rule.....................................12 (b) Surrender of Stock...............................12 (c) Services Rendered................................12 (d) Cashless Exercise................................12 (e) Exercise/Pledge..................................12 (f) Promissory Note..................................12 (g) Other Forms of Payment...........................12 (h) Restrictions on Forms of Payment.................12 SECTION 10. STOCK APPRECIATION RIGHTS.................................13 (a) SAR Agreement....................................13 (b) Number of Shares.................................13 (c) Exercise Price...................................13 (d) Exercisability and Term..........................13 (e) Effect of Change in Control......................13 (f) Exercise of SARs.................................13 (g) Special Holding Period...........................13 (h) Special Exercise Window..........................14 (i) Modification or Assumption of SARs...............14 SECTION 11. STOCK UNITS...............................................14 (a) Stock Unit Agreement.............................14 (b) Payment for Awards...............................14 (c) Vesting Conditions...............................14 (d) Voting and Dividend Rights.......................14 (e) Form and Time of Settlement of Stock Units.......14 (f) Death of Recipient...............................15 (g) Creditors' Rights................................15 SECTION 12. ADJUSTMENT OF SHARES......................................15 (a) Adjustments......................................15 (b) Dissolution or Liquidation.......................16 (c) Reorganizations..................................16 (d) Reservation of Rights............................16 SECTION 13. DEFERRAL OF AWARDS........................................16 SECTION 14. AWARDS UNDER OTHER PLANS..................................17 SECTION 15. PAYMENT OF DIRECTOR'S FEES IN SECURITIES..................17 (a) Effective Date...................................17 (b) Elections to Receive Options, Restricted Shares or Stock Units..........................17 (c) Number and Terms of Options, Restricted Shares or Stock Units..........................17 SECTION 16. LEGAL AND REGULATORY REQUIREMENTS.........................17 SECTION 17. WITHHOLDING TAXES.........................................18 (a) General..........................................18 (b) Share Withholding................................18 SECTION 18. LIMITATION ON PARACHUTE PAYMENTS..........................18 (a) Scope of Limitation..............................18 (b) Basic Rule.......................................18 (c) Reduction of Payments............................18 (d) Overpayments and Underpayments...................19 (e) Related Corporations.............................19 SECTION 19. NO EMPLOYMENT RIGHTS......................................19 SECTION 20. DURATION AND AMENDMENTS...................................19 (a) Term of the Plan.................................19 (b) Right to Amend or Terminate the Plan.............19 (c) Effect of Amendment or Termination...............19 SECTION 21. EXECUTION.................................................20 HEADWATERS INCORPORATED 2002 STOCK INCENTIVE PLAN (As Amended and Restated Effective October ___, 2002) SECTION 1. ESTABLISHMENT AND PURPOSE. The Plan was adopted by the Board of Directors effective April 23, 2002 and is hereby amended and restated in its entirety effective October __, 2002. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options or stock appreciation rights. The Plan is intended to be a "broad-based" plan for purposes of the Nasdaq Listing Qualifications. SECTION 2. DEFINITIONS. (a) "Affiliate"shall mean any entity other than a Subsidiary, if the Company and/or one of more Subsidiaries own not less than 50% of such entity. (b) "Award"shall mean any award of an Option, a SAR, a Restricted Share or a Stock Unit under the Plan. (c) "Board of Directors"shall mean the Board of Directors of the Company, as constituted from time to time. (d) "Change in Control"shall mean the occurrence of either of the following events: (i) A change in the composition of the Board of Directors, as a result of which fewer than one-half of the incumbent directors are directors who either: (A) Had been directors of the Company 24 months prior to such change; or (B) Were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination; or (ii) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) who by the acquisition or aggregation of securities, is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); except that any change in the relative beneficial ownership of the Company's securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. For purposes of this subsection (d)(ii), the term "person" shall exclude a trustee or other fiduciary holding securities under an employee benefit plan maintained by the Company or a Parent or Subsidiary. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. (e) "Code"shall mean the Internal Revenue Code of 1986, as amended. (f) "Committee"shall mean the committee designated by the Board of Directors, which is authorized to administer the Plan, as described in Section 3 hereof. (g) "Company"shall mean Headwaters Incorporated, a Delaware corporation. (h) "Consultant"shall mean a consultant or advisor who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a Consultant shall be considered Service for all purposes of the Plan. (i) "Employee"shall mean any individual who is a common-law employee of the Company, a Parent or a Subsidiary. (j) "Exchange Act"shall mean the Securities Exchange Act of 1934, as amended. (k) "Exercise Price"shall mean, in the case of an Option, the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. "Exercise Price," in the case of a SAR, shall mean an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR. (l) "Fair Market Value"with respect to a Share, shall mean the market price of one Share of Stock, determined by the Committee as follows: (i) If the Stock was traded over-the-counter on the date in question but was not traded on the Nasdaq Stock Market, then the Fair Market Value shall be equal to the last transaction price quoted for such date by the OTC Bulletin Board or, if not so quoted, shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which the Stock is quoted or, if the Stock is not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; (ii) If the Stock was traded on The Nasdaq Stock Market, then the Fair Market Value shall be equal to the last reported sale price quoted for such date by The Nasdaq Stock Market; (iii) If the Stock was traded on a United States stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported for such date by the applicable composite-transactions report; and (iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons. (m) "Offeree"shall mean an individual to whom the Committee has offered the right to acquire Shares under the Plan (other than upon exercise of an Option). (n) "Option"shall mean an option granted under the Plan and entitling the holder to purchase Shares. Options granted under the plan are not intended to be employee incentive stock options described in Section 422 of the Code. (o) "Optionee"shall mean an individual or estate who holds an Option or SAR. (p) "Outside Director"shall mean a member of the Board of Directors who is not a common-law employee of the Company, a Parent or a Subsidiary. Service as an Outside Director shall be considered Service for all purposes of the Plan. (q) "Parent"shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be a Parent commencing as of such date. (r) "Participant"shall mean an individual or estate who holds an Award. (s) "Plan"shall mean this 2002 Stock Incentive Plan of Headwaters Incorporated, as amended from time to time. (t) "Purchase Price"shall mean the consideration for which one Share may be acquired under the Plan (other than upon exercise of an Option), as specified by the Committee. (u) "Restricted Share"shall mean a Share awarded under the Plan. (v) "Restricted Share Agreement"shall mean the agreement between the Company and the recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to such Restricted Shares. (w) "SAR"shall mean a stock appreciation right granted under the Plan. (x) "SAR Agreement"shall mean the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR. (y) "Service"shall mean service as an Employee, Consultant or Outside Director. (z) "Share"shall mean one share of Stock, as adjusted in accordance with Section 9 (if applicable). (aa) "Stock"shall mean the Common Stock of the Company. (bb) "Stock Option Agreement"shall mean the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option. (cc) "Stock Purchase Agreement"shall mean the agreement between the Company and an Offeree who acquires Shares under the Plan that contains the terms, conditions and restrictions pertaining to the acquisition of such Shares. (dd) "Stock Unit"shall mean a bookkeeping entry representing the equivalent of one Share, as awarded under the Plan. (ee) "Stock Unit Agreement"shall mean the agreement between the Company and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit. (ff) "Subsidiary"shall mean any corporation, if the Company and/or one or more other Subsidiaries own not less than 50% of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. (gg) "Total and Permanent Disability"shall mean that the Optionee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted, or can be expected to last, for a continuous period of not less than 12 months. SECTION 3. ADMINISTRATION. (a) Committee Composition. The Plan shall be administered by the Committee. The Committee shall consist of the Board itself or two or more directors of the Company who shall satisfy the requirements of Rule 16b-3 (or its successor) under the Exchange Act with respect to the grant of Awards to persons who are officers or directors of the Company under Section 16 of the Exchange Act. (b) Committee for Non-Officer Grants. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not satisfy the requirements of Section 3(a), who may administer the Plan with respect to Employees who are not considered officers or directors of the Company under Section 16 of the Exchange Act, may grant Awards under the Plan to such Employees and may determine all terms of such grants. Within the limitations of the preceding sentence, any reference in the Plan to the Committee shall include such committee or committees appointed pursuant to the preceding sentence. (c) Committee Procedures. The Board of Directors shall designate one of the members of the Committee as chairperson. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all Committee members, shall be valid acts of the Committee. (d) Committee Responsibilities. Subject to the provisions of the Plan, the Committee shall have full discretionary authority to take the following actions: (i) To interpret the Plan and to apply its provisions; (ii) To adopt, amend or rescind rules, procedures and forms relating to the Plan; (iii) To authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; (iv) To determine when Shares are to be awarded or offered for sale and when Options are to be granted under the Plan; (v) To select the Offerees and Optionees; (vi) To determine the number of Shares to be offered to each Offeree or to be made subject to each Option; (vii) To prescribe the terms and conditions of each award or sale of Shares, including (without limitation) the Purchase Price, the vesting of the award (including accelerating the vesting of awards) and to specify the provisions of the Stock Purchase Agreement relating to such award or sale; (viii) To prescribe the terms and conditions of each Option, including (without limitation) the Exercise Price, the vesting or duration of the Option (including accelerating the vesting of the Option), and to specify the provisions of the Stock Option Agreement relating to such Option; (ix) To amend any outstanding Stock Purchase Agreement or Stock Option Agreement, subject to applicable legal restrictions and to the consent of the Offeree or Optionee who entered into such agreement; (x) To prescribe the consideration for the grant of each Option or other right under the Plan and to determine the sufficiency of such consideration; (xi) To determine the disposition of each Option or other right under the Plan in the event of an Optionee's or Offeree's divorce or dissolution of marriage; (xii) To determine whether Options or other rights under the Plan will be granted in replacement of other grants under an incentive or other compensation plan of an acquired business; (xiii) To correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Stock Option Agreement or any Stock Purchase Agreement; and (xiv) To take any other actions deemed necessary or advisable for the administration of the Plan. Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Options or other rights under the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and other actions of the Committee shall be final and binding on all Offerees, all Optionees, and all persons deriving their rights from an Offeree or Optionee. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan, any Option, or any right to acquire Shares under the Plan. SECTION 4. ELIGIBILITY. (a) General Rule. All Employees, Consultants and Outside Directors shall be eligible for the grant of Restricted Shares, Stock Units, Options or SARs. During the first three years of the Plan and annually thereafter, at least 50% of the Shares covered by Awards under the Plan shall be made to Employees who are not officers or directors of the Company. (b) Outside Directors. Any other provision of the Plan notwithstanding, the participation of Outside Directors in the Plan shall be subject to the following restrictions: (i) Outside Directors shall be eligible for the grant of Restricted Shares, Stock Units, Options and SARs. (ii) The Exercise Price of all Options granted to an Outside Director under this Section 4(b) shall be not less than 100% of the Fair Market Value of a Share on the date of grant, payable in one of the forms described in Section 9(a), (b) and (d). (iii) Unless otherwise stated in the Stock Option Agreement, each Option granted under Section 4(b) shall become exercisable in three equal annual installments on each of the first three anniversaries of the date of grant. Each Option that has been outstanding for not less than six months shall become exercisable in full in the event that a Change in Control occurs with respect to the Company. (iv) Subject to Sections 4(b)(v) and (vi), all Options granted to an Outside Director under this Section 4(b) shall terminate on the tenth anniversary of the date of grant of such Options. (v) If an Optionee's Service terminates for any reason other than death, then his or her Options shall expire on the earliest of the following occasions: (A) The expiration date determined pursuant to Section 4(b)(iv); (B) The date 24 months after the termination of the Optionee's Service, if the termination occurs because of his or her Total and Permanent Disability; or (C) The date six months after the termination of the Optionee's Service for any reason other than Total and Permanent Disability. The Optionee may exercise all or part of his or her Options at any time before the expiration of such Options under the preceding sentence, but only to the extent that such Options had become exercisable before his or her Service terminated. The balance of such Options shall lapse when the Optionee's Service terminates. In the event that the Optionee dies after the termination of his or her Service but before the expiration of his or her Options, all or part of such Options may be exercised at any time prior to their expiration by the executors or administrators of the Optionee's estate or by any person who has acquired such Options directly from him or her by bequest, inheritance or beneficiary designation under the Plan, but only to the extent that such Options had become exercisable before his or her Service terminated. (vi) If an Optionee dies while he or she is in Service, then his or her Options shall expire on the earlier of the following dates: (A) The expiration date determined pursuant to Section 4(b)(iv) above; or (B) The date 24 months after his or her death. All or part of the Optionee's Options may be exercised at any time before the expiration of such Options under the preceding sentence by the executors or administrators of his or her estate or by any person who has acquired such Options directly from him or her by bequest, inheritance or beneficiary designation under the Plan. (vii) No Option shall be transferable by the Optionee other than by will, by written beneficiary designation or by the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by the Optionee or by the Optionee's guardian or legal representative. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. SECTION 5. STOCK SUBJECT TO PLAN. (a) Basic Limitation. Shares offered under the Plan shall be authorized but unissued Shares or treasury Shares. The maximum aggregate number of Options, SARs, Stock Units and Restricted Shares awarded under the Plan shall not exceed 850,000 Shares, plus the additional Shares described in Sections (b) and (c), but in no event more than 1,500,000 Shares. The limitation of this Section 5(a) shall be subject to adjustment pursuant to Section 12. (b) Annual Increase in Shares. As of January 1 of each year, commencing with the year 2003, the aggregate number of Options, SARs, Stock Units and Restricted Shares that may be awarded under the Plan shall automatically increase by a number equal to the lesser of (i) 500,000 shares, (ii) 2% of the outstanding shares of Stock of the Company on such date or (iii) a lesser amount determined by the Board. The aggregate number of Shares that may be issued under the Plan shall at all times be subject to adjustment pursuant to Section 12. The number of Shares that are subject to Options or other rights outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan. (c) Additional Shares. If Restricted Shares or Shares issued upon the exercise of Options are forfeited, then such Shares shall again become available for Awards under the Plan. If Stock Units, Options or SARs are forfeited or terminate for any other reason before being exercised, then the corresponding Shares shall again become available for Awards under the Plan. If Stock Units are settled, then only the number of Shares (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 5(a) and the balance shall again become available for Awards under the Plan. If SARs are exercised, then only the number of Shares (if any) actually issued in settlement of such SARs shall reduce the number available in Section 5(a) and the balance shall again become available for Awards under the Plan. (d) Dividend Equivalents. Any dividend equivalents paid or credited under the Plan shall not be applied against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units. SECTION 6. RESTRICTED SHARES (a) Restricted Share Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Share Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Share Agreements entered into under the Plan need not be identical. (b) Payment for Awards. Subject to the following sentence, Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, full-recourse promissory notes, past services and future services. To the extent that an Award consists of newly issued Restricted Shares, the Award recipient shall furnish consideration with a value not less than the par value of such Restricted Shares in the form of cash, cash equivalents, or past services rendered to the Company (or a Parent or Subsidiary), as the Committee may determine. (c) Vesting. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Share Agreement. The Committee may include among such conditions the requirement that the performance of the Company or a business unit of the Company for a specified period of one or more years equal or exceed a target determined in advance by the Committee. The Committee may specify that such performance shall be determined by the Company's independent auditors. The Committee shall determine such target not later than the 90th day of such period. In no event shall the number of Restricted Shares which are subject to performance based vesting conditions exceed 50% of the Restricted Shares, subject to adjustment in accordance with Section 12. A Restricted Share Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. The Committee may determine, at the time of granting Restricted Shares or thereafter, that all or part of such Restricted Shares shall become vested in the event that a Change in Control occurs with respect to the Company. (d) Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders. A Restricted Share Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. SECTION 7. OTHER TERMS AND CONDITIONS OF AWARDS OR SALES. (a) Duration of Offers and Nontransferability of Rights. Any right to acquire Shares under the Plan (other than an Option) shall automatically expire if not exercised by the Offeree 30 days after the grant of such right was communicated to him by the Committee. Such right shall not be transferable and shall be exercisable only by the Offeree to whom such right was granted. (b) Purchase Price. The Purchase Price shall be determined by the Committee at its sole discretion. The Purchase Price shall be payable in one of the forms described in Sections 9(a), (b) or (c). (c) Withholding Taxes. As a condition to the purchase of Shares, the Offeree shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such purchase. (d) Restrictions on Transfer of Shares. Any Shares awarded or sold under the Plan shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Purchase Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. SECTION 8. TERMS AND CONDITIONS OF OPTIONS. (a) Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee's other compensation. A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in a form described in Section 9(b). (b) Number of Shares. Each Stock Option Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 12. Options granted to an Optionee in a single fiscal year of the Company shall not cover more than 200,000 Shares (subject to adjustment in accordance with Section 12). (c) Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price under any Option shall be determined by the Committee at its sole discretion. The Exercise Price shall be payable in one of the forms described in Section 9. (d) Withholding Taxes. As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make such arrangements as the Committee may require for the satisfaction of any federal, state or local withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option. (e) Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability, or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. The Committee at its sole discretion shall determine when all or any installment of an Option is to become exercisable and when an Option is to expire. (f) Nontransferability. During an Optionee's lifetime, his Option(s) shall be exercisable only by him or her and shall not be transferable by operation of law or agreement. In the event of an Optionee's death, his or her Option(s) shall not be transferable other than by will or by the laws of descent and distribution. (g) Exercise of Options Upon Termination of Service. Each Stock Option Agreement shall set forth the extent to which the Optionee shall have the right to exercise the Option following termination of the Optionee's Service with the Company and its Subsidiaries, and the right to exercise the Option of any executors or administrators of the Optionee's estate or any person who has acquired such Option(s) directly from the Optionee by bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service. (h) Effect of Change in Control. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Shares subject to such Option in the event that a Change in Control occurs with respect to the Company. (i) Leaves of Absence. An Employee's Service shall cease when such Employee ceases to be actively employed by, or a consultant, director or adviser to, the Company (or any subsidiary) as determined in the sole discretion of the Board of Directors. For purposes of Options, Service does not terminate when an Employee goes on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. Service terminates in any event when the approved leave ends, unless such Employee immediately returns to active work. The Company determines which leaves count toward Service, and when Service terminates for all purposes under the Plan. (j) No Rights as a Stockholder. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder with respect to any Shares covered by his Option until the date of the issuance of a stock certificate for such Shares. No adjustments shall be made, except as provided in Section 12. (k) Modification, Extension and Renewal of Options. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding options or may accept the cancellation of outstanding options (to the extent not previously exercised), whether or not granted hereunder, in return for the grant of new Options for the same or a different number of Shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, impair his rights or increase his obligations under such Option. (l) Restrictions on Transfer of Shares. Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares. (m) Buyout Provisions. The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish. SECTION 9. PAYMENT FOR SHARES. (a) General Rule. The entire Exercise Price of Shares issued under the Plan shall be payable in lawful money of the United States of America at the time when such Shares are purchased, except as provided in Sections 9(b) through 9(g) below. (b) Surrender of Stock. At the discretion of the Company and to the extent that a Stock Option Agreement so provides, payment may be made all or in part by surrendering, or attesting to the ownership of, Shares which have already been owned by the Optionee or his representative for more than 6 months. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes. (c) Services Rendered. At the discretion of the Committee, Shares may be awarded under the Plan in consideration of services rendered to the Company or a Subsidiary prior to the award. If Shares are awarded without the payment of a Purchase Price in cash, the Committee shall make a determination (at the time of the award) of the value of the services rendered by the Offeree and the sufficiency of the consideration to meet the requirements of Section 6(b). (d) Cashless Exercise. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. (e) Exercise/Pledge. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker or lender to pledge Shares, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of the aggregate Exercise Price. (f) Promissory Note. To the extent that a Stock Option Agreement so provides, payment may be made all or in part by delivering (on a form prescribed by the Company) a full-recourse promissory note. However, the par value of the Common Shares being purchased under the Plan, if newly issued, shall be paid in cash or cash equivalents. In no event will payment by promissory note be available to persons who are considered officers or directors of the Company under Section 16 of the Exchange Act. (g) Other Forms of Payment. To the extent that a Stock Option Agreement so provides, payment may be made in any other form that is consistent with applicable laws, regulations and rules. (h) Restrictions on Forms of Payment. Notwithstanding anything to the contrary in the Plan or the terms of any Award, a form of payment will not be available if the Committee determines, in its sole discretion, that such form of payment could violate any law or regulation. SECTION 10. STOCK APPRECIATION RIGHTS. (a) SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee's other compensation. (b) Number of Shares. Each SAR Agreement shall specify the number of Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Section 12. SARs granted to any Optionee in a single calendar year shall in no event pertain to more than 200,000 Shares (subject to adjustment in accordance with Section 12). The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Section 12. (c) Exercise Price. Each SAR Agreement shall specify the Exercise Price. A SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding. (d) Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. A SAR may be included in an Option at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control. (e) Effect of Change in Control. The Committee may determine, at the time of granting a SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company. (f) Exercise of SARs. Upon exercise of a SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Shares, (b) cash or (c) a combination of Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Shares subject to the SARs exceeds the Exercise Price. If, on the date when a SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. (g) Special Holding Period. To the extent required by Section 16 of the Exchange Act or any rule thereunder, an SAR shall not be exercised for cash unless both it and the related Option have been outstanding for more than six months. (h) Special Exercise Window. To the extent required by Section 16 of the Exchange Act or any rule thereunder, an SAR may only be exercised for cash during a period which (a) begins on the third business day following a date when the Company's quarterly summary statement of sales and earnings is released to the public and (b) ends on the third business day following such date. This Section 10(h) shall not apply if the exercise occurs automatically on the date when the related Option expires, and the Committee may determine that it shall not apply to limited SARs that are exercisable only in the event of a Change in Control. (i) Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of a SAR may, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR. SECTION 11. STOCK UNITS. (a) Stock Unit Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient's other compensation. (b) Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients. (c) Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. The Committee may determine, at the time of granting Stock Units or thereafter, that all or part of such Stock Units shall become vested in the event that a Change in Control occurs with respect to the Company, except as provided in the next following sentence. (d) Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions (including without limitation, any forfeiture conditions) as the Stock Units to which they attach. (e) Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 12. (f) Death of Recipient. Any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's estate. (g) Creditors' Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement. SECTION 12. ADJUSTMENT OF SHARES. (a) Adjustments. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of: (i) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Section 5; (ii) The limitations set forth in Sections 8(b) and 10(b); (iii) The number of Shares covered by each outstanding Option and SAR; (iv) The Exercise Price under each outstanding Option and SAR; or (v) The number of Stock Units included in any prior Award which has not yet been settled. Except as provided in this Section 12, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. (b) Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company. (c) Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement shall provide for: (i) The continuation of the outstanding Awards by the Company, if the Company is a surviving corporation; (ii) The assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary; (iii) The substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards; (iv) Full exercisability or vesting and accelerated expiration of the outstanding Awards; or (v) Settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards. (d) Reservation of Rights. Except as provided in this Section 12, an Optionee or Offeree shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. SECTION 13. DEFERRAL OF AWARDS. The Committee (in its sole discretion) may permit or require a Participant to (a) have cash that otherwise would be paid to such Participant as a result of the exercise of a SAR or the settlement of Stock Units credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company's books; (b) have Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR converted into an equal number of Stock Units; or (c) have Shares that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR or the settlement of Stock Units converted into amounts credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company's books. Such amounts shall be determined by reference to the Fair Market Value of such Shares as of the date when they otherwise would have been delivered to such Participant. A deferred compensation account established under this Section 13 may be credited with interest or other forms of investment return, as determined by the Committee. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the applicable agreement between such Participant and the Company. If the deferral or conversion of Awards is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such Awards, including (without limitation) the settlement of deferred compensation accounts established under this Section 13. SECTION 14. AWARDS UNDER OTHER PLANS. The Company may grant awards under other plans or programs. Such awards may be settled in the form of Shares issued under this Plan. Such Shares shall be treated for all purposes under the Plan like Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Shares available under Section 5. SECTION 15. PAYMENT OF DIRECTOR'S FEES IN SECURITIES. (a) Effective Date. No provision of this Section 15 shall be effective unless and until the Board has determined to implement such provision. (b) Elections to Receive Options, Restricted Shares or Stock Units. An Outside Director may elect to receive his or her annual retainer payments and/or meeting fees from the Company in the form of cash, Options, Restricted Shares or Stock Units, or a combination thereof, as determined by the Board. Such Options, Restricted Shares and Stock Units shall be issued under the Plan. An election under this Section 15 shall be filed with the Company on the prescribed form. (c) Number and Terms of Options, Restricted Shares or Stock Units. The number of Options, Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms of such Options, Restricted Shares or Stock Units shall also be determined by the Board. SECTION 16. LEGAL AND REGULATORY REQUIREMENTS. Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Company's securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable. SECTION 17. WITHHOLDING TAXES. (a) General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied. (b) Share Withholding. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. SECTION 18. LIMITATION ON PARACHUTE PAYMENTS. (a) Scope of Limitation. This Section 18 shall apply to an Award unless the Committee, at the time of making an Award under the Plan or at any time thereafter, specifies in writing that such Award shall not be subject to this Section 18. If this Section 18 applies to an Award, it shall supersede any contrary provision of the Plan or of any Award granted under the Plan. (b) Basic Rule. In the event that the independent auditors most recently selected by the Board (the "Auditors") determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a "Payment") would be nondeductible by the Company for federal income tax purposes because of the provisions concerning "excess parachute payments" in Section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Section 18, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. (c) Reduction of Payments. If the Auditors determine that any Payment would be nondeductible by the Company because of Section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Section 18, present value shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations made by the Auditors under this Section 18 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. (d) Overpayments and Underpayments. As a result of uncertainty in the application of Section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company that should not have been made (an "Overpayment") or that additional Payments that will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant that the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company, together with interest at the applicable federal rate provided in Section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount subject to taxation under Section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in Section 7872(f)(2) of the Code. (e) Related Corporations. For purposes of this Section 18, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with Section 280G(d)(5) of the Code. SECTION 19. NO EMPLOYMENT RIGHTS. No provision of the Plan, nor any right or Option granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee. The Company and its Subsidiaries reserve the right to terminate any person's Service at any time and for any reason, with or without notice. SECTION 20. DURATION AND AMENDMENTS. (a) Term of the Plan. The amended and restated Plan, as set forth herein, shall terminate automatically on the 10th anniversary of date of Plan and may be terminated on any earlier date pursuant to Subsection (b) below. (b) Right to Amend or Terminate the Plan. The Board of Directors may, at any time and for any reason, amend or terminate the Plan. Rights and obligations under any Award granted before amendment or termination of the Plan shall not be materially impaired by such amendment or termination, except with consent of the person to whom the Award was granted. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. (c) Effect of Amendment or Termination. No Shares shall be issued or sold under the Plan after the termination thereof, except upon exercise of an Option granted prior to such termination. The termination of the Plan, or any amendment thereof, shall not affect any Share previously issued or any Option previously granted under the Plan. SECTION 21. EXECUTION. To record this amendment and restatement of the Plan by the Board of Directors effective as of October 25, 2002, the Company has caused its authorized officer to execute the same. Headwaters Incorporated By /s/ Kirk A. Benson ---------------------------- Kirk A. Benson Chief Executive Officer EX-99.5 23 ex995k093002.txt SECTION 906 CERTIFICATION OF CEO Exhibit 99.5 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report of Headwaters Incorporated (the "Company") on Form 10-K for the year ended September 30, 2002 (the "Report"), I, Kirk A. Benson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kirk A. Benson - ------------------------- Kirk A. Benson Chief Executive Officer December 23, 2002 EX-99.6 24 ex996k093002.txt SECTION 906 CERTIFICATION OF CFO Exhibit 99.6 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the filing of the Annual Report of Headwaters Incorporated (the "Company") on Form 10-K for the year ended September 30, 2002 (the "Report"), I, Steven G. Stewart, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (i) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Steven G. Stewart - ----------------------- Steven G. Stewart Chief Financial Officer December 23, 2002 -----END PRIVACY-ENHANCED MESSAGE-----