10. Equity Securities and Stock-Based Compensation

Authorized Stock—In addition to the 200.0 million shares of authorized common stock, Headwaters also has 10.0 million shares of authorized preferred stock. No preferred stock was issued or outstanding as of September 30, 2012 or 2013.

Issuance of Common Stock—In 2013, Headwaters issued 11.5 million shares of common stock for gross cash proceeds of approximately $83.4 million. Offering costs totaled approximately $5.4 million, resulting in net proceeds of approximately $78.0 million.

Shelf Registration—In February 2012, Headwaters filed a universal shelf registration statement with the SEC under which $210.0 million was available for offerings of securities. Following the above-described issuance of common stock, there is approximately $126.6 million available for future securities offerings. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering can commence under the registration statement.

Treasury Shares Held for Deferred Compensation Obligation—In accordance with the terms of the Directors' Deferred Compensation Plan (DDCP), non-employee directors can elect to defer certain compensation and choose from various options how the deferred compensation will be invested. One of the investment options is Headwaters common stock. When a director chooses Headwaters stock as an investment option, Headwaters purchases the common stock in accordance with the director's request and holds the shares until such time as the deferred compensation obligation becomes payable, normally when the director retires from the Board. At such time, the shares held by Headwaters are distributed to the director in satisfaction of the obligation. Headwaters accounts for the purchase of common stock as treasury stock, at cost, and the corresponding deferred compensation obligation is reflected in capital in excess of par value. Changes in the fair value of the treasury stock are not recognized. As of September 30, 2013, the treasury stock and related deferred compensation obligation had fair values of approximately $0.6 million, which was $0.1 million higher than the carrying values at cost.

Grants and Cancellations of Stock Incentive Awards—The Compensation Committee of Headwaters' Board of Directors (the Committee) approved grants of approximately 0.9 million, 1.2 million and 0.5 million stock-based awards during 2011, 2012 and 2013, respectively. The awards consisted of stock-settled SARs, restricted stock and restricted stock units granted to officers, employees and directors. Subsequent to September 30, 2013, the Committee approved grants of approximately 0.5 million stock-based awards to officers and employees.

All stock-based awards for the years 2011 through 2013 and subsequent thereto were granted under existing equity compensation plans, and all of the SARs vest over an approximate three-year period, have an exercise price equal to the fair market value of Headwaters' common stock on the dates of grant and a contractual term of 10 years. In addition, the vesting of the SARs granted in 2012 and 2013 was made subject to 60-day average stock price hurdles that precluded vesting unless the stock price exceeded by predetermined amounts the stock prices on the dates of grant, which thresholds must be reached prior to the final vest dates. The thresholds for both years' grants have been met as of September 30, 2013. When exercised by grantees, stock-settled SARs are settled in Headwaters' common stock. Headwaters has also granted cash-settled SARs as described in Note 15.

Stock-Based Compensation—Stock-based compensation expense was approximately $3.7 million in 2011 and $1.7 million in 2012 and 2013. The total income tax benefit recognized for stock-based compensation in the consolidated statements of operations was $0 for all years presented.

Valuation Assumptions—The fair values of stock-settled SARs have been estimated using the B-S-M model. The following table summarizes the assumptions used in determining the fair values of these awards for the years indicated.

	2011	2012	2013

Expected stock volatility	65%	65%	65%
Risk-free interest rates	0.2% - 2.6%	0.4% - 1.0%	0.8% - 1.2%
Expected lives (beyond vest dates)	4 years	4 years	4 years
Dividend yield	0%	0%	0%

Expected stock price volatility was estimated primarily using historical volatilities of Headwaters' stock. Implied volatilities of traded options on Headwaters' stock, volatility predicted by other models, and an analysis of volatilities used by other public companies in comparable lines of business to Headwaters were also considered. Risk-free interest rates used were the U.S. Treasury bond yields with terms corresponding to the expected terms of the awards being valued. In estimating expected lives, Headwaters considered the contractual and vesting terms of awards, along with historical experience; however, due to insufficient historical data from which to reliably estimate expected lives, Headwaters used estimates based on the "simplified method" set forth by the SEC in Staff Accounting Bulletins No. 107 and 110, where expected life is estimated by summing the award's vesting term and contractual term and dividing that result by two. Insufficient historical data from which to more reliably estimate expected lives is expected to exist for the foreseeable future due to the varying terms of awards granted in recent and past years, along with other factors.

Equity Compensation Plans—Headwaters has five equity compensation plans under which outstanding awards have been granted, four of which have been approved by stockholders. In connection with stockholder approval of the newest plan, the 2010 Incentive Compensation Plan (2010 ICP), Headwaters agreed to not issue any additional stock-based awards under any of its other existing incentive compensation plans. In 2012, Headwaters' stockholders approved a 2.7 million increase in the number of shares of common stock available for issuance under the 2010 ICP, to 5.2 million shares. Following the grants of equity-based awards made subsequent to September 30, 2013, approximately 3.4 million shares were available for future grants under the 2010 ICP.

Headwaters uses newly issued shares to meet its obligations to issue stock when awards are exercised. The Committee, or in its absence the full Board, administers and interprets all equity compensation plans. This Committee is authorized to grant stock-based awards and other awards both under the plans and outside of any plan to eligible employees, officers, directors, and consultants of Headwaters. Terms of awards granted under the plans, including vesting requirements, are determined by the Committee and historically have varied significantly. Current outstanding awards granted under the plans generally vest over periods ranging from three to five 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.

Stockholder Approval of Equity Compensation Plans—The following table presents information related to stockholder approval of equity compensation plans as of September 30, 2013.

(in thousands of shares)

Plan Category		Weighted-average exercise price of outstanding options and other awards

Plans approved by stockholders	4,054	$	9.20	3,982
Plans not approved by stockholders	396		15.26	0

Total	4,450	$	9.74	3,982

Headwaters has issued options not covered by any plan, though not since 2004. The amounts included in the caption "not approved by stockholders" in the table above represent amounts relating to the plan not approved by stockholders plus all awards granted outside of any plan.

Stock Options—The following table summarizes the activity for all of Headwaters' stock options.

(in thousands, except per-share amounts)			Weighted- average exercise price			Aggregate intrinsic value

Outstanding at September 30, 2010	1,801		$	21.68
Granted	0			0.00
Exercised	0			0.00
Forfeited or expired	(254	)		20.64

Outstanding at September 30, 2011	1,547		$	21.86	2.2	$	0

Granted	0		$	0.00
Exercised	0			0.00
Forfeited or expired	(285	)		17.02

Outstanding at September 30, 2012	1,262		$	22.95	1.5	$	0

Granted	0		$	0.00
Exercised	0			0.00
Forfeited or expired	(644	)		18.66

Outstanding at September 30, 2013	618		$	27.42	1.2	$	0

Exercisable at September 30, 2011	1,547		$	21.86	2.2	$	0

Exercisable at September 30, 2012	1,262		$	22.95	1.5	$	0

Exercisable at September 30, 2013	618		$	27.42	1.2	$	0

SARs—The following table summarizes the activity for all of Headwaters' stock-settled SARs.

(in thousands, except per-share amounts)			Weighted- average threshold price			Aggregate intrinsic value

Outstanding at September 30, 2010	2,615		$	11.46
Granted	602			3.85
Exercised	(96	)		4.18
Forfeited or expired	(229	)		11.92

Outstanding at September 30, 2011	2,892		$	10.08	6.7	$	0

Granted	1,241		$	1.85
Exercised	(8	)		4.28
Forfeited or expired	(231	)		11.12

Outstanding at September 30, 2012	3,894		$	7.41	6.7	$	8,147

Granted	307		$	6.79
Exercised	(322	)		4.51
Forfeited or expired	(240	)		12.93

Outstanding at September 30, 2013	3,639		$	7.25	6.4	$	13,157

Exercisable at September 30, 2011	2,294		$	11.41	6.2	$	0

Exercisable at September 30, 2012	2,909		$	9.18	6.0	$	3,920

Exercisable at September 30, 2013	3,027		$	8.01	6.0	$	9,801

The weighted-average grant-date fair value of SARs granted was $2.26, $0.86 and $3.39 in 2011, 2012 and 2013, respectively. The total intrinsic value of SARs exercised was approximately $0 in 2011 and 2012 and $1.8 million in 2013.

Other Stock-Based Awards and Unrecognized Compensation Cost—In addition to the stock options and SARs reflected in the tables above, during 2011 through 2013 Headwaters also issued approximately 0.4 million shares of restricted common stock to officers and employees and approximately 0.1 million restricted stock units to non-affiliated directors. The restricted stock vests over an approximate three-year period and the restricted stock units vested over an approximate one-year period. The restricted stock and restricted stock units were issued at no cost to the recipients and compensation expense equal to the trading price of the stock on the dates of grant is therefore recognized over the respective vesting periods, which also represent the requisite service periods. The following table summarizes the activity for Headwaters' nonvested restricted stock during 2013. There were no unvested restricted stock units outstanding at any time during 2013.

(in thousands of shares)			Weighted- average grant date fair value

Outstanding at beginning of year	57		$	3.89
Granted	153			6.79
Vested	(108	)		5.26
Forfeited	0

Outstanding at end of year	102		$	6.79

Headwaters also recognizes compensation expense in connection with its Employee Stock Purchase Plan (ESPP). Compensation expense related to restricted stock, restricted stock units and the ESPP was approximately $1.9 million in 2011 and $0.7 million in 2012 and 2013.

As of September 30, 2013, there was approximately $1.3 million of total compensation cost related to unvested awards not yet recognized, which will be recognized over a weighted-average period of approximately 1.9 years. Due to the grant of stock-based awards subsequent to September 30, 2013 described above, the amount of total compensation cost related to nonvested awards has increased, and the weighted-average period over which compensation cost will be recognized has changed.