Authorized Stock—In 2011, Headwaters' stockholders approved an increase in the number of shares of authorized common stock, from 100.0 million to 200.0 million. Headwaters also has 10.0 million shares of authorized preferred stock. No preferred stock was issued or outstanding as of September 30, 2011 or 2012.

Treasury Shares Held for Deferred Compensation Obligation—In accordance with the terms of the new Directors' Deferred Compensation Plan (DDCP) described in Note 14, 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 an eligible 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 will be 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, 2012, the treasury stock and related deferred compensation obligation had fair values of approximately $0.2 million, which amount was not significantly different from the carrying values at cost.

Shelf Registration—In February 2012, Headwaters filed a universal shelf registration statement with the SEC under which $210.0 million is available for future offerings of securities. A prospectus supplement describing the terms of any additional securities to be issued is required to be filed before any future offering could commence under the registration statement.

Grants and Cancellations of Stock Incentive Awards—The Compensation Committee of Headwaters' Board of Directors (the Committee) approved the grant of approximately 1.1 million, 0.9 million and 1.2 million stock-based awards during 2010, 2011 and 2012, respectively. The awards consisted of stock-settled SARs, restricted stock and restricted stock units granted to directors, officers and employees. Subsequent to September 30, 2012, the Committee granted approximately 0.5 million stock-based awards to officers and employees.

All stock-based awards for the years 2010 through 2012 and subsequent thereto were granted under existing equity compensation plans, and all of the SARs 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. When exercised by grantees, stock-settled SARs are settled in Headwaters' common stock. Headwaters has also granted cash-settled SARs as described in Note 14.

Stock-Based Compensation—Stock-based compensation expense was approximately $5.0 million, $3.7 million and $1.7 million in 2010, 2011 and 2012, respectively. The total income tax benefit recognized for stock-based compensation in the consolidated statements of operations was approximately $1.8 million in 2010 and $0 in 2011 and 2012.

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.

	2010	2011	2012

Expected stock volatility	65%	65%	65%
Risk-free interest rates	0.4% - 3.6%	0.2% - 2.6%	0.4% - 1.0%
Expected lives (beyond vest dates)	4 years	4 years	4 years
Dividend yield	0%	0%	0%

Expected stock price volatility was estimated using primarily 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—As of September 30, 2009, Headwaters had four equity compensation plans, three of which have been approved by stockholders. In 2010, Headwaters' stockholders approved a new 2010 Incentive Compensation Plan (2010 ICP), which authorized the issuance of up to 2.5 million shares of common stock for stock-based incentives, as well as certain cash incentives, as determined by the Committee. In connection with the approval of the 2010 ICP, Headwaters agreed to not issue any additional stock-based awards under any of its other existing 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, 2012, approximately 3.2 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 (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. Awards granted under the Plans vest over periods ranging from zero 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.

Stockholder Approval of Equity Compensation Plans—The following table presents information related to stockholder approval of equity compensation plans as of September 30, 2012.

(shares in thousands)

Plan Category	Maximum shares to be issued upon exercise of options and other awards		Weighted-average exercise price of outstanding options and other awards		Shares remaining available for future issuance under existing equity compensation plans (excluding shares reflected in the first column)
Plans approved by stockholders		4,786	$	10.11		3,660
Plans not approved by stockholders		639		14.79		0

Total		5,425	$	10.66		3,660

As discussed above, Headwaters currently has five Plans under which options and SARs have been granted and stockholders have approved four of the five Plans. Headwaters has also issued options not covered by any Plan, though not in recent years. 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, including options not granted under the Plans.

(in thousands of shares)			Weighted- average exercise price			Aggregate intrinsic value

Outstanding at September 30, 2009	1,812		$	21.67
Granted	0			0.00
Exercised	0			0.00
Forfeited or expired	(11	)		19.92

Outstanding at September 30, 2010	1,801		$	21.68	3.2	$	0

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

Exercisable at September 30, 2010	1,801		$	21.68	3.2	$	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

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, 2009	1,931		$	14.37
Granted	790			4.60
Exercised	0			0
Forfeited or expired	(106	)		13.28

Outstanding at September 30, 2010	2,615		$	11.46	7.5	$	0

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

Exercisable at September 30, 2010	1,731		$	12.98	7.0	$	0

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

The weighted-average grant-date fair value of SARs granted was $2.77, $2.26 and $0.86 in 2010, 2011 and 2012, respectively. The total intrinsic value of SARs exercised was approximately $0.1 million and $0 in 2011 and 2012, respectively.

Other Stock-Based Awards and Unrecognized Compensation Cost—In addition to the stock options and SARs reflected in the tables above, during 2010 through 2012 Headwaters also issued approximately 0.4 million shares of restricted common stock to officers and employees and approximately 0.2 million restricted stock units to non-affiliated directors. The restricted stock vests over an approximate three-year period and the restricted stock units vest 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 and restricted stock units during 2012.

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

Outstanding at beginning of year	195		$	4.28
Granted	0			0.00
Vested	(133	)		4.44
Forfeited	(5	)		4.60

Outstanding at end of year	57		$	3.89

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 $2.3 million, $1.9 million and $0.7 million in 2010, 2011 and 2012, respectively.

As of September 30, 2012, there was approximately $0.8 million of total compensation cost related to unvested awards not yet recognized, which will be recognized over a weighted-average period of approximately 1.6 years. Due to the grant of stock-based awards subsequent to September 30, 2012 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.