STOCKHOLDERS’ EQUITY

Stock Based Compensation Plans

During the three year period ended December 31, 2013, we had four stock benefit plans in effect under which stock option grants or restricted stock have been issued or remain outstanding: the 1995 Stock Incentive Plan (the “1995 Plan”), the 1996 Stock Option Plan (the “1996 Plan”), the 1996 Directors’ Stock Option Plan (the “Directors’ Plan”) and the Second Amended and Restated 2006 Long Term Incentive Plan (the “Amended and Restated 2006 Plan”). All of the options granted under the plans have either five or ten-year terms. The 1995 Plan expired in 2005 and the 1996 Plan and the Director’s Plan were terminated during 2006. The 2006 Amended and Restated Plan expires on May 24, 2022. The expiration and termination of these plans does not affect the options previously issued and outstanding.

All stock-based plans are administered by the Compensation Committee appointed by our Board. On May 23, 2012, our Stockholders approved the Carriage Services, Inc. Second Amended and Restated 2006 Long-Term Incentive Plan which, among other things, increased the reserve balance from 2,850,000 shares to 5,000,000 shares. The Amended and Restated 2006 Plan provides for grants of options as non-qualified options or incentive stock options, restricted stock, stock appreciation rights and performance awards. Option grants are required by the 2006 Amended and Restated Plan to be issued with an exercise price equal to or greater than the fair market value of Carriage’s common stock as determined by the average of the high and low closing price on the date of the option grant.

During 2013, 2,000 shares under the 1996 Plan expired. At December 31, 2013, no options were outstanding under the 1996 Plan and the Directors' Plan. The status of the 1995 Plan and the Amended and Restated 2006 Plan at December 31, 2013 is as follows (shares in thousands):



	Shares Reserved	Shares Available to Issue	Options Outstanding
1995 Plan	—	—	1
Amended and Restated 2006 Plan	5,000	680	765
Total	5,000	680	766

Employee Stock Options

The fair value of the option grants are estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions, as indicated by year:



	2011		2012		2013
Dividend yield	—	%	1.7	%	0.6	%
Expected volatility	60.09	%	60.09	%	33.63	%
Risk-free interest rate	1.25	%	1.25	%	0.41	%
Expected life (years)	3		3		3.6

On May 22, 2013, a total of 562,500 stock options were awarded to certain officers and employees of the Company. These options will vest in 33.33% increments over a three year period and will expire on May 22, 2018. The value of these stock options is approximately $2.3 million. In 2012, a total of 96,283 stock options were awarded, the value of which is approximately $0.2 million. In 2011, a total of 210,549 stock options were awarded, the value of which is approximately $0.5 million.

A summary of the stock options at December 31, 2011, 2012 and 2013 and changes during the three years ended December 31, 2013 is presented in the table and narrative below (shares in thousands):



	Year Ended December 31,
	2011				2012				2013
	Shares		Wtd. Avg. Ex. Price		Shares		Wtd. Avg. Ex. Price		Shares		Wtd. Avg. Ex. Price
Outstanding at beginning of period	445		$	4.74	321		$	5.17	312		$	5.41
Granted	211		$	5.69	96		$	5.94	563		$	16.73
Exercised	(173	)	$	5.56	(81	)	$	4.90	(45	)	$	5.33
Canceled or expired	(162	)	$	5.24	(24	)	$	5.94	(64	)	$	13.82
Outstanding at end of year	321		$	5.17	312		$	5.41	766		$	13.03
Exercisable at end of year	106		$	4.75	145		$	5.13	192		$	5.36

The aggregate intrinsic value of the outstanding and exercisable stock options at December 31, 2013 was $5.0 million and $2.7 million, respectively. The total intrinsic value of options exercised during 2011, 2012 and 2013 totaled $0.2 million, $0.3 million and $0.5 million, respectively.

The total fair value of stock options vested during 2011, 2012 and 2013 totaled approximately $60,000, $142,000 and $224,000, respectively. We recorded compensation expense related to vesting stock options totaling approximately $237,000 in 2011, $218,000 in 2012 and $797,000 in 2013. The significant increase in expense for the year ended December 31, 2013 as compared to 2012 was due to additional expense of approximately $0.3 million related to the 2013 grant of stock options awarded at a significantly higher grant price compared to prior years and additional expense of approximately $0.3 million due to the accelerated vesting of stock options for a former executive officer.

As of December 31, 2013, there was $1.6 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options expected to be recognized over a weighted average period of 2.35 years.

The following table further describes our outstanding stock options at December 31, 2013 (shares in thousands):



	Options Outstanding				Options Exercisable
Actual Ranges of Exercise Prices 150% increment	Number Outstanding at 12/31/13	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number Exercisable at 12/31/13	Weighted-Average Exercise Price
$4.66 - $4.66	1	0.08	$	4.66	1	$	4.66
$4.78 - $4.78	79	6.38	$	4.78	79	$	4.78
$5.21 - $5.21	3	7.61	$	5.21	3	5.21
$5.70 - $5.70	96	7.17	$	5.70	69	$	5.70
$5.94 - $5.94	73	8.18	$	5.94	40	$	5.94
$16.73 - $16.73	514	9.24	$	16.73	—	$	—
$4.60 - $16.73	766	8.57	$	13.03	192	$	5.36

Employee Stock Purchase Plan

We provide all employees the opportunity to purchase common stock through payroll deductions in our employee stock purchase plan (“ESPP”). Purchases are made quarterly; the price being 85% of the lower of the price on the first day of the plan entry date (beginning of a quarter) or the actual date of purchase (end of quarter). In 2011, employees purchased a total of 86,287 shares at a weighted average price of $4.15 per share. In 2012, employees purchased a total of 100,620 shares at a weighted average price of $4.92 per share. In 2013, employees purchased a total of 76,272 shares at a weighted average price of $11.89 per share. Compensation cost for the ESPP totaling approximately $100,000, $135,000, and $277,000 was expensed in 2011, 2012 and 2013, respectively.

The fair values of the right (option) to purchase shares under the ESPP are estimated at the date of purchase with the four quarterly purchase dates using the following assumptions:



	2011		2012		2013
Dividend yield	—	%	1.7	%	0.6	%
Expected volatility	29	%	32	%	41	%
Risk-free interest rate	0.15%, 0.19%, 0.24%, 0.29%		0.02%, 0.06%, 0.09%, 0.12%		0.08%, 0.12%,0.135%, 0.15%
Expected life (years)	.25, .50, .75, 1.00		.25, .50, .75, 1.00		.25, .50, .75, 1.00

Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of purchase. The expected life of the ESPP grants represents the calendar quarters from the beginning of the year to the purchase date (end of each quarter).

Restricted Stock Grants

From time to time, we issue shares of restricted common stock to certain officers, directors, and key employees of the Company from our stock benefit plans. The restricted stock shares issued to officers and key employees vest in either 25% or 33¹/₃% increments over four or three year terms, respectively. During the second quarter of 2013, we awarded a grant of 38,200 shares of restricted stock that vest over a three year period and had an aggregate grant date market value of approximately $0.8 million. During the third quarter of 2013, we awarded a grant of 25,000 shares of restricted stock to a new key employee. These shares vest in 20% increments over a five year period and had an aggregate grant date market value of $0.5 million. A summary of the status of unvested restricted stock awards as of December 31, 2013, and changes during 2013, is presented below (shares in thousands):



Unvested stock awards	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2012	565		$	5.81
Awards	63		19.78
Vestings	(292	)	5.50
Cancellations	(13	)	7.34
Unvested at December 31, 2013	323		$	8.64

Related to the vesting of restricted stock awards previously awarded to our officers, employees and directors, we recorded compensation expense, which is included in general, administrative and other expenses, totaling $1.9 million for the year ended December 31, 2011, $1.4 million for the year ended December 31, 2012, and $1.7 million for the year ended December 31, 2013. The increase in expense in 2013 was due to additional expense of approximately $0.4 million due to the accelerated vesting of restricted stock for three former employees, offset by slightly lower amortization expense in 2013 as compared to 2012.

As of December 31, 2013, we had $2.8 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.4 years.

Performance-Based Stock Awards

During the third quarter of 2012, the Compensation Committee of our Board approved the grant of performance awards with both market and service vesting conditions to certain officers, employees and outside directors. The awards vest and become exercisable only in the event the closing price of our common stock is greater than or equal to $21.50 on any three days, whether or not consecutive, within a period of 30 consecutive calendar days, and the grantee remains continuously employed by us from the grant date through such date, which can be no earlier than the first anniversary of the grant date. If the market condition is met prior to the first anniversary of the grant date, then such award will not become vested until the first anniversary of the grant date, provided that the grantee remains continuously employed by us from the grant date through the first anniversary of the grant date. Promptly following the date a grantee’s award becomes vested (but no later than March 15th of the year following the year in which the award becomes vested) and subject to the grantee’s payment of the purchase price, we will issue and deliver to the grantee the number of shares of our common stock subject to the award. The purchase price is equal to the greater of (a) the fair market value of a share of our common stock on the grant date plus $0.50 or (b) $9.00. A grantee’s award will automatically terminate without payment of any consideration if (i) the grantee’s employment with us terminates for any reason (other than due to death or disability) prior to the vesting or (ii) the vesting does not occur on or before the fifth anniversary of the grant date.

During 2012, we granted 1,705,000 performance awards with an aggregate fair value of approximately $1.5 million. The fair value of the performance awards are estimated on the date of grant using a Monte-Carlo simulation pricing model with the following assumptions: share price at date of grant (majority at $7.76); weighted average purchase price at grant date of $9.07; performance hurdle price of $21.50; expected dividend yield of 1.7%; median time to vesting of 3.37 years; and expected volatility of 31.3%. Expected volatilities are based on the historical volatility of the weekly closing stock price of the underlying common stock utilizing a five year period to the valuation date with a 5.0% weighting to the year between August 2008 and August 2009 to effect for mean reversion in asset prices during the global financial crisis. The risk-free rate is based on the U.S. Treasury yields in effect at the time of grant. The allowance for forfeiture is 3.0% to 5.0% and it is assumed that the holders of the performance awards will exercise the award immediately upon vesting. The pre-tax compensation expense associated with these awards for the year ended December 31, 2013 was $0.5 million.

See Note 25 to the Consolidated Financial Statements herein for further information regarding our performance based stock awards.

Director Compensation Plans

On March 5, 2012, our Board approved a new Director Compensation Policy, which provides for the following: (i) the chairman of our Audit Committee receives an annual cash retainer of $17,500, the chairman of our Compensation and our Corporate Governance Committees receives an annual cash retainer of $15,000 and the Lead Director of our Board receives an annual cash retainer of $115,000, payable in quarterly installments; and (ii) each independent director of our Board receives an annual cash retainer of $40,000 paid on a quarterly basis and an annual equity retainer of $75,000 in shares of our common stock issued at our annual meeting of stockholders. Additionally, each independent director receives $2,000 for each regular or special meeting of the full Board, our Audit Committee and our Executive Committee attended in person or by phone. Members of the other committees and their chairmen receive $1,600 for each committee meeting held in person or by phone that such director attends. Under our Director Compensation Policy, the annual cash retainers for each committee chairman and the annual equity retainer are paid on the date of our annual meeting of stockholders, which for this year was held on May 22, 2013.

On May 23, 2013, we issued 17,928 shares of common stock to each of the four independent directors for such retainer. We recorded $0.6 million, $0.8 million and $0.8 million, respectively, in pre-tax compensation expense, which is included in general, administrative and other expenses, for the years ended December 31, 2011, 2012 and 2013 related to the director fees, annual retainers and deferred compensation amortization.

Cash Dividends

Our Board declared four quarterly dividends of $0.025 per share, totaling approximately $1.8 million, which were paid on March 1, 2013, June 3, 2013, September 3, 2013 and December 2, 2013, respectively, to record holders of our common stock as of February 13, 2013, May 16, 2013, August 14, 2013 and November 12, 2013, respectively. We have a dividend reinvestment program so that stockholders may elect to reinvest their dividends into additional shares of our common stock.

Accumulated other comprehensive income

Our components of Accumulated other comprehensive income are as follows:



	Accumulated Other Comprehensive Income
Balance at December 31, 2012	$	—
Increase in net unrealized gains associated with available-for-sale securities of the trusts	6,152
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus’	(6,152		)
Balance at December 31, 2013	$	—