STOCKHOLDERS’ EQUITY

Stock Options

As of June 30, 2014, there were 1,429,421 stock options outstanding and 1,097,022 stock options which remain unvested. On May 21, 2014, we granted 6,000 options to an employee at an option price of $17.00. On May 22, 2014, we granted 25,000 options to a new employee at an option price of $17.21. These options will vest in 25.00% increments over a four year period and have a six year term. The value of these stock options is approximately $0.1 million.

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 grant date:



	May 21, 2014			May 22, 2014
Dividend yield	0.588		%	0.581		%
Expected volatility	33.36		%	33.35		%
Risk-free interest rate	1.170		%	1.185		%
Expected life (years)	4			4
Black-Scholes value	$	4.48		$	4.54

We recorded pre-tax stock-based compensation expense for stock options totaling approximately $0.1 million and $0.5 million for the three months ended June 30, 2013 and 2014, respectively, and $0.2 million and $0.7 million for the six months ended June 30, 2013 and 2014, respectively. The significant increase in expense for the three and six months ended June 30, 2014 was due to a large number of stock option grants in the first six months of 2014 at a a significantly higher option price compared to prior grants.

Employee Stock Purchase Plan

During the second quarter of 2014, employees purchased a total of 14,507 shares of common stock through the employee stock purchase plan (“ESPP”) at a weighted average price of $14.56 per share. We recorded pre-tax stock-based compensation expense for the ESPP totaling approximately $88,000 and $73,000 for the three months ended June 30, 2013 and 2014, respectively, and $187,000 and $189,000 for the six months ended June 30, 2013 and 2014, respectively.

The fair value of the right (option) to purchase shares under the ESPP is estimated on the date of grant (January 1, 2014) associated with the four quarterly purchase dates using the following assumptions:



	2014
Dividend yield	0.6	%
Expected volatility	33.37	%
Risk-free interest rate	0.07%, 0.09%, 0.11%, 0.13%
Expected life (years)	0.25, 0.50, 0.75, 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 the 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 and key employees of the Company from our stock benefit plans. The restricted stock shares issued to officers and key employees vest in either 20%, 25% or 33.33% increments over five, four or three year terms, respectively. We did not issue any restricted common stock in the three months ended June 30, 2014.

Related to the vesting of restricted stock awards awarded to our officers and key employees, we recorded $0.3 million and $0.5 million of pre-tax compensation expense, which is included in general, administrative and other expenses for the three months ended June 30, 2013 and 2014, respectively, and $0.7 million and $0.8 million for the six months ended June 30, 2013 and 2014, respectively.

As of June 30, 2014, we had $5.7 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 2.6 years.

Performance-Based Stock Awards

During the third quarter of 2012, the Compensation Committee of our Board of Directors (our “Board”) granted performance-based awards (the “PBS Awards”) with both market and service vesting conditions to certain officers, employees and outside directors. No PBS Awards were granted during fiscal year 2013. To the extent vested, each PBS Award represented the right to receive a specified number of shares of our common stock, subject to the grantee’s payment, with respect to each share of common stock subject to such PBS Award, of an amount equal to the greater of (a) the then-current market price per share of our common stock on the date such PBS Award was granted plus $0.50 or (b) $9.00. Each PBS Award would have vested if on or before the fifth anniversary of the applicable grant date, the closing price of our common stock was greater than or equal to $21.50 on any three days, whether or not consecutive, within a period of 30 consecutive calendar days, subject to the applicable grantee’s continuous employment or service relationship with us through such date (the “Price Vesting Date”). However, if the Price Vesting Date occurred prior to the first anniversary of the grant date, then each PBS Award would not vest until the first anniversary of such grant date, subject to the applicable grantee's continued employment or service relationship with us through the first anniversary of the grant date.

On January 3, 2014, we offered all grantees who held outstanding PBS Awards an opportunity to surrender their PBS Awards to us in exchange for cash payments equal to the product of (i) the difference between (x) $19.00 and (y) the applicable purchase price under their respective PBS Awards and (ii) the number of shares of our common stock subject to their PBS Awards (the “Cash Out Payments”). All outstanding PBS Awards were surrendered to us and canceled in exchange for Cash Out Payments of approximately $16.1 million.

Director Compensation Policy

Our Director Compensation Policy provides for the following: (a) 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; (b) 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 was held on May 21, 2014. We issued 13,233 shares of common stock for the equity retainer to three independent directors.

We recorded $476,000 and $326,000 of pre-tax compensation expense, which is included in general, administrative and other expenses, for the three months ended June 30, 2013 and 2014, respectively, and $609,000 and $648,000 for the six months ended June 30, 2013 and 2014, respectively, related to the director fees, annual retainers and deferred compensation amortization.

Cash Dividends

During the three months ended June 30, 2014, our Board declared a quarterly dividend of $0.025 per share, totaling approximately $0.5 million, which was paid on June 2, 2014 to record holders of our common stock as of May 15, 2014. For the six months ended June 30, 2014, we paid approximately $0.9 million in dividends. 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, 2013	$	—
Increase in net unrealized gains associated with available-for-sale securities of the trusts	15,628
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus’	(15,628		)
Balance at June 30, 2014	$	—