STOCKHOLDERS’ EQUITY

Stock Based Compensation Plans

During the three year period ended December 31, 2014, we had three stock benefit plans in effect under which stock option grants or restricted stock have been issued or remain outstanding: 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 1996 Plan and the Director’s Plan were terminated during 2006. At December 31, 2014, no options were outstanding under the 1996 Plan or the Directors' Plan. The Amended and Restated 2006 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 Amended and Restated 2006 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.

The status of the Amended and Restated 2006 Plan at December 31, 2014 is as follows (shares in thousands):



	Shares Reserved	Shares Available to Issue	Options Outstanding
Amended and Restated 2006 Plan	5,000	1,498	1,381

Employee Stock Options

Employee stock options have historically been granted annually, or upon hire, as approved by the Compensation Committee of the Board of Directors. The options are granted with an exercise price equal to the market price of our common stock on the date of grant. We utilize the Black-Scholes option valuation model for estimating the fair value of our stock options. This model allows the use of a range of assumptions related to volatility, risk-free interest rate, expected holding period and dividend yield. The expected volatility utilized in the valuation model is based on the historical volatility of our stock price. The dividend yield and expected holding period are based on historical experience and management's estimate of future events. The risk-free interest rate is derived from the U.S. Treasury yield curve based on the expected life of the option in effect at the time of grant. The fair values of our stock options were calculated using the following weighted average of assumptions, based on the methods described above for the years ended December 31, 2012, 2013 and 2014:



	2012		2013		2014
Dividend yield	1.70	%	0.59	%	0.50	%
Expected volatility	60.09	%	33.63	%	33.34	%
Risk-free interest rate	1.25	%	0.41	%	0.99	%
Expected holding period (years)	3.0		3.6		3.7

During the first quarter of 2014, we granted 457,700 options to certain employees at a grant price of $20.26 and 300,000 options to three executives at a grant price of $20.49. These options will vest in 33.33% increments over a three year period and have a five year term. The value of these stock options is approximately $3.9 million. During the second quarter of 2014, we granted 6,000 options to an employee at an option price of $17.00 and 25,000 options to a new employee at an option price of $17.21. These options will vest in 25% increments over a four year period and have a six year term. The value of these stock options is approximately $0.1 million. During the third quarter of 2014, we granted 15,000 options to a new employee at an option price of $18.86. These options will vest in 25% increments over a four year period and have a six year term. The value of these stock options is approximately $0.1 million. In 2013, a total of 562,500 stock options were awarded, the value of which 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.

A summary of the stock options at December 31, 2012, 2013 and 2014 and changes during the three years ended December 31, 2014 is presented in the table and narrative below (shares in thousands):



	Year Ended December 31,
	2012				2013				2014
	Shares		Wtd. Avg. Ex. Price		Shares		Wtd. Avg. Ex. Price		Shares		Wtd. Avg. Ex. Price
Outstanding at beginning of period	321		$	5.17	312		$	5.41	766		$	13.03
Granted	96		$	5.94	563		$	16.73	804		$	20.20
Exercised	(81	)	$	4.90	(45	)	$	5.33	(68	)	$	5.47
Canceled or expired	(24	)	$	5.94	(64	)	$	13.82	(121	)	$	18.80
Outstanding at end of year	312		$	5.41	766		$	13.03	1,381		$	17.07
Exercisable at end of year	145		$	5.13	192		$	5.36	329		$	10.97

The aggregate intrinsic value of the outstanding and exercisable stock options at December 31, 2014 was $5.4 million and $3.3 million, respectively. The total intrinsic value of options exercised during 2012, 2013 and 2014 totaled $0.3 million, $0.5 million and $1.0 million, respectively.

The total fair value of stock options vested during 2012, 2013 and 2014 totaled approximately $0.1 million, $0.2 million and $0.8 million, respectively. We recorded compensation expense related to stock options totaling approximately $0.2 million, $0.8 million and $1.6 million in 2012, 2013 and 2014, respectively. The significant increase in expense for the year ended December 31, 2014 as compared to 2013 was due to a large number of stock option grants in 2014 at a significantly higher option price compared to the 2013 grants.

As of December 31, 2014, there was $3.4 million of unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options expected to be recognized over a weighted average period of approximately two years.

The following table further describes our outstanding stock options at December 31, 2014:



	Options Outstanding				Options Exercisable
Actual Ranges of Exercise Prices	Number Outstanding at 12/31/14	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number Exercisable at 12/31/14	Weighted-Average Exercise Price
$4.78 - $5.94	184,221	6.19	$	5.47	167,900	$	5.43
$16.73 - $17.21	495,500	8.05	$	16.76	161,499	$	16.73
$18.86 - $20.49	701,700	4.20	$	20.33	—	$	—
$4.78 - $20.49	1,381,421	5.84	$	17.07	329,399	$	10.97

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 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. In 2014, employees purchased a total of 55,877 shares at a weighted average price of $15.50 per share. Compensation expense for the ESPP totaling approximately $135,000, $277,000, and $260,000 was expensed in 2012, 2013 and 2014, 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:



	2012		2013		2014
Dividend yield	1.7	%	0.6	%	0.6	%
Expected volatility	32	%	41	%	33	%
Risk-free interest rate	0.02%, 0.06%, 0.09%, 0.12%		0.08%, 0.12%,0.135%, 0.15%		0.07%, 0.09%,0.11%, 0.13%
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 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 33.33% increments over four or three year terms, respectively. During the first quarter of 2014, we awarded restricted stock grants totaling 200,000 shares that vest over a four year period and had an aggregate grant date market value of approximately $4.1 million. A summary of the status of unvested restricted stock awards as of December 31, 2014, and changes during 2014, is presented below (shares in thousands):



Unvested stock awards	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2013	323		$	8.64
Awards	200		20.42
Vestings	(172	)	7.46
Cancellations	(21	)	11.81
Unvested at December 31, 2014	330		$	16.20

Related to the vesting of restricted stock awards previously awarded to our officers and key employees, we recorded compensation expense, which is included in general, administrative and other expenses, totaling $1.4 million for the year ended December 31, 2012, $1.7 million for the year ended December 31, 2013 and $1.8 million for the year ended December 31, 2014.

As of December 31, 2014, we had $5.3 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 2.2 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 or 2014. 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 $16.2 million. Of this amount, $3.2 million was paid to the Board of Directors.

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 21, 2014.

On May 21, 2014, we issued 13,233 shares of common stock to each of the three independent directors for such retainer. We recorded $0.8 million in pre-tax compensation expense, which is included in general, administrative and other expenses, for each of the years ended December 31, 2012, 2013 and 2014 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 3, 2014, June 2, 2014, September 2, 2014 and December 1, 2014, respectively, to record holders of our common stock as of February 13, 2014, May 15, 2014, August 15, 2014 and November 13, 2014, 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, 2013	$	—
Increase in net unrealized gains associated with available-for-sale securities of the trusts	(335		)
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus’	335
Balance at December 31, 2014	$	—