STOCKHOLDERS’ EQUITY

Share Authorization

We are authorized to issue 80,000,000 shares of common stock, $0.01 per share par value. We had 22,490,855 and 22,497,873 shares issued and outstanding, net of 5,849,316 shares held in treasury at par, at December 31, 2016 and 2015, respectively.

Stock Based Compensation Plans

All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). At December 31, 2016, we had one stock benefit plan in effect, the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”), under which restricted stock, stock options and performance awards have been granted or remain outstanding. 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.

The status of the Amended and Restated 2006 Plan at December 31, 2016 is as follows (shares in thousands):



	Shares Reserved	Shares Available to Issue	Options Outstanding
Amended and Restated 2006 Plan	5,000	1,126	1,650

Stock Options

Employee stock options have historically been granted annually, as approved by the Compensation Committee of the Board. The options are granted with an exercise price equal to the closing price of our common stock on the date of grant. All of the options granted under this plan have either five, seven or ten-year terms. 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, 2014, 2015 and 2016:



	2014		2015		2016
Dividend yield	0.50	%	0.44	%	0.50	%
Expected volatility	33.34	%	32.62	%	31.21	%
Risk-free interest rate	0.99	%	1.13	%	1.23	%
Expected holding period (years)	3.7		3.6		5.0

During the first quarter of 2016, we granted 235,500 options to certain officers and key employees at an option price of $20.06. These options will vest in one-fifth increments over a five year period and have a ten year term. The fair value of these stock options is approximately $1.3 million. During the third quarter of 2016, we canceled 146,100 options related to the retirement of a former executive. In 2015, a total of 628,000 stock options were awarded, the fair value of which is approximately $3.7 million. In 2014, a total of 803,700 stock options were awarded, the fair value of which is approximately $4.1 million.

A summary of the stock options at December 31, 2014, 2015 and 2016 and changes during the three years ended December 31, 2016 is presented in the table and narrative below (shares in thousands):



	Year Ended December 31,
	2014				2015				2016
	Shares		Wtd. Avg. Ex. Price		Shares		Wtd. Avg. Ex. Price		Shares		Wtd. Avg. Ex. Price
Outstanding at beginning of period	766		$	13.03	1,381		$	17.07	1,695		$	18.95
Adjustment to beginning balance	—		$	—	—		$	—	18		$	18.94
Granted	804		$	20.20	653		$	22.66	236		$	20.06
Exercised	(68	)	$	5.47	(110	)	$	14.36	(112	)	$	13.76
Canceled or expired	(121	)	$	18.80	(229	)	$	20.39	(187	)	$	21.30
Outstanding at end of year	1,381		$	17.07	1,695		$	18.95	1,650		$	19.18
Exercisable at end of year	329		$	10.97	583		$	15.00	1,106		$	18.21

The aggregate intrinsic value of the outstanding and exercisable stock options at December 31, 2016 was $15.6 million and $11.5 million, respectively. The total intrinsic value of options exercised during 2014, 2015 and 2016 totaled $1.0 million, $1.1 million and $1.2 million, respectively.

The total fair value of stock options vested during 2014, 2015 and 2016 totaled approximately $0.8 million, $1.8 million and $2.8 million, respectively. We recorded pre-tax stock-based compensation expense for stock options totaling approximately $1.6 million, $2.4 million and $1.7 million in 2014, 2015 and 2016, respectively. The significant decrease in expense for the year ended December 31, 2016 as compared to 2015 was due to the cancellation of options for the retirement of a former executive which resulted in a decrease of approximately $0.2 million and the full vesting of a grant in the second quarter of 2016 resulting in a decrease of approximately $0.3 million.

As of December 31, 2016, there was $1.5 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested 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, 2016:



	Options Outstanding				Options Exercisable
Actual Ranges of Exercise Prices	Number Outstanding at 12/31/16	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number Exercisable at 12/31/16	Weighted-Average Exercise Price
$4.78 - $5.94	105,603	4.50	$	5.66	105,603	$	5.66
$16.73 - $20.06	569,400	5.30	$	17.84	380,000	$	16.73
$20.26 - $22.58	974,943	3.60	$	21.43	620,877	$	21.26
$4.78 - $22.58	1,649,946	4.89	$	19.18	1,106,480	$	18.21

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 2016, employees purchased a total of 44,774 shares at a weighted average price of $19.48 per share. In 2015, employees purchased a total of 44,074 shares at a weighted average price of $17.17 per share. In 2014, employees purchased a total of 55,877 shares at a weighted average price of $15.50 per share. Pre-tax compensation expense for the ESPP totaling approximately $260,000, $197,000, and $234,000 was expensed in 2014, 2015 and 2016, 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:



	2014		2015		2016
Dividend yield	0.6	%	0.4	%	0.6	%
Expected volatility	33	%	24	%	25	%
Risk-free interest rate	0.07%, 0.09%,0.11%, 0.13%		0.02%, 0.11%,0.18%, 0.25%		0.22%, 0.49%,0.55%, 0.61%
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

From time to time, we issue shares of restricted stock to certain officers, key employees and directors of the Company from our Amended and Restated 2006 Plan. The restricted stock 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 2016, we issued restricted stock totaling 16,900 to certain employees that vest over a three year period and had an aggregate grant date market value of approximately $0.3 million. A summary of the status of unvested restricted stock as of December 31, 2016, and changes during 2016, is presented below (shares in thousands):



Unvested stock awards	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2016	202		$	20.64
Awards	18		20.27
Vestings	(66	)	20.78
Cancellations	(91	)	20.17
Unvested at December 31, 2016	63		$	21.07

Related to the vesting of restricted stock awards previously awarded to our officers and key employees, we recorded pre-tax compensation expense, which is included in general, administrative and other expenses, totaling $1.8 million for the year ended December 31, 2014, $1.5 million for the year ended December 31, 2015 and $0.7 million for the year ended December 31, 2016. The significant decrease in expense for the year ended December 31, 2016 as compared to 2015 was due to the cancellation of 50,000 unvested restricted stock for a former executive.

As of December 31, 2016, we had $1.1 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 Awards

During the first quarter of 2016, we granted 73,700 performance awards to certain officers and key employees, payable in shares. These awards will vest (if at all) on December 31, 2020 provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Consolidated Earnings Before Interest Tax Depreciation and Amortization) and Relative Shareholder Return performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents 25% of the award and the Relative Shareholder Return performance represents 75% of the award. The fair value of these performance awards granted during the first quarter of 2016 was approximately $1.6 million. The pre-tax compensation expense associated with these awards for the year ended December 31, 2016 was approximately 221,000. During the third quarter of 2016, we canceled 14,200 performance awards related to the retirement of a former executive.

The fair value of the performance awards are estimated on the date of the grant using a Monte-Carlo simulation pricing model with the following assumptions:



	February 23, 2016
Performance period	January 1, 2016 - December 31, 2020
Simulation period (years)	4.86
Share price at grant date	$20.06
Expected volatility	31.2	%
Risk-free interest rate	1.21	%
Forfeiture rate	2.0	%

Director Compensation Plans

On May 17, 2016, our Board approved a new Director Compensation Policy, which provides for the following: (i) each independent director is entitled to an annual retainer of $75,000, payable in quarterly installments of $18,750 each at the end of the quarter; and (ii) the Lead Director and chairman of our Audit Committee are entitled to an additional annual retainer of $10,000, payable in quarterly installments of $2,500 each at the end of each quarter, and the chairman of our Corporate Governance and Compensation Committees are entitled to an additional annual retainer of $5,000, payable in quarterly installments of $1,250 each at the end of each quarter. Any new independent director will receive upon admission to the Board a grant of $25,000 (in addition to the independent director annual retainer prorated at the time the new director is admitted to the Board) which can be taken in cash or restricted shares of our common stock. The number of shares of such common stock will be determined by dividing the cash amount by the closing price of our common stock on the date of grant, which will be the date of admission to the Board. Such common stock, will vest (based on continued service on the Board) 50% immediately and 25% on the first and second anniversaries of admission. Prior to the approval of the new Director Compensation Policy, there was one meeting during the second quarter of 2016 for which the directors were paid under the previous policy.

On August 9, 2016, Richard W. Scott resigned from our Board. At the time of his resignation, Mr. Scott was serving as the chairman of the Corporate Governance Committee and a member of the Audit and Compensation Committees. On the same day, the Board voted James R. Schenck to serve as a Class 1 Director until the 2018 annual meeting of shareholders. Mr. Schenck was appointed to serve as the chairman of the Corporate Governance Committee and a member of the Audit and Compensation Committees. Concurrently with the appointment, the Board granted Mr. Schenck 1,061 shares of the Company’s common stock under our Director Compensation Policy, which such grant was valued at approximately $25,000 based on the closing price on the grant date. One-half of these shares vested immediately upon grant, and the remaining one-half of the shares will vest equally on August 9, 2017 and August 9, 2018.

We recorded approximately $0.8 million, $0.7 million and $0.4 million of pre-tax compensation expense, which is included in general, administrative and other expenses, in the years ended 2014, 2015 and 2016, respectively, related to the director fees and annual retainers.

Cash Dividends

Our Board declared two quarterly dividends of $0.025 per share and two quarterly dividends of $0.05 per share, totaling approximately $2.5 million. The two dividends of $0.025 per share were paid on March 1, 2016 and June 1, 2016 and the two dividends of $0.05 per share were paid on September 1, 2016 and December 1, 2016. During 2015, we paid four quarterly dividends of $0.025 per share, totaling approximately $1.8 million.

Accumulated other comprehensive income

Our components of Accumulated other comprehensive income are as follows (in thousands):



	Accumulated Other Comprehensive Income
Balance at December 31, 2015	$	—
Decrease in net unrealized gains associated with available-for-sale securities of the trusts	(563		)
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus’	563
Balance at December 31, 2016	$	—