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 22,622,242 shares issued and outstanding, net of 5,849,316 and 6,523,370 shares held in treasury at par, at December 31, 2016 and 2017, respectively.

Stock Based Compensation Plans

During the year ended December 31, 2017, we had two stock benefits plans in effect under which stock, restricted stock, stock options and performance awards have been granted or remain outstanding: the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”). The Amended and Restated 2006 Plan was terminated upon the approval of the 2017 Plan at the annual shareholders meeting on May 17, 2017. The termination of the Amended and Restated 2006 Plan does not affect the awards previously issued and outstanding.

All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). The 2017 Plan provides for grants of options as non-qualified options or incentive stock options, restricted stock and performance awards. The 2017 Plan expires on May 17, 2027.

The status of each of the plans at December 31, 2017 is as follows (shares in thousands):



	Shares Reserved		Shares Available to Issue	Options Outstanding	Performance Awards Outstanding⁽²⁾
Amended and Restated 2006 Plan	—		—	1,918	311
2017 Plan	1,583	⁽¹⁾	1,553	16	9
Total	1,583		1,553	1,934	320




(1)	Amount includes approximately 28,000 shares granted from the Amended and Restated 2006 Plan that were returned to the Company due to cancellations and to pay the option price upon exercise.
(2)	Performance Awards are reserved at 200% of shares granted which is equal to the maximum payout in shares.

Restricted Stock

During 2017, we issued restricted stock to certain employees totaling 27,250 shares that vest over a three year period and had an aggregate grant date market value of approximately $0.8 million. The restricted stock issued will vest in either 25% or 33.33% increments over four or three year terms, respectively. In 2016, a total of 16,900 shares of restricted stock were awarded with a grant date market value of approximately $0.3 million. In 2015, a total of 37,900 shares of restricted stock were awarded with a grant date market value of approximately $0.9 million.

A summary of the status of unvested restricted stock as of December 31, 2017, and changes during 2017, is presented below (shares in thousands):



Unvested stock awards	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2017	63		$	21.07
Awards	27		27.53
Vestings	(30	)	20.10
Cancellations	(6	)	22.70
Unvested at December 31, 2017	54		$	24.09

We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for restricted stock awards of approximately $1.5 million, $0.7 million and $0.7 million in 2015, 2016 and 2017, respectively.

As of December 31, 2017, we had $1.3 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 1.4 years.

Stock Options

During 2017, we granted 461,700 options to our leadership team and certain key employees at a weighted average exercise price of $26.56. These options will vest in one-fifth increments over a five-year period and have a ten-year term. The fair value of these options was approximately $3.3 million. In 2016, a total of 235,500 stock options were awarded, the fair value of which was $1.3 million. In 2015, a total of 628,000 stock options were awarded, the fair value of which was approximately $3.7 million.

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 assumptions, based on the methods described above for the years ended December 31, 2015, 2016 and 2017:



	2015		2016		2017
Dividend yield	0.44	%	0.50	%	0.75	%
Expected volatility	32.62	%	31.21	%	29.29	%
Risk-free interest rate	1.13	%	1.23	%	1.95	%
Expected holding period (years)	3.6		5.0		5.0

A summary of the stock options at December 31, 2015, 2016 and 2017 and changes during the three years ended December 31, 2017 is presented in the table and narrative below (shares in thousands):



	Year Ended December 31,
	2015				2016				2017
	Shares		Wtd. Avg. Ex. Price		Shares		Wtd. Avg. Ex. Price		Shares		Wtd. Avg. Ex. Price
Outstanding at beginning of period	1,381		$	17.07	1,695		$	18.95	1,650		$	19.18
Adjustment to beginning balance	—		$	—	18		$	18.94	—		$	—
Granted	653		$	22.66	236		$	20.06	462		$	26.56
Exercised	(110	)	$	14.36	(112	)	$	13.76	(159	)	$	19.81
Canceled or expired	(229	)	$	20.39	(187	)	$	21.30	(19	)	$	23.17
Outstanding at end of year	1,695		$	18.95	1,650		$	19.18	1,934		$	20.85
Exercisable at end of year	583		$	15.00	1,106		$	18.21	1,225		$	18.68

The aggregate intrinsic value of the outstanding and exercisable stock options at December 31, 2017 was $9.8 million and $8.6 million, respectively. The total intrinsic value of options exercised during 2015, 2016 and 2017 totaled $1.1 million, $1.2 million and $1.0 million, respectively.

The total fair value of stock options vested during 2015, 2016 and 2017 totaled approximately $1.8 million, $2.8 million and $1.5 million, respectively. We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for stock options of approximately $2.4 million, $1.7 million and $1.5 million in 2015, 2016 and 2017, respectively.

As of December 31, 2017, there was $3.0 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 four years.

The following table further describes our outstanding stock options at December 31, 2017:



	Options Outstanding				Options Exercisable
Actual Ranges of Exercise Prices	Number Outstanding at 12/31/17	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number Exercisable at 12/31/17	Weighted-Average Exercise Price
$4.78 - $5.94	105,603	3.50	$	5.66	105,603	$	5.66
$16.73 - $20.49	942,153	3.92	$	19.02	797,673	$	18.83
$22.58 - $26.93	885,900	6.74	$	24.61	322,001	$	22.58
$4.78 - $26.93	1,933,656	5.19	$	20.85	1,225,277	$	18.68

Performance Awards

During 2017, we granted 105,540 performance awards to our leadership team and certain key employees, payable in shares. These awards will vest (if at all) on December 31, 2021 and June 30, 2022, provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Earnings Before Interest Tax Depreciation and Amortization) and Adjusted Consolidated EBITDA Margin performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents 50% of the award and the Adjusted Consolidated EBITDA Margin performance represents 50% of the award. The fair value of these performance awards was approximately $2.8 million and was determined by using the weighted average stock price on the grant date of $26.56.

During 2016, we granted 73,700 performance awards to our leadership team and certain 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 was approximately $1.6 million and was determined by using a Monte-Carlo simulation pricing model. The assumptions used in the Monte-Carlo simulation pricing model are as follows:



	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	%

We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for performance awards of approximately $0.2 million and $0.7 million in 2016 and 2017, respectively.

Employee Stock Purchase Plan

We provide all employees the opportunity to purchase common stock through payroll deductions in our 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 the fiscal year) or the actual date of purchase (end of quarter). In 2017, employees purchased a total of 43,808 shares at a weighted average price of $22.43 per share. 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.

We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for our ESPP of approximately $197,000, $234,000 and $244,000 in 2015, 2016 and 2017, 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:



	2015		2016		2017
Dividend yield	0.4	%	0.6	%	0.9	%
Expected volatility	24	%	25	%	19	%
Risk-free interest rate	0.02%, 0.11%,0.18%, 0.25%		0.22%, 0.49%,0.55%, 0.61%		0.53%, 0.65%,0.77%0.89%
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).

Director Compensation Plans

Our Director Compensation Policy 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.

On August 9, 2016, 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.

We recorded compensation expense, which is included in General, administrative and other expenses, related to annual retainers and restricted stock awards of approximately $0.7 million, $0.4 million and $0.4 million in 2015, 2016 and 2017, respectively.

Cash Dividends

On October 25, 2017, our Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075 per share, effective with respect to dividends payable on December 1, 2017 and later.

For the years ended December 31, 2016 and 2017, our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):



2017	Per Share		Dollar Value
March 1st	$	0.050	$	833
June 1st	$	0.050	$	835
September 1st	$	0.050	$	835
December 1st	$	0.075	$	1,206

2016	Per Share		Dollar Value
March 1st	$	0.025	$	415
June 1st	$	0.025	$	415
September 1st	$	0.050	$	831
December 1st	$	0.050	$	830

Accumulated other comprehensive income

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



	Accumulated Other Comprehensive Income
Balance at December 31, 2016	$	—
Increase in net unrealized gains associated with available-for-sale securities of the trusts	10,304
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus’	(10,304		)
Balance at December 31, 2017	$	—