CAPITAL STOCK, STOCK AWARDS AND STOCK OPTIONS

Capital Stock. Each share of Class A common stock and Class B common stock participates equally in dividends. The Class B stock has limited voting rights and as a class has the right to elect 30% of the Board of Directors; the Class A stock has unlimited voting rights, including the right to elect a majority of the Board of Directors. In 2013 and 2012, the Company’s Class A shareholders converted 50,310, or 4%, and 10,000, or 1%, respectively, of the Class A shares of the Company to an equal number of Class B shares. The conversions had no impact on the voting rights of the Class A and Class B common stock.

During 2013, 2012 and 2011, the Company purchased a total of 33,024, 301,231 and 644,948 shares, respectively, of its Class B common stock at a cost of approximately $17.7 million, $103.2 million and $248.1 million, respectively. In September 2011, the Board of Directors increased the authorization to repurchase a total of 750,000 shares of Class B common stock. The Company did not announce a ceiling price or a time limit for the purchases. The authorization included 43,573 shares that remained under the previous authorization. At December 31, 2013, the Company had remaining authorization from the Board of Directors to purchase up to 159,219 shares of Class B common stock.

Stock Awards. In 2001, the Company adopted an incentive compensation plan, which, among other provisions, authorizes the awarding of Class B common stock to key employees. Stock awards made under this incentive compensation plan are primarily subject to the general restriction that stock awarded to a participant will be forfeited and revert to Company ownership if the participant’s employment terminates before the end of a specified period of service to the Company. Some of the awards are also subject to performance and market conditions and will be forfeited and revert to Company ownership if the conditions are not met. At December 31, 2013, there were 43,950 shares reserved for issuance under this incentive compensation plan, which were all subject to awards outstanding.

In 2012, the Company adopted a new incentive compensation plan (the 2012 Plan), which, among other provisions, authorizes the awarding of Class B common stock to key employees in the form of stock awards, stock options and other awards involving the actual transfer of shares. All stock awards, stock options and other awards involving the actual transfer of shares issued subsequent to the adoption of this plan are covered under this new incentive compensation plan. Stock awards made under the 2012 incentive compensation plan are primarily subject to the general restriction that stock awarded to a participant will be forfeited and revert to Company ownership if the participant’s employment terminates before the end of a specified period of service to the Company. Some of the awards are also subject to performance and market conditions and will be forfeited and revert to Company ownership if the conditions are not met. At December 31, 2013, there were 471,800 shares reserved for issuance under the 2012 incentive compensation plan. Of this number, 91,029 shares were subject to stock awards and stock options outstanding and 380,771 shares were available for future awards.

Activity related to stock awards under these incentive compensation plans was as follows:



	Year Ended December 31
	2013				2012				2011
	Number of Shares		Average Grant-Date Fair Value		Number of Shares		Average Grant-Date Fair Value		Number of Shares		Average Grant-Date Fair Value
Beginning of year, unvested	207,917		$	350.21	77,319		$	424.45	48,359		$	498.95
Awarded	70,165		562.29		145,348		321.56		44,030		432.09
Vested	(71,585	)	515.09		(7,134	)	499.06		(13,132	)	722.67
Forfeited	(92,018	)	300.86		(7,616	)	417.79		(1,938	)	436.31
End of Year, Unvested	114,479		424.65		207,917		350.21		77,319		424.45

In connection with the sale of the Publishing Subsidiaries, the Company modified the terms of 86,824 share awards affecting 102 employees. The modification resulted in the acceleration of the vesting period for 45,374 share awards, the elimination of a market condition and vesting terms of 15,000 share awards, and the forfeiture of 26,450 share awards; the effect of which are reflected in the above activity. The Company also offered some employees with 26,124 share awards the option to settle their awards in cash resulting in a modification of these awards from equity awards to liability awards. The Company paid employees $13.1 million for the settlement of these liability awards. The Company recorded incremental stock compensation expense, net of forfeitures, amounting to $19.9 million, which is included in income (loss) from discontinued operations, net of tax, in the consolidated statement of operations.

For the share awards outstanding at December 31, 2013, the aforementioned restriction will lapse in 2014 for 10,250 shares, in 2015 for 32,453 shares, in 2016 for 21,515 shares and in 2017 for 50,261 shares. Also, in early 2014, the Company made stock awards of 750 shares. Stock-based compensation costs resulting from Company stock awards were $35.2 million, $11.4 million and $8.9 million in 2013, 2012 and 2011, respectively.

As of December 31, 2013, there was $29.6 million of total unrecognized compensation expense related to these awards. That cost is expected to be recognized on a straight-line basis over a weighted average period of 2.1 years.

Stock Options. The Company’s 2003 employee stock option plan reserves 1,900,000 shares of the Company’s Class B common stock for options to be granted under the plan. The purchase price of the shares covered by an option cannot be less than the fair value on the grant date. Options generally vest over four years and have a maximum term of 10 years. At December 31, 2013, there were 101,194 shares reserved for issuance under this stock option plan, which were all subject to options outstanding.

Stock options granted under the 2012 Plan cannot be less than the fair value on the grant date, and generally vest over four years and have a maximum term of 10 years.

Activity related to options outstanding was as follows:



	Year Ended December 31
	2013				2012				2011
	Number of Shares		Average Option Price		Number of Shares		Average Option Price		Number of Shares		Average Option Price
Beginning of year	125,694		$	478.32	129,044		$	494.95	87,919		$	495.05
Granted	15,000		373.03		7,500		378.00		51,000		499.45
Exercised	(14,500	)	391.83		—		—		—		—
Expired or forfeited	(4,500	)	637.53		(10,850	)	605.82		(9,875	)	519.04
End of Year	121,694		469.76		125,694		478.32		129,044		494.95

In connection with the sale of the Publishing Subsidiaries, the Company modified the terms of 4,500 stock options affecting six employees. The modification resulted in the acceleration of the vesting period for 4,250 stock options and the forfeiture of 250 stock options. The Company recorded incremental stock option expense amounting to $0.8 million, which is included in income (loss) from discontinued operations, net of tax, in the consolidated statement of operations.

Of the shares covered by options outstanding at the end of 2013, 73,194 are now exercisable; 21,500 will become exercisable in 2014; 17,875 will become exercisable in 2015; 5,375 will become exercisable in 2016; and 3,750 will become exercisable in 2017. For 2013, 2012 and 2011, the Company recorded expense of $3.5 million, $2.9 million and $2.7 million related to stock options, respectively. Information related to stock options outstanding and exercisable at December 31, 2013, is as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares Outstanding at 12/31/2013	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Shares Exercisable at 12/31/2013	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price
$369-396	44,000	7.6	$	380.96	20,500	6.3	$	384.82
419-439	17,694	5.4	421.75		17,694	5.4	421.75
503	50,000	7.2	502.58		25,000	7.2	502.58
652	2,000	4.4	651.91		2,000	4.4	651.91
730	5,000	2.9	729.67		5,000	2.9	729.67
954	3,000	1.0	953.50		3,000	1.0	953.50
	121,694	6.7	469.76		73,194	5.9	488.13

At December 31, 2013, the intrinsic value for all options outstanding, exercisable and unvested was $24.8 million, $14.0 million and $10.7 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of the Company’s stock was $663.32 at December 31, 2013. At December 31, 2013, there were 48,500 unvested options related to this plan with an average exercise price of $442.02 and a weighted average remaining contractual term of 7.9 years. At December 31, 2012, there were 61,673 unvested options with an average exercise price of $460.24.

As of December 31, 2013, total unrecognized stock-based compensation expense related to stock options was $3.4 million, which is expected to be recognized on a straight-line basis over a weighted average period of approximately 1.9 years. There were 14,500 options exercised during 2013. The total intrinsic value of options exercised during 2013 was $3.2 million; a tax benefit from these stock option exercises of $1.3 million was realized. No options were exercised during 2012 and 2011.

All options granted during 2013 and 2012 were at an exercise price equal to the fair market value of the Company’s common stock at the date of grant. During 2011, the Company granted 50,000 options at an exercise price above the fair market value of its common stock at the date of grant. All other options granted during 2011 were at an exercise price equal to the fair market value of the Company’s common stock at the date of grant. The weighted average grant-date fair value of options granted during 2013, 2012 and 2011 was $91.74, $91.71 and $110.67, respectively. Also, in early 2014, an additional 5,000 stock options were granted.

The fair value of options at date of grant was estimated using the Black-Scholes method utilizing the following assumptions:



	2013	2012	2011
Expected life (years)	7	7	7
Interest rate	1.31%	1.04%–1.27%	1.49%–2.85%
Volatility	31.80%	31.71%–31.80%	30.35%–31.24%
Dividend yield	2.63%	2.54%–2.60%	2.11%–2.74%

The Company also maintains a stock option plan at Kaplan. Under the provisions of this plan, options are issued with an exercise price equal to the estimated fair value of Kaplan’s common stock, and options vest ratably over the number of years specified (generally four to five years) at the time of the grant. Upon exercise, an option holder may receive Kaplan shares or cash equal to the difference between the exercise price and the then fair value.

At December 31, 2013, a Kaplan senior manager holds 7,206 Kaplan restricted shares. The fair value of Kaplan’s common stock is determined by the Company's compensation committee of the Board of Directors, and in January 2014, the committee set the fair value price at $1,150 per share. During 2013, 5,000 options were awarded to a Kaplan senior manager at a price of $973 per share which vest over a four-year period. No options were awarded during 2012 or 2011; no options were exercised during 2013 or 2012; and there were 5,000 options outstanding at December 31, 2013. In December 2011, a Kaplan senior manager exercised 2,000 Kaplan stock options at an option price of $652 per option. Additionally, in January 2014, an additional 2,500 stock options were awarded.

Kaplan recorded stock compensation expense of $2.9 million in 2013, and a stock compensation credit of $1.1 million and $1.3 million in 2012 and 2011, respectively. At December 31, 2013, the Company’s accrual balance related to Kaplan stock-based compensation totaled $9.9 million. There were no payouts in 2013, 2012 or 2011. The total intrinsic value of options exercised during 2011 was $1.0 million.

Earnings Per Share. The Company's unvested restricted stock awards contain nonforfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The diluted earnings per share computed under the two-class method is lower than the diluted earnings per share computed under the treasury stock method, resulting in the presentation of the lower amount in diluted earnings per share. The computation of the earnings per share under the two-class method excludes the income attributable to the unvested restricted stock awards from the numerator and excludes the dilutive impact of those underlying shares from the denominator.

The following reflects the Company's income from continuing operations and share data used in the basic and diluted earnings per share computations using the two-class method:



	Year Ended December 31
(in thousands, except per share amounts)	2013			2012			2011
Numerator:
Numerator for basic earnings per share:
Income from continuing operations attributable to Graham Holdings Company common stockholders	$	189,891		$	71,090		$	150,464
Less: Dividends paid-common stock outstanding and unvested restricted shares	—			(146,432		)	(74,575		)
Undistributed earnings (losses)	189,891			(75,342		)	75,889
Percent allocated to common stockholders ⁽¹⁾	98.45		%	100.00		%	98.98		%
	186,948			(75,342		)	75,115
Add: Dividends paid-common stock outstanding	—			143,175			73,831
Numerator for basic earnings per share	186,948			67,833			148,946
Add: Additional undistributed earnings due to dilutive stock options	5			—			—
Numerator for diluted earnings per share	$	186,953		$	67,833		$	148,946
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding	7,238			7,360			7,826
Add: Effect of dilutive stock options	12			—			—
Denominator for diluted earnings per share	7,250			7,360			7,826
Graham Holdings Company Common Stockholders:
Basic earnings per share from continuing operations	$	25.83		$	9.22		$	19.03
Diluted earnings per share from continuing operations	$	25.78		$	9.22		$	19.03

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(1)	Percent of undistributed losses allocated to common stockholders is 100% in 2012 as participating securities are not contractually obligated to share in losses.

Diluted earnings per share excludes the following weighted average potential common shares, as the effect would be antidilutive, as computed under the treasury stock method:



	Year Ended December 31
(in thousands)	2013	2012	2011
Weighted average restricted stock	83	44	79

The 2013, 2012 and 2011 diluted earnings per share amounts exclude the effects of 10,000, 124,694 and 115,294 stock options outstanding, respectively, as their inclusion would have been antidilutive. The 2013 and 2012 diluted earnings per share amounts also exclude the effects of 5,500 and 52,200 restricted stock awards, respectively, as their inclusion would have been antidilutive.

In 2012 and 2011, the Company declared regular dividends totaling $9.80 and $9.40 per share, respectively. In December 2012, the Company declared and paid an accelerated cash dividend totaling $9.80 per share, in lieu of regular quarterly dividends that the Company otherwise would have declared and paid in calendar year 2013.