Note I — Stock-Based Compensation

Compensation expense for stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-line basis over the vesting period of the entire award in the “Labor” line of the Consolidated Statements of Comprehensive Income (Loss). For the years ended December 31, 2012, 2011 and 2010, we recorded total stock-based compensation expense of $3.4 million, $5.0 million and $3.9 million, respectively. $0.5 million of the 2011 stock-based compensation related to the retirement of the President of Harte-Hanks Shoppers. In connection with his retirement on August 31, 2011, all of his unvested stock-based awards vested.

In May 2005, we adopted the 2005 Omnibus Incentive Plan (2005 Plan), a stockholder approved plan, pursuant to which we may issue equity securities to directors, officers and key employees. Under the 2005 Plan we have awarded stock options, non-vested shares and performance stock units. The 2005 Plan replaced the 1991 Stock Option Plan (1991 Plan), a stockholder approved plan, pursuant to which we issued stock options to directors, officers and key employees. No additional options will be granted under the 1991 Plan. As of December 31, 2012, there were 3.6 million shares available for grant under the 2005 Plan.

Stock Options

Under the 2005 Plan, all options have been granted at exercise prices equal to the market value of the common stock on the grant date (2005 Plan options). All 2005 Plan options granted prior to 2011 become exercisable in 25% increments on the second, third, fourth and fifth anniversaries of their date of grant and expire on the tenth anniversary of their date of grant. All options granted in 2011 and 2012 become exercisable in 25% increments on the first, second, third and fourth anniversaries of their date of grant, and expire on the tenth anniversary of their date of grant. As of December 31, 2012, 2005 Plan options to purchase 4.1 million shares were outstanding with exercise prices ranging from $6.04 to $28.85 per share.

Under the 1991 Plan, options were granted at exercise prices equal to the market value of the common stock on the grant date (1991 Plan market price options) and at exercise prices below the market value of the common stock (1991 Plan performance options). 1991 Plan market price options become exercisable in 25% increments on the second, third, fourth and fifth anniversaries of their date of grant and expire on the tenth anniversary of their date of grant. As of December 31, 2012, 1991 Plan market price options to purchase 1.0 million shares were outstanding with exercise prices ranging from $17.45 to $25.63 per share. No 1991 Plan performance options have been granted since January 1999, and all remaining 1991 Plan performance options were exercised in January 2009.

All options granted under the 1991 Plan and 2005 Plan vest in full upon a change of control (as defined in each plan).

The following summarizes all stock option activity during the years ended December 31, 2012, 2011 and 2010:

					Weighted-
					Average	Aggregate
			Weighted-		Remaining	Intrinsic
	Number		Average		Contractual	Value
	of Shares		Option Price		Term (Years)	(Thousands)
Options outstanding at December 31, 2009	6,995,649		$	16.63

Granted	1,514,500		11.89
Exercised	(5,550	)	13.64			$	7
Unvested options forfeited	(282,196	)	12.60
Vested options expired	(649,393	)	16.50
Options outstanding at December 31, 2010	7,573,010		$	15.85

Granted	420,500		11.68
Exercised	(118,250	)	6.04			$	717
Unvested options forfeited	(363,192	)	11.17
Vested options expired	(758,440	)	18.16
Options outstanding at December 31, 2011	6,753,628		$	15.75

Granted	970,500		8.98
Exercised	(106,375	)	6.04			$	297
Unvested options forfeited	(798,311	)	10.28
Vested options expired	(1,712,813	)	19.33
Options outstanding at December 31, 2012	5,106,629		$	14.32	5.51	$	0

Exercisable at December 31, 2012	2,850,335		$	18.06	3.69	$	0

The aggregate intrinsic value at year end in the table above represents the total pre-tax intrinsic value that would have been received by the option holders if all of the in-the-money options were exercised on December 31, 2012. The pre-tax intrinsic value is the difference between the closing price of our common stock on December 31, 2012 and the exercise price for each in-the-money option. This value fluctuates with the changes in the price of our common stock. The intrinsic value is zero at December 31, 2012 as the exercise prices of all outstanding options are above the closing price of our common stock.

The following table summarizes information about stock options outstanding at December 31, 2012:

		Outstanding			Exercisable
		Weighted-		Weighted-		Weighted-
		Average		Average		Average
Range of	Number	Exercise		Remaining	Number	Exercise
Exercise Prices	Outstanding	Price		Life (Years)	Exercisable	Price
$ 0.00 – 6.99	1,008,750	$	6.04	5.90	535,250	$	6.04
$ 7.00 – 10.99	933,000	$	8.81	9.30	15,000	$	7.86
$11.00 – 11.99	860,625	$	11.90	6.90	291,125	$	11.90
$12.00 – 15.99	684,626	$	14.36	6.03	389,332	$	15.16
$16.00 – 24.49	657,216	$	21.10	1.35	657,216	$	21.10
$24.50 – 28.85	962,412	$	25.87	2.64	962,412	$	25.87
	5,106,629	$	14.32	5.51	2,850,335	$	18.06

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted-average assumptions used for grants during 2012, 2011 and 2010:

	Years Ended December 31,
	2012		2011		2010
Expected term (in years)	6.25		6.25		6.75
Expected stock price volatility	44.24	%	39.76	%	36.03	%
Risk-free interest rate	1.05	%	2.43	%	2.70	%
Expected dividend yield	3.41	%	2.42	%	2.42	%

Expected term is estimated using the simplified method, which takes into account vesting and contractual term. The simplified method is being used to calculate expected term instead of historical experience due to a lack of relevant historical data resulting from changes in option vesting schedules and changes in the pool of employees receiving option grants. Expected stock price volatility is based on the historical volatility from traded shares of our stock over the expected term. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. Expected dividend yield is based on historical stock price movement and anticipated future annual dividends over the expected term. Future annual dividends over the expected term are estimated to range between $0.34 and $0.44 per share, with a weighted-average annual dividend of $0.39 per share.

The weighted-average fair value of options granted during 2012, 2011 and 2010 was $2.74, $3.85 and $3.70, respectively. As of December 31, 2012, there was $4.3 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average period of approximately 2.56 years.

Non-vested Shares

All non-vested shares have been granted under the 2005 Plan. In general, all non-vested shares granted prior to 2011 vest 100% on the third anniversary of their date of grant. The majority of non-vested shares granted in 2011 and 2012 vest in three equal increments on the first, second and third anniversaries of their date of grant. The remaining non-vested shares granted in 2011 and 2012 vest 100% on the third anniversary of their date of grant. Non-vested shares granted under the 2005 Plan also vest upon a change of control.

The following summarizes all non-vested share activity during 2012, 2011 and 2010:

			Weighted-
			Average
	Number		Grant-Date
	of Shares		Fair Value
Non-vested shares outstanding at December 31, 2009	153,740		$	15.76

Granted	85,747		11.93
Vested	(48,201	)	24.79
Forfeited	(10,000	)	24.86
Non-vested shares outstanding at December 31, 2010	181,286		$	11.05

Granted	300,224		12.31
Vested	(53,671	)	15.04
Forfeited	(8,499	)	11.95
Non-vested shares outstanding at December 31, 2011	419,340		$	11.42

Granted	332,113		9.91
Vested	(143,626	)	9.82
Forfeited	(107,374	)	11.09
Non-vested shares outstanding at December 31, 2012	500,453		$	10.95

The fair value of each non-vested share is estimated on the date of grant as the closing market price of our common stock on the date of grant. As of December 31, 2012, there was $3.0 million of total unrecognized compensation cost related to non-vested shares. This cost is expected to be recognized over a weighted average period of approximately 1.71 years.

Performance Stock Units

All performance stock units have been granted under the 2005 Plan. Performance stock units are a form of share-based awards similar to non-vested shares, except that the number of shares ultimately issued is based on our performance against specific performance goals over a three-year period. At the end of the performance period, the number of shares of stock issued will be determined by adjusting upward or downward from the maximum in a range between 0% and 100%. Upon a change of control, outstanding performance stock units will be paid out at the 100% level.

The following summarizes all performance stock unit activity during 2012, 2011 and 2010:

			Weighted-
			Average
	Number		Grant-Date
	of Shares		Fair Value
Performance stock units outstanding at December 31, 2009	57,450		$	20.52

Granted	0		0
Issued	0		0
Forfeited	(33,200	)	24.56
Performance stock units outstanding at December 31, 2010	24,250		$	14.98

Granted	188,800		11.34
Issued	(19,200	)	11.34
Forfeited	(24,250	)	14.98
Performance stock units outstanding at December 31, 2011	169,600		$	11.34

Granted	136,000		8.84
Issued	0		0
Forfeited	(65,900	)	10.15
Performance stock units outstanding at December 31, 2012	239,700		$	10.25

The fair value of each performance stock unit is estimated on the date of grant as the closing market price of our common stock on the date of grant, minus the present value of anticipated dividend payments. Periodic compensation expense is based on the current estimate of future performance against specific performance goals over a three-year period and is adjusted up or down based on those estimates.