Note 7. Stock Compensation

Employee Stock Purchase Plan

Under the terms of our employee stock purchase plan, participating employees may acquire shares of common stock through payroll deductions of not more than 10% of their compensation. Shares are purchased on one specified date, the end of the plan year. The purchase price is 85% of the average closing price for the five days previous to the purchase date. As of December 31, 2012, there were 500,000 common shares reserved for this plan and 381,728 shares still available for issuance. As of December 31, 2012 employees had subscribed to purchase approximately 28,034 shares for the plan year ended August 31, 2013. Employees purchased 18,973 shares for the plan year ended August 31, 2012. We recorded stock compensation expense in the amount of $29,000 in 2012 and $27,000 in both 2011 and 2010, related to this plan.

Retainer Stock Plan for Directors

Under the terms of a corporate retainer stock plan for directors, participating directors may acquire shares of common stock in exchange for their quarterly retainers. The price at which the shares can be purchased is 100% of the fair market value for such shares on the date of purchase. In 2012, directors received $25,000 of their annual retainer solely in shares of HickoryTech stock. As of December 31, 2012, there were 300,000 common shares reserved for this plan and 123,214 shares still available for future issuance.

Non-Employee Directors' Incentive Plan

The Non-Employee Directors' Incentive plan provided for each director to receive common stock contingent upon HickoryTech meeting pre-established objectives. This plan was not utilized in 2012 or 2011. As of December 31, 2012 there were 200,000 common shares reserved for this plan and 152,000 shares available for future grants.

Stock Award Plan

HickoryTech's Stock Award Plan provides for the granting of stock awards and non-qualified stock options to employees. Shares issued under the stock award plan are new common shares. As of December 31, 2012, there were 1,750,000 common shares reserved for this plan and 798,503 shares available for future grants.

We recognize compensation for share-based payments based on management's best estimates and assumptions that the performance and service requirements of the plan will be achieved. Such compensation charges are recorded based upon the grant date fair value or settlement date fair value (as applicable) of our stock and are recognized over the requisite service period specified by the specific award plans. Stock-based compensation expense recognized was $761,000, $1,119,000 and $951,000 in 2012, 2011 and 2010, respectively. This includes compensation expense for share-based payment awards granted prior to, but not vested as of December 31, 2012. Historical data is used to estimate pre-vesting forfeitures and are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from the estimate.

As of December 31, 2012, we had not yet recognized compensation expense related to non-vested awards totaling $985,000. The weighted average period over which this compensation expense will be recognized is 2.09 years.

In the fourth quarter of 2012, we recorded adjustments to decrease additional paid-in capital and increase accrued employee benefits and deferred compensation by $802,000, and to decrease compensation expense and decrease additional paid in capital by $228,000 ($137,000 net of tax). These adjustments were made to correct immaterial errors in the Company's accounting for share-based payments.

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Long-Term Executive Incentive Program (LTEIP)

Under this program, executives can earn shares of common stock based on pre-established objective(s) over a three-year performance period. Shares issued under this Program are granted under the Stock Award Plan. An award is earned if at least 75% of the at-target objectives are achieved and a higher level award can be earned if performance exceeds the at-target objectives up to 125% of target. For program periods initiated between 2007 and 2009, the at-target awards were stated as a number of shares of common stock (equity classified). For program periods initiated in 2010 and after, the at-target awards are stated in dollars (liability classified) until the end of the performance period at which time the award is converted to shares based on a five day average share price and classified in equity. The company carries liabilities of $1,028,000 and $552,000 as of December 31, 2012 and 2011, respectively, related to liability classified program periods that will be settled in company common stock in future periods.

Following the performance period, shares earned are issued in the name of the executive as restricted stock and are subject to a vesting period. Half of the shares vest 30 days after they are awarded and the remainder vest 12 months after the award date. The requisite service period (combined performance period plus vesting) totals 51 months under this program. Compensation expense related to the LTEIP plan is recognized over the 51 month requisite service period.

Non-vested restricted stock activity for the year ended December 31, 2012 is depicted in the table below. Granted shares represent non-vested shares issued to settle an obligation under the LTEIP plan during the period.

										Weighted Average
	Shares									Fair Value
	2012			2011			2010			2012		2011		2010
Non-vested at beginning of year		22,813			46,854			-		$	7.84	$	5.88	$	-
Granted/settled		73,946			51,992			101,355		$	3.43	$	7.84	$	5.88
Vested		(64,312	)		(76,033	)		(50,676	)	$	4.99	$	6.63	$	5.88
Forfeited		-			-			(3,825	)	$	-	$	-	$	5.88
Non-vested at end of year		32,447			22,813			46,854		$	3.43	$	7.84	$	5.88

Employee Stock Retention

Under this program, designated employees can earn shares of common stock if they complete a requisite service period which typically ranges from 11 to 36 months. Shares are granted under the Stock Award Plan. Compensation expense related to the Employee Stock Retention program is recognized over the requisite service period.

Retention stock activity for the year ended December 31, 2012 was as follows:

										Weighted Average
	Shares									Fair Value
	2012			2011			2010			2012		2011		2010
Non-vested at beginning of year		20,159			29,920			36,150		$	7.68	$	7.47	$	7.63
Granted		14,300			7,600			6,650		$	10.88	$	9.31	$	7.63
Vested		(19,609	)		(13,861	)		(11,630	)	$	8.35	$	8.13	$	8.16
Forfeited		(3,700	)		(3,500	)		(1,250	)	$	8.65	$	7.66	$	6.31
Non-vested at end of year		11,150			20,159			29,920		$	10.28	$	7.68	$	7.47

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Stock Options

Stock options granted under the stock option component of the stock award plan may be exercised no later than ten years after the date of grant, with one-third of the options vesting each year. The fair value of each option award is estimated on the date of the grant using a Black-Scholes option valuation model.

We granted 10,000 options in April 2011 to the Chief Operating Officer as a condition of employment. The weighted average grant date fair value of options issued was $0.80 per share. Other than this stock award, options were last granted under the Company's Stock Award Plan in September 2006. As of December 31, 2012, the total unrecognized compensation cost related to non-vested stock options granted under the Company's Stock Award Plan is insignificant. This expense is expected to be recognized over a weighted average period of three years.

A summary of all stock option activity for the year ended December 31, 2012 is as follows:

										Weighted Average
	Stock Options									Exercise Price
	2012			2011			2010			2012		2011		2010
Outstanding at beginning of year		247,650			343,250			430,950		$	11.28	$	12.45	$	12.87
Granted		-			10,000			-		$	-	$	9.03	$	-
Exercised		(9,833	)		(13,000	)		-		$	8.82	$	8.94	$	-
Forfeited		(5,800	)		(5,800	)		-		$	10.98	$	12.51	$	-
Expired		(88,200	)		(86,800	)		(87,700	)	$	13.73	$	15.94	$	14.52
Outstanding at end of year		143,817			247,650			343,250		$	9.95	$	11.28	$	12.45

Exercisable at end of year		137,150			237,650			343,250		$	10.00	$	11.37	$	12.45

Fair value of options vesting
During the year	$	3,000		$	-		$	-

Intrinsic value of options
Exercised during the year	$	8,000		$	36,000		$	-

In 2012, we received $87,000 in cash related to stock options exercised during the year.

The following tables provide certain information with respect to stock options outstanding and exercisable at December 31, 2012:

					Weighted
	Stock Options		Weighted Average		Average Remaining
Range of Exercise Prices	Outstanding		Exercise Price		Contractual Life (Years)
$6.00 - $8.00		15,000	$	6.95		3.67
$8.00 - $12.00		128,817		10.30		1.67
		143,817	$	9.95		1.88

Aggregate intrinsic value			$	89,000

					Weighted
	Stock Options		Weighted Average		Average Remaining
Range of Exercise Prices	Exercisable		Exercise Price		Contractual Life (Years)
$6.00 - $8.00		15,000	$	6.95		3.67
$8.00 - $12.00		122,150		10.37		1.30
		137,150	$	10.00		1.56

Aggregate intrinsic value			$	84,000