|
9. Stock-Based Compensation
Stock Incentive Plans
We maintain stock incentive plans to attract and retain officers, directors and key employees. Stock awards under these plans include both performance and non-performance based stock incentives. As of September 30, 2011, we had outstanding under these plans stock options to acquire 9.1 million shares of our Class A common stock and 0.2 million restricted stock units. Stock options granted prior to and on September 30, 2011 were granted with exercise prices equal to or greater than the market value of our Class A common stock at the date of grant and with a maximum term of ten years. While historically we have issued stock awards subject to vesting, typically at the rate of 20% to 33% per year, some stock awards have been granted with immediate vesting and other stock awards vest only upon the achievement of certain company-wide objectives. As of September 30, 2011, we had 4.5 million shares of our Class A common stock available for future grant under our stock incentive plans.
In connection with the Spin-off, as permitted by DISH Network’s existing stock incentive plans and consistent with the Spin-off exchange ratio, each DISH Network stock option was converted into two stock options as follows:
· an adjusted DISH Network stock option for the same number of shares that were exercisable under the original DISH Network stock option, with an exercise price equal to the exercise price of the original DISH Network stock option multiplied by 0.831219.
· a new EchoStar stock option for one-fifth of the number of shares that were exercisable under the original DISH Network stock option, with an exercise price equal to the exercise price of the original DISH Network stock option multiplied by 0.843907.
Similarly, each holder of DISH Network restricted stock units retained his or her DISH Network restricted stock units and received one EchoStar restricted stock unit for every five DISH Network restricted stock units that they held.
Consequently, the fair value of the DISH Network stock award and the new EchoStar stock award immediately following the Spin-off was equivalent to the fair value of such stock award immediately prior to the Spin-off.
As of September 30, 2011, the following stock awards were outstanding:
|
|
|
As of September 30, 2011 |
|
|
|
|
EchoStar Awards |
|
DISH Network Awards |
|
|
Stock Awards Outstanding |
|
Stock
Options |
|
Restricted
Stock
Units |
|
Stock
Options |
|
Restricted
Stock
Units |
|
|
Held by EchoStar employees |
|
8,311,415 |
|
93,165 |
|
3,011,803 |
|
211,124 |
|
|
Held by DISH Network employees |
|
823,454 |
|
57,786 |
|
N/A |
|
N/A |
|
|
Total |
|
9,134,869 |
|
150,951 |
|
3,011,803 |
|
211,124 |
|
We are responsible for fulfilling all stock awards related to EchoStar common stock and DISH Network is responsible for fulfilling all stock awards related to DISH Network common stock, regardless of whether such stock awards are held by our or DISH Network’s employees. Notwithstanding the foregoing, our stock-based compensation expense, resulting from stock awards outstanding at the Spin-off date, is based on the stock awards held by our employees regardless of whether such stock awards were issued by EchoStar or DISH Network. Accordingly, stock-based compensation that we expense with respect to DISH Network stock awards is included in “Additional paid-in capital” on our Condensed Consolidated Balance Sheets.
Stock Award Activity
Our stock option activity was as follows:
|
|
|
For the Nine Months |
|
|
|
|
Ended September 30, 2011 |
|
|
|
|
Options |
|
Weighted-
Average
Exercise Price |
|
|
Total options outstanding, beginning of period |
|
7,795,373 |
|
$ |
23.24 |
|
|
Granted |
|
2,600,000 |
|
$ |
36.82 |
|
|
Exercised |
|
(1,035,504 |
) |
$ |
23.95 |
|
|
Forfeited and cancelled |
|
(225,000 |
) |
$ |
21.25 |
|
|
Total options outstanding, end of period |
|
9,134,869 |
|
$ |
27.07 |
|
|
Performance based options outstanding, end of period (1) |
|
673,000 |
|
$ |
25.31 |
|
|
Exercisable at end of period |
|
2,660,787 |
|
$ |
25.46 |
|
(1) These stock options are included in the caption “Total options outstanding, end of period.” See discussion of the 2005 LTIP below.
We realized tax benefits from stock awards exercised during the three and nine months ended September 30, 2011 and 2010 as follows:
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
|
|
Ended September 30, |
|
Ended September 30, |
|
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
(In thousands) |
|
|
Tax benefit from stock awards exercised |
|
$ |
329 |
|
$ |
53 |
|
$ |
5,205 |
|
$ |
1,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the closing market price of our Class A common stock on September 30, 2011, the aggregate intrinsic value of our stock options was as follows:
|
|
|
As of September 30, 2011 |
|
|
|
|
Options
Outstanding |
|
Options
Exercisable |
|
|
|
|
(In thousands) |
|
|
Aggregate intrinsic value |
|
$ |
14,097 |
|
$ |
3,236 |
|
|
|
|
|
|
|
|
|
Our restricted stock unit activity was as follows:
|
|
|
For the Nine Months |
|
|
|
|
Ended September 30, 2011 |
|
|
|
|
Restricted
Stock
Units |
|
Weighted-
Average
Grant Date
Fair Value |
|
|
Total restricted stock units outstanding, beginning of period |
|
107,249 |
|
$ |
27.33 |
|
|
Granted |
|
49,950 |
|
$ |
36.43 |
|
|
Vested |
|
— |
|
$ |
— |
|
|
Forfeited and cancelled |
|
(6,248 |
) |
$ |
28.17 |
|
|
Total restricted stock units outstanding, end of period |
|
150,951 |
|
$ |
30.29 |
|
|
Restricted Performance Units outstanding, end of period (1) |
|
89,776 |
|
$ |
26.68 |
|
(1) These Restricted Performance Units are included in the caption “Total restricted stock units outstanding, end of period.” See discussion of the 2005 LTIP below.
Long-Term Performance Based Plans
2005 LTIP. During 2005, DISH Network adopted a long-term, performance based stock incentive plan (the “2005 LTIP”). The 2005 LTIP provides stock options and restricted stock units, either alone or in combination, which vest over seven years at the rate of 10% per year during the first four years, and at the rate of 20% per year thereafter. Exercise of the stock awards is subject to the foregoing vesting schedule and a performance condition that a company-specific goal is achieved by March 31, 2015.
Contingent compensation related to the 2005 LTIP will not be recorded in our financial statements unless and until the achievement of the performance condition is probable. The competitive nature of our industry and certain other factors can significantly impact achievement of the goal. Consequently, while it was determined that achievement of the goal was not probable as of September 30, 2011, this assessment could change in the future.
If all of the stock awards under the 2005 LTIP were vested and the goal had been met or if we had determined that achievement of the goal was probable during the nine months ended September 30, 2011, we would have recorded total non-cash, stock-based compensation expense for our employees as indicated in the table below. If the goal is met and there are unvested stock awards at that time, the vested amounts would be expensed immediately on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), with the unvested portion recognized ratably over the remaining vesting period.
|
|
|
2005 LTIP |
|
|
|
|
|
|
Vested |
|
|
|
|
Total |
|
Portion (1) |
|
|
|
|
(In thousands) |
|
|
DISH Network awards held by EchoStar employees |
|
$ |
17,029 |
|
$ |
13,133 |
|
|
EchoStar awards held by EchoStar employees |
|
3,393 |
|
2,616 |
|
|
Total |
|
$ |
20,422 |
|
$ |
15,749 |
|
(1) Represents the amount of this award that has met the foregoing vesting schedule and would therefore vest upon achievement of the performance condition.
Of the 9.1 million stock options and 0.2 million restricted stock units outstanding under our stock incentive plans as of September 30, 2011, the following awards were outstanding pursuant to the 2005 LTIP:
|
|
|
As of September 30, 2011 |
|
|
|
|
Number of
Awards |
|
Weighted-
Average
Exercise
Price |
|
|
Stock options |
|
673,000 |
|
$ |
25.31 |
|
|
Restricted Performance Units |
|
89,776 |
|
|
|
|
Total |
|
762,776 |
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation
Total non-cash, stock-based compensation expense for all of our employees is shown in the following table for the three and nine months ended September 30, 2011 and 2010 and was allocated to the same expense categories as the base compensation for such employees:
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
|
|
Ended September 30, |
|
Ended September 30, |
|
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
(In thousands) |
|
|
Research and development expenses |
|
$ |
564 |
|
$ |
755 |
|
$ |
1,776 |
|
$ |
2,883 |
|
|
Selling, general and administrative expenses |
|
4,452 |
|
2,486 |
|
9,782 |
|
7,659 |
|
|
Total non-cash, stock-based compensation |
|
$ |
5,016 |
|
$ |
3,241 |
|
$ |
11,558 |
|
$ |
10,542 |
|
As of September 30, 2011, our total unrecognized compensation cost related to our non-performance based unvested stock awards was $52 million and includes compensation expense that we will recognize for DISH Network stock awards held by our employees as a result of the Spin-off. This cost is based on an estimated future forfeiture rate of approximately 1.1% per year and will be recognized over a weighted-average period of approximately three years. Share-based compensation expense is recognized based on stock awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Changes in the estimated forfeiture rate can have a significant effect on share-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed.
Valuation
The fair value of each stock option for the three and nine months ended September 30, 2011 and 2010 was estimated at the date of the grant using a Black-Scholes option valuation model with the following assumptions:
|
|
|
For the Three Months |
|
For the Nine Months |
|
|
|
|
Ended September 30, |
|
Ended September 30, |
|
|
Stock Options |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
Risk-free interest rate |
|
1.19% |
|
1.64% |
|
1.19% - 2.57% |
|
1.64% - 2.97% |
|
|
Volatility factor |
|
37.85% |
|
31.32% |
|
34.68% - 38.68% |
|
31.00% - 31.51% |
|
|
Expected term of options in years |
|
6.0 |
|
6.2 |
|
5.1 - 6.0 |
|
6.1 - 6.2 |
|
|
Weighted-average fair value of options granted |
|
$8.59 |
|
$6.44 |
|
$8.59 - $14.42 |
|
$6.44 - $7.38 |
|
We do not currently intend to pay dividends on our common stock and accordingly, the dividend yield percentage used in the Black-Scholes option valuation model is set at zero for all periods. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded stock options which have no vesting restrictions and are fully transferable. Consequently, our estimate of fair value may differ from other valuation models. Further, the Black-Scholes option valuation model requires the input of subjective assumptions. Changes in the subjective input assumptions can materially affect the fair value estimate.
We will continue to evaluate the assumptions used to derive the estimated fair value of our stock options as new events or changes in circumstances become known. |