Note 14. 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-based and non-performance based stock incentives. As of December 31, 2012, we had outstanding under these plans stock options to acquire 7.9 million shares of our Class A common stock and 0.2 million restricted stock units. Stock options granted prior to and on December 31, 2012 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 over three to five years, 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 December 31, 2012, we had 5.5 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, holders of DISH Network restricted stock units retained their 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 December 31, 2012, the following stock awards were outstanding:

	As of December 31, 2012
	EchoStar Awards		DISH Network Awards
	Stock Options	Restricted Stock Units	Stock Options	Restricted Stock Units
Held by EchoStar employees	6,798,432	106,063	2,215,313	94,999
Held by DISH Network employees	1,109,868	45,620	—	—
Total outstanding stock awards	7,908,300	151,683	2,215,313	94,999

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 employees 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 recognize with respect to DISH Network stock awards was included in “Additional paid-in capital” on our Consolidated Balance Sheets.

Exercise prices for stock options outstanding and exercisable as of December 31, 2012 are as follows:

	Options Outstanding				Options Exercisable
Price Range	Number Outstanding as of December 31, 2012	Weighted- Average Remaining Contractual Term (In Years)	Weighted- Average Exercise Price		Number Exercisable as of December 31, 2012	Weighted- Average Remaining Contractual Term (In Years)	Weighted- Average Exercise Price
$0.00 - $10.00	3,666	3	$	2.15	3,666	3	$	2.15
$10.01 - $15.00	587,033	6	$	14.83	202,633	6	$	14.83
$15.01 - $20.00	796,565	7	$	18.82	249,565	7	$	18.65
$20.01 - $25.00	1,931,812	5	$	22.15	1,160,212	6	$	21.05
$25.01 - $30.00	2,354,903	5	$	28.59	1,614,103	4	$	28.77
$30.01 - $35.00	485,601	9	$	33.89	59,501	4	$	31.93
$35.01 - $40.00	1,748,720	8	$	37.14	456,486	7	$	37.03
	7,908,300	6	$	27.21	3,746,166	6	$	25.98

Stock Award Activity

Our stock option activity was as follows:

	For the Years Ended December 31,
	2012				2011				2010
	Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price		Options		Weighted- Average Exercise Price
Total options outstanding, beginning of period	8,078,413		$	26.30	7,795,373		$	23.24	7,203,101		$	24.85
Granted	771,000		$	30.81	1,955,000		$	36.01	1,258,000		$	19.15
Exercised	(569,073	)	$	20.02	(1,082,280	)	$	23.59	(105,573	)	$	15.06
Forfeited and cancelled	(372,040	)	$	25.71	(589,680	)	$	23.07	(560,155	)	$	33.99
Total options outstanding, end of period	7,908,300		$	27.21	8,078,413		$	26.30	7,795,373		$	23.24
Performance-based options outstanding, end of period (1)	632,100		$	25.28	658,700		$	25.30	697,100		$	25.38
Exercisable at end of period	3,746,166		$	25.98	2,854,272		$	25.02	2,722,709		$	25.77

(1) These stock options are included in the caption “Total options outstanding, end of period.” See discussion of the 2005 LTIP below.

(2) Granted options for the year ended December 31, 2011 was corrected in the fourth quarter of 2012 to exclude 700,000 options which had not been validly granted in 2011.

We realized tax benefits from stock options exercised of $3 million, $5 million and $2 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Based on the closing market price of our Class A common stock on December 31, 2012, the aggregate intrinsic value of our stock options was $61 million for options outstanding and $32 million for options exercisable as of December 31, 2012.

Our restricted stock unit activity was as follows:

	For the Years Ended December 31,
	2012				2011				2010
	Restricted Stock Units		Weighted- Average Grant Date Fair Value		Restricted Stock Units		Weighted- Average Grant Date Fair Value		Restricted Stock Units		Weighted- Average Grant Date Fair Value
Total restricted stock units outstanding, beginning of period	144,226		$	29.22	107,249		$	27.33	130,040		$	27.78
Granted	33,333		$	34.22	69,950		$	32.00	—		$	—
Vested	(16,210	)	$	32.61	(11,225	)	$	31.84	(13,975	)	$	31.84
Forfeited and cancelled	(9,666	)	$	25.84	(21,748	)	$	27.36	(8,816	)	$	26.70
Total restricted stock units outstanding, end of period	151,683		$	30.18	144,226		$	29.22	107,249		$	27.33
Restricted Performance Units outstanding, end of period (1)	64,610		$	26.72	74,276		$	26.61	93,274		$	26.66

(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 vests 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. While it was determined that achievement of the goal was not probable as of December 31, 2012, 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 as of December 31, 2012, 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 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	$	16,293	$	16,159
EchoStar awards held by EchoStar employees	2,947		2,923
Total	$	19,240	$	19,082

(1) Represents the amount of this award that has met the foregoing vesting schedule and would therefore vest upon achievement of the performance condition.

Stock-Based Compensation

Total non-cash, stock-based compensation expense for all of our employees is shown in the following table for the years ended December 31, 2012, 2011and 2010 and was allocated to the same expense categories as the base compensation for such employees:

	For the Years Ended December 31,
	2012		2011		2010
	(In thousands)
Research and development expenses	$	2,755	$	2,411	$	3,579
Selling, general and administrative expenses	11,830		13,653		9,967
Total non-cash, stock-based compensation	$	14,585	$	16,064	$	13,546

As of December 31, 2012, total unrecognized compensation cost related to our non-performance based unvested stock awards was $33 million, including compensation expense related to 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 2.4% per year and will be recognized over a weighted-average period of approximately two years. Stock-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 years ended December 31, 2012, 2011 and 2010 was estimated at the date of the grant using a Black-Scholes option valuation model with the following assumptions:

	For the Years Ended December 31,
Stock Options	2012	2011	2010
Risk-free interest rate	0.82% - 1.33%	1.08%-2.57%	1.64% - 2.97%
Volatility factor	40.36% - 41.12%	34.68% - 38.92%	31.00% - 32.73%
Expected term of options in years	5.9 - 6.0	5.1 - 6.0	6.1 - 6.2
Weighted-average grant-date fair value	$10.60 - $13.70	$8.07 - $14.42	$6.44 - $9.11

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 was assumed to be 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.