eTrade 2005 Annual Report Download - page 121

Table of Contents
The following table illustrates the effect on the Company’s reported net income and net income per share if the Company had applied
the fair value recognition provisions of SFAS No.123, to stock-based employee compensation in periods prior to July1, 2005 (in
thousands, except per share amounts):
Year Ended December31,
2005
2004
2003
Net income, as reported
$
430,412
$
380,483
$
203,027
Add back: Stock-based employee compensation expense, net of tax included in
reported net income, net of tax
11,356
3,081
2,033
Deduct: Total stock-based employee compensation expense determined under fair
value-based method for all awards, net of tax
(18,733
)
(22,640
)
(17,561
)
Pro forma net income
$
423,035
$
360,924
$
187,499
Income per share:
Basic—as reported
$
1.16
$
1.04
$
0.57
Basic—pro forma
$
1.14
$
0.98
$
0.52
Diluted—as reported
$
1.12
$
0.99
$
0.55
Diluted—pro forma
$
1.10
$
0.94
$
0.51
The underlying assumptions to these fair value calculations are discussed in Note 21.
Comprehensive Income
—The Company’s comprehensive income is comprised of net income, foreign currency cumulative translation
adjustments, unrealized gains (losses) on available-for-sale mortgage-backed and investment securities and the effective portion of the
unrealized gains (losses) on financial derivatives in cash flow hedge relationships, net of reclassification adjustments and related taxes.
Earnings Per Share
—Basic earnings per share (“EPS”) is computed by dividing net income by the weighted-average common shares
outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. The Units will be reflected in diluted earnings per share calculations using the
treasury stock method as defined by SFAS No.128,
Earning per Share
. Under this method, the number of shares of common stock
used in calculating diluted earnings per share (based on the settlement formula applied at the end of the reporting period) is deemed to
be increased by the excess, if any, of the number of shares that would be issued upon settlement of the purchase contracts less the
number of shares that could be purchased by the Company in the market at the average market price during the period using the
proceeds to be received upon settlement.
Financial Derivative Instruments and Hedging Activities
—The Company enters into derivative transactions to protect against the
risk of market price or interest rate movements on the value of certain assets, liabilities and future cash flows. The Company must also
recognize certain contracts and commitments as derivatives when the characteristics of those contracts and commitments meet the
definition of a derivative promulgated by SFASNo.133
, Accounting for Derivative Instruments and Hedging Activities,
as amended.
Each derivative is recorded on the balance sheet at fair value as a freestanding asset or liability. Financial derivative instruments in
hedging relationships that mitigate exposure to changes in the fair value of assets or liabilities are considered fair value hedges under
SFAS No.133. Financial derivative instruments designated in hedging relationships that mitigate the exposure to the variability in
expected future cash flows or other forecasted transactions are considered cash flow hedges. The Company formally documents all
relationships between hedging instruments and hedged items and the risk management objective and strategy for each hedge
transaction.
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2006. EDGAR Online, Inc.