eTrade 2007 Annual Report Download - page 133

Excluded from the calculations of diluted earnings per share are 2.2 million and 7.8 million shares of
common stock for the years ended December 31, 2006 and 2005, respectively, issuable under convertible
subordinated notes as the effect of applying the treasury stock method on an if-converted basis would be anti-
dilutive. There were not any shares issuable under convertible subordinated notes excluded from the year ended
2007, as all convertible subordinated notes outstanding had been redeemed in 2006. In addition, in 2005,
25.0 million shares of common stock potentially issuable related to the conversion of mandatory convertible
notes were excluded from the calculations because it would be anti-dilutive.
NOTE 20—EMPLOYEE SHARE-BASED PAYMENTS AND OTHER BENEFITS
Adoption of SFAS No. 123(R)
As discussed in Note 1—Organization, Basis of Presentation and Summary of Significant Accounting
Policies, effective July 1, 2005, the Company adopted SFAS No. 123(R). The adoption resulted in the
recognition of or changes to the recognition method of expense for the Company’s employee stock option plans,
restricted stock awards and employee stock purchase plan. The combined impact of the adoption in 2005 was as
follows: $13.7 million in compensation expense for stock options; $0.4 million compensation expense for the
stock purchase plan; and a pre-tax credit of $2.8 million in cumulative effect of accounting change for 2005.
Results for prior periods have not been restated. Total compensation expense for share-based compensation also
includes $4.2 million for restricted stock awards, which were previously expensed by the Company under APB
Opinion No. 25, prior to the adoption of SFAS No. 123(R).
Employee Stock Option Plans
In 2005, the Company adopted and the shareholders approved the 2005 Stock Incentive Plan (“2005 Plan”)
to replace the 1996 Stock Incentive Plan (“1996 Plan”) which provides for the grant of nonqualified or incentive
stock options to officers, directors, key employees and consultants for the purchase of newly issued shares of the
Company’s common stock at a price determined by the Board at the date the option is granted. Options are
generally exercisable ratably over a four-year period from the date the option is granted and expire within ten
years from the date of grant. Beginning in 2006, most options that were granted have a contractual term of seven
years. Certain options provide for accelerated vesting upon a change in control. Exercise prices are generally
equal to the fair market value of the shares on the grant date. A total of 85.4 million shares had been authorized
under the 1996 Plan. Under the 2005 Plan, the remaining unissued authorized shares of the 1996 Plan, up to
42.0 million shares, were authorized for issuance. Additionally, any shares that had been awarded but remained
unissued under the 1996 Plan that were subsequently canceled, would be authorized for issuance under the 2005
Plan, up to 39.0 million shares. As of December 31, 2007, 27.1 million shares were available for grant under the
2005 Plan.
The Company recognized $25.4 million, $22.1 million and $13.7 million in compensation expense for stock
options for the years ended December 31, 2007, 2006 and 2005, respectively. The Company recognized a tax
benefit of $8.2 million, $7.8 million and $5.0 million related to the stock options for the years ended
December 31, 2007, 2006 and 2005, respectively.
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