eTrade 2011 Annual Report Download - page 152

recognized built-in losses and other carryovers after an “ownership change” occurs. Section 382 rules governing
when a change in ownership occurs are complex and subject to interpretation; however, an ownership change
generally occurs when there has been a cumulative change in the stock ownership of a corporation by certain
“5% shareholders” of more than 50 percentage points over a rolling three-year period.
Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a
corporation may offset with pre-ownership change NOLs. In general, the annual limitation is determined by
multiplying the value of the corporation’s stock immediately before the ownership change (subject to certain
adjustments) by the applicable long-term tax-exempt rate. Any unused portion of the annual limitation is
available for use in future years until such NOLs are scheduled to expire (in general, NOLs may be carried
forward 20 years). In addition, the limitation may, under certain circumstances, be increased or decreased by
built-in gains or losses, respectively, which may be present with respect to assets held at the time of the
ownership change that are recognized in the five-year period (one-year for loans) after the ownership change.
The use of NOLs arising after the date of an ownership change would not be affected unless a corporation
experienced an additional ownership change in a future period.
The Company believes the tax ownership change will extend the period of time it will take to fully utilize its
pre-ownership change NOLs, but will not limit the total amount of pre-ownership change NOLs it can utilize.
The Company’s updated estimate is that it will be subject to an overall annual limitation on the use of its
pre-ownership change NOLs of approximately $194 million. The Company’s overall pre-ownership change
NOLs, which were approximately $1.4 billion, have a statutory carry forward period of 20 years (the majority of
which expire in 16 years). As a result, the Company believes it will be able to fully utilize these NOLs in future
periods.
The Company’s ability to utilize the pre-ownership change NOLs is dependent on its ability to generate
sufficient taxable income over the duration of the carry forward periods and will not be impacted by its ability or
inability to generate taxable income in an individual year.
NOTE 16—SHAREHOLDERS’ EQUITY
The activity in shareholders’ equity during the year ended December 31, 2011 is summarized as follows
(dollars in thousands):
Common Stock /
Additional Paid-In
Capital
Accumulated Deficit /
Other Comprehensive
Loss Total
Beginning balance, December 31, 2010 $6,642,923 $ (2,590,478) $4,052,445
Net income — 156,701 156,701
Conversions of convertible debentures 660,946 — 660,946
Net change from available-for-sale securities — 199,643 199,643
Net change from cash flow hedging instruments — (149,455) (149,455)
Other(1) 5,847 1,823 7,670
Ending balance, December 31, 2011 $7,309,716 $(2,381,766) $4,927,950
(1) Other includes employee share-based compensation accounting and changes in accumulated other comprehensive loss from foreign
currency translation.
Conversions of Convertible Debentures
During the years ended December 31, 2011 and 2010, $660.9 million and $317.0 million of the Company’s
convertible debentures were converted into 63.9 million and 30.7 million shares of common stock, respectively.
For further details on the convertible debentures, see Note 13—Corporate Debt.
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