eTrade 2002 Annual Report Download - page 160

Table of Contents
Index to Financial Statements
grant date as prescribed by SFAS No. 123, the related pro forma expense that would have been recorded is described in Note 2.
The Company’ s calculations were made using the Black-Scholes option-pricing models with the following weighted average assumptions
applied to grants made in the following periods:
Year Ended
December31, ThreeMonths Ended December 31, 2000 YearEnded September30, 2000
2002 2001
Dividend yield — — — —
Expected volatility 71 % 74 % 87 % 85 %
Risk-free interest rate 4 % 5 % 6 % 6 %
Expected life of option following vesting (in
months)
36 32 18 17
Under SFAS No. 123, the fair value of stock-based awards to employees is calculated using option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ
from the Company’ s stock option awards. These models also require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
The Company’ s calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. The valuations of
the computed weighted average fair values of option grants under SFAS No.123 were $4.69 for fiscal 2002, $4.14 for fiscal 2001, $4.60 for
three months ended December31, 2000 and $12.78 for fiscal 2000.
Employee Stock Ownership Plan
ETFC sponsored an Employee Stock Ownership Plan (“ESOP”). The ESOP previously borrowed from ETFC and used the proceeds to acquire
common stock. The ESOP shares initially were pledged as collateral for its debt to ETFC. As the debt was repaid, shares were released from
collateral and allocated to active employees, based on the proportion of debt service paid in the year. Accordingly, the shares pledged as
collateral were reported as unearned ESOP shares in the consolidated balance sheet. As shares were released from collateral, the Company
recorded compensation expense equal to the current market price of the shares. During fiscal 2001, the ESOP repaid all amounts due ETFC and
released all remaining unearned shares to ETFC’ s employees. The ESOP owned approximately 154,000 of the Company’ s common stock as of
December 31, 2002, 538,000 shares as of December 31, 2001 and 688,791 shares as of September 30, 2000, with all of the shares allocated as
of December31, 2001. The Company terminated the plan during fiscal 2002. Compensation expense was none for fiscal 2002, $1.0million for
fiscal 2001, $75,000 for the three months ended December 31, 2000 and $1.8million for fiscal 2000.
Supplemental Executive Retirement Plan
Effective January 1, 2001, the Company’ s Board of Directors adopted a SERP program for certain executive officers. Annual contributions and
funding of the SERP by the Company are discretionary. Contributions to the SERP, if any, are due at the beginning of each fiscal year and are
deposited into a Rabbi Trust to which the Company retains ownership until participant benefits vest and are distributed. With the exception of
the Company’ s Former CEO, whose benefits vested immediately, no portion of a participant’ s benefits will become vested unless the individual
has participated in the plan for at least five years. Fifty percent of participation benefits vest after five years of participation in the SERP with
the remaining benefits vesting over the next fiveyears of participation or upon the participant’ s attaining the age of sixty.
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