eTrade 2003 Annual Report Download - page 34

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Table of Contents
Index to Financial Statements
Corporate interest expense was $45.6 million in 2003, $47.7 million in 2002 and $52.9 million in 2001. On December 31, 2003, we had $695
million outstanding of convertible subordinated notes. We have retired $280 million of our convertible subordinated notes through share and
cash exchanges since 2001.
Gain (loss) on investments was a gain of $147.5 million for 2003, a loss of $18.5 million for 2002 and $49.8 million for 2001. The gain in
2003 was primarily due to a change in accounting treatment for our holding in E*TRADE Japan K.K., as well as subsequent sales of these
holdings. On June 2, 2003, E*TRADE Japan K.K. merged with SBI. Upon closing of the merger, we owned 19.8% of SBI and determined that
we no longer exercised significant influence or control over SBI to account for our ownership under the equity method and, therefore, began to
account for our investment in SBI at fair value as an available-for-sale investment security. We recognized a $29.5 million gain on investment
based on the fair value of the SBI shares received in excess of our book value on the June 2, 2003 exchange date. During 2003, we sold shares
of SBI resulting in a gain of $122.2 million. At December 31, 2003, we owned 9.07% of SBI and the fair value of our investment in SBI was
$216.8 million, with a gross unrealized gain of $178.4 million. We also recorded other-than-temporary impairment charges related to
investments in privately held companies accounted for under the cost method of $8.0 million for 2003, $12.5 million for 2002 and $30.0
million for 2001.
Income Tax Expense (Benefit)
Income tax expense (benefit) represents the expense for worldwide income taxes at an effective tax rate of 36.2% for 2003, 43.9% for
2002 and a benefit of 7.6% for 2001. The rate for 2003 reflects a decrease in tax expense due to the reversal of valuation allowance resulting
from the realization of capital gains on our shares of SBI; offset by a tax expense increase due to valuation allowances for operating losses in
foreign jurisdictions, and valuation allowances on deferred tax assets related to investments and joint ventures. The rate for 2002 reflects a
decrease in taxes due to reversal of foreign loss valuation allowances as operations in certain jurisdictions became profitable, an increase in
taxes due to valuation allowance for losses in certain foreign jurisdictions and capital losses for which no benefit was recognized. The rate for
2001 reflects a decrease in the tax benefit for non-deductible expenses, such as certain compensation and the amortization of goodwill,
differences between our statutory and foreign effective tax rates and losses in certain foreign jurisdictions for which no benefit was recognized.
Cumulative Effect of Accounting Change
Cumulative effect of accounting change was $293.7 million in 2002, which was due to our adoption of SFAS No. 142, effective January
1, 2002. Goodwill was tested for impairment using fair value tests and, as a result, we wrote-down goodwill associated with certain of our
international subsidiaries acquired in previous years.
Analysis of Segment Revenues
Brokerage Segment Revenues
During 2003, our Brokerage Segment generated nearly 60% of the Company’s net revenues. Our net brokerage revenues increased 2% to
$879.1 million in 2003 from $862.2 million in 2002 mainly due to an increase in commissions as a result of a resurgence in market activity
offset by a decrease in net brokerage interest income attributable to lower interest rates and tightening of the spread between free credit
per brokerage revenue trade reflecting the implementation of a simplified $9.99 flat commission rate program for the most active trader
segment in June 2002 and lower customer margin balances.
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