eTrade 2006 Annual Report Download - page 132

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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, 2006, 30.4 million shares were available for grant under the
2005 Plan.
The Company recognized $22.1 million and $13.7 million in compensation expense for stock options for the
years ended December 31, 2006 and 2005, respectively. There was not any compensation expense for stock
options for the year ended December 31, 2004. The Company recognized a tax benefit of $7.8 million and
$5.0 million related to the stock options for the years ended December 31, 2006 and 2005, respectively.
The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option
pricing model based on the assumptions noted in the table below. Expected volatility is based on a combination
of historical volatility of the Company’s stock and implied volatility of publicly traded options on the Company’s
stock. The expected term represents the period of time that options granted are expected to be outstanding. The
expected term is estimated using employees’ actual historical behavior and projected future behavior based on
expected exercise patterns. The risk-free interest rate is based on the U.S. Treasury zero-coupon bond where the
remaining term equals the expected term. Dividend yield is zero as the Company has not, nor does it currently
plan to, issue dividends to its shareholders.
Year Ended December 31,
2006 2005 2004
Expected volatility 34% 34% 55%
Expected term (years) 4.5 4.9 4.3
Risk-free interest rate 5% 4% 3%
Dividend yield — — —
The weighted-average fair values of options granted were $8.60, $4.57 and $5.95 for the years ended
December 31, 2006, 2005 and 2004, respectively. Intrinsic value of options exercised were $89.1 million,
$67.0 million and $53.1 million for the years ended December 31, 2006, 2005 and 2004, respectively.
A summary of options activity under the 2005 Plan is presented below:
Shares
(in thousands)
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2005 37,166 $10.37 6.76 $389,766
Granted 5,994 $24.13
Exercised (5,771) $ 8.53
Canceled (1,634) $15.92
Outstanding at December 31, 2006 35,755 $12.72 5.92 $370,368
Vested and expected to vest at December 31, 2006 31,655 $12.10 5.80 $346,321
Exercisable at December 31, 2006 20,721 $ 9.83 5.20 $271,370
As of December 31, 2006, there was $38.9 million of total unrecognized compensation cost related to
non-vested stock options. This cost is expected to be recognized over a weighted-average period of 1.9 years.
Restricted Stock Awards
The Company recorded $10.5 million, $4.2 million and $4.7 million for the years ended
December 31, 2006, 2005 and 2004, respectively, in compensation expense related to restricted stock awards.
The Company recognized a tax benefit of $4.0 million, $1.6 million and $1.9 million related to restricted stock
awards for the years ended December 31, 2006, 2005 and 2004, respectively. In addition, the Company recorded
a pre-tax credit of $2.8 million in cumulative effect of accounting change as a result of adopting SFAS
No. 123(R) in 2005.
129