Filed
Pursuant to Rule 424(b)(7)
Registration
No. 333-158636
CALCULATION
OF REGISTRATION FEE
|
Title
of Each Class of Securities to be Registered
|
Amount
to be
Registered
|
Proposed
Maximum
Offering
Price
Per
Unit
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount
of
Registration
Fee
|
8.0%
Senior Notes Due 2011
|
$230,245,000
|
111.25% (1)
|
$256,147,563
(1)
|
$14,294
|
12.5%
Springing Lien Notes Due 2017 issued on November 29, 2007
|
$1,604,641,000
|
111.07% (1)
|
$1,782,274,759
(1)
|
$99,451
|
12.5%
Springing Lien Notes Due 2017 issued on January 18, 2008
|
$169,335,000
|
111.07% (1)
|
$188,080,385
(1)
|
$10,495
|
Common
Stock, par value $0.01 per share
|
180,095,920
|
$1.29 (2)
|
$232,323,737
(2)
|
$12,964
|
Total
|
—
|
—
|
$2,458,826,444
|
$137,204
|
(1)
|
Estimated solely for the purpose
of determining the registration fee pursuant to Rule 457(c) under the
Securities Act of 1933, as amended, based upon average of the high and low
prices for the securities as reported to the Financial Industry Regulatory
Authority through its TRACE system on June 30,
2009.
|
(2)
|
Estimated
solely for the purpose of determining the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933, as amended, based upon the
average of the high and low prices for the registrant’s common stock as
reported on the NASDAQ Global Select Market on June 30,
2009.
|
(3)
|
A
filing fee of $109,563 was previously paid in connection with the filing
of Form S-3ASR, Registration Number 333-150997, filed on May 19,
2008. That registration statement has been withdrawn and
$95,719 of unused fees from that registration statement has been applied
to this filing to offset the registration
fee.
|
Prospectus
Supplement
(To
Prospectus dated April 17, 2009)
E*TRADE
Financial Corporation
Shares
of Common Stock, 8.0% Senior Notes Due 2011 and 12.5% Springing Lien Notes Due
2017
This
prospectus supplement relates to:
|
·
|
180,095,920
shares of our common stock , par value $0.01 per
share,
|
|
·
|
$230,245,000
principal amount of our 8.0% Senior Notes due 2011 (the “2011 Notes”),
and
|
|
·
|
$1,773,976,000
principal amount (plus capitalized interest, if any) of our 12.5%
Springing Lien Notes due 2017 (the “2017 Notes”, and together with the
2011 Notes, the “Notes”),
|
which may
be sold from time to time by the selling securityholders named
herein.
The 2017
Notes include $1,604,641,000 principal amount of 12.5% Springing Lien Notes Due
2017 issued on November 29, 2007 (the “Initial 2017 Notes”) and
$169,335,000 principal amount of 12.5% Springing Lien Notes Due 2017 issued on
January 18, 2008 (the “Additional 2017 Notes”). Although the
Initial 2017 Notes and Additional 2017 Notes were issued in separate tranches
and are not fungible, for purposes of this prospectus supplement, except as
expressly stated or where the context otherwise requires, the term the “2017
Notes” includes the Initial 2017 Notes and the Additional 2017
Notes. To the extent the Company has elected or elects to capitalize
all or a portion of the interest payable on the 2017 Notes on interest payment
dates occurring on or prior to May 31, 2010 as permitted by the Indenture
governing the 2017 Notes, the terms the “Notes” and the “2017 Notes” also
includes such additional principal amount.
The Notes
are general senior obligations of E*TRADE Financial Corporation and, except as
described in this prospectus supplement, are not and will not be secured by any
property or assets and are not and will not be guaranteed by any of our
subsidiaries through which we currently conduct substantially all of our
operations. In the future, as described in more detail in this
prospectus supplement, we will be required to secure the 2017 Notes and certain
of our subsidiaries will be required to guarantee the 2017
Notes. Such security and guarantees may not provide the holders of
the 2017 Notes with any further protection. See “Description of
Notes” and “Risk Factors” for a more complete description of the terms of the
Notes and the risks associated with any investment in the Notes.
This
prospectus supplement includes both Notes tendered by the selling
securityholders in the Debt Exchange (defined below) and Notes not tendered in
the Debt Exchange. As described in “The Debt Exchange and Consent
Solicitation” and elsewhere in this prospectus supplement, Notes tendered during
the Early Tender Period of the Debt Exchange have been assigned temporary CUSIP
numbers. The temporary CUSIP numbers assigned to such Notes are as
follows:
|
·
|
the
2011 Notes with permanent CUSIP No. 269246 AF1 have been assigned
269246 BC7 as a temporary CUSIP
number.
|
|
·
|
the
2017 Notes with permanent CUSIP Nos. 269246 AS3, 269246 AT1
and 269246 AV6 have been assigned one of 269246 BD5, 269246 BE3 or
269246 BF0 as a temporary CUSIP
number.
|
Notes
bearing such temporary CUSIP numbers represent the right to receive in exchange
therefor an equal principal amount of Class A Debentures (defined below) and
accrued but unpaid interest in cash through but excluding the settlement date of
the Debt Exchange, provided the Debt Exchange is completed, and are not fungible
with any Note not so tendered. Notes bearing a permanent CUSIP number
will not be eligible to tender in the Debt Exchange. There is no
assurance that the Debt Exchange will be consummated, and if it is not, the
Notes bearing temporary CUSIP numbers will revert to their prior permanent CUSIP
numbers and will not be exchanged for Class A Debentures.
The
selling securityholders may offer and sell the common stock and Notes (together,
the “securities”) offered hereby directly to purchasers or through underwriters,
brokers, dealers or agents, who may receive compensation in the form of
discounts, concessions or commissions. The securities may be sold in
one or more transactions at fixed or negotiated prices or at prices based on
prevailing market prices at the time of sale. If underwriters,
brokers, dealers or agents are used to sell the securities, we will name them
and describe their compensation in a supplement to this prospectus
supplement.
We will
not receive any of the proceeds from the sale of the securities pursuant to this
prospectus supplement. We are, however, responsible for expenses
incident to the registration under the Securities Act of 1933 of the offer and
sale of the securities.
The Notes
will not be listed on any securities exchange. Our common stock is
listed on the NASDAQ Global Select Market under the symbol
“ETFC”. The closing price of our common stock on July 1, 2009 was
$1.35 per share.
Investing
in these securities involves certain risks. See “Risk Factors”
beginning on page S-8 of this prospectus supplement.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved these securities, or determined if this prospectus
supplement is truthful or complete. Any representation to the
contrary is a criminal offense.
The date
of this prospectus supplement is July 2, 2009
TABLE
OF CONTENTS
Prospectus
Supplement
Page
About
This Prospectus Supplement
|
S-1
|
Cautionary
Statement Concerning Forward-looking Statements
|
S-1
|
E*TRADE
Financial Corporation
|
S-3
|
Risk
Factors
|
S-8
|
Use
of Proceeds
|
S-30
|
Price Range of
Common Stock
|
S-30
|
Ratio
of Earnings to Fixed Charges
|
S-30
|
The
Debt Exchange and Consent Solicitation
|
S-31
|
Description
of Capital Stock
|
S-34
|
Description
of Notes
|
S-41
|
Description
of Debentures
|
S-89
|
Material
U.S. Federal
Income Tax Considerations
|
S-135
|
Selling
Securityholders
|
S-141
|
Plan
of Distribution
|
S-143
|
Where
You Can Find More Information
|
S-146
|
Prospectus
Page
The
Company
|
1
|
Where
You Can Find More Information
|
2
|
Special
Note On Forward-Looking Statements
|
3
|
Use
Of Proceeds
|
4
|
Dividend
Policy
|
4
|
Ratio
Of Earnings To Fixed Charges And Preferred Stock Dividends
|
5
|
Description
Of Common Stock
|
6
|
Description
Of Preferred Stock
|
11
|
Description
Of Debt Securities
|
12
|
Description
Of Depositary Shares
|
22
|
Description
Of Rights
|
25
|
Description
Of Warrants
|
25
|
Description
Of Purchase Contracts
|
25
|
Description
Of Units
|
26
|
Forms
Of Securities
|
27
|
Plan
Of Distribution
|
29
|
Validity
Of Securities
|
30
|
Experts
|
30
|
You
should rely only on the information contained in this prospectus supplement, the
accompanying prospectus, any related free writing prospectus issued by us (which
we refer to as a “Company free writing prospectus”) and the documents
incorporated by reference in this prospectus supplement and the accompanying
prospectus. We have not authorized anyone to provide you with
different information. If anyone provides you with different or
inconsistent information, you should not rely on it. This prospectus
supplement may be used only where it is legal to sell the securities offered
hereby. You should not assume that the information in this prospectus
supplement, the accompanying prospectus, any related Company free writing
prospectus or any document incorporated herein by reference is accurate as of
any date other than the date of this prospectus supplement. Also, you
should not assume that there has been no change in the affairs of E*TRADE since
the date of this prospectus supplement. Our business, financial
condition, results of operations and prospects may have changed since that
date.
We refer
to E*TRADE Financial Corporation in this prospectus supplement as “E*TRADE”, the
“Company”, “we”, “us”, “our” or comparable terms. All such references
refer to E*TRADE Financial Corporation and not its consolidated subsidiaries
unless expressly indicated or the context otherwise requires.
ABOUT
THIS PROSPECTUS SUPPLEMENT
This
prospectus supplement and the accompanying prospectus are part of a registration
statement that we filed with the Securities and Exchange Commission (“SEC”),
utilizing a “shelf” registration process. This document contains two
parts. The first part consists of this prospectus supplement, which
provides you with specific information about the securities being sold and about
the offering itself. The second part, the accompanying prospectus,
provides more general information, some of which may not apply to this
offering. If the description of this offering varies between this
prospectus supplement and the accompanying prospectus, you should rely on the
information contained in this prospectus supplement.
Both this
prospectus supplement and the accompanying prospectus include or incorporate by
reference important information about us, our securities and other information
you should know before investing in our securities. Before purchasing
any securities, you should carefully read both this prospectus supplement and
the accompanying prospectus, together with the additional information described
under the heading “Where You Can Find More Information”.
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain
information included in this prospectus supplement, the accompanying prospectus
and the documents we incorporate herein by reference may be deemed to be
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange
Act of 1934, as amended (the “Exchange Act”). Statements that are not
statements of historical facts are hereby identified as forward-looking
statements for these purposes. In particular, statements regarding
concurrent transactions, our special stockholders meeting and certain recent
developments, as well as statements incorporated by reference that we make under
the heading “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in our Annual Report on Form 10-K for the year ended
December 31, 2008, our Quarterly Report on Form 10-Q for the three months ended
March 31, 2009 and our Current Report on Form 8-K dated May 14, 2009 relating to
our overall volume trends, and industry forces, margin trends, anticipated
capital expenditures and our strategies are forward-looking
statements. When used or incorporated by reference in this document,
the words “may”, “believe”, “expect”, “intend”, “anticipate”, “estimate”,
“project”, “plan”, “should” and similar expressions are intended to identify
forward-looking statements.
These
statements are based on assumptions and assessments made by our management in
light of their experience and their perception of market conditions, historical
trends, current conditions, expected future developments and other factors they
believe to be appropriate. Any forward-looking statements are not
guarantees of our future performance and are subject to risks and uncertainties
that could cause actual results, developments and business decisions to differ
materially from those contemplated by such forward-looking
statements. Except as expressly stated herein, we disclaim any duty
to update any forward-looking statements. Some of the factors that
may cause actual results, developments and business decisions to differ
materially from those contemplated by such forward-looking statements are set
forth under “Risk Factors” and discussed under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our
Annual Report on Form 10-K for the year ended December 31, 2008, our Quarterly
Report on Form 10-Q for the three months ended March 31, 2009 and our Current
Report on Form 8-K dated May 14, 2009, and our Current Report on Form 8-K dated
May 14, 2009, including the following:
|
·
|
potential
actions that government regulators may take with respect to us or our
subsidiaries;
|
|
·
|
our
potential inability to service and reduce our substantial indebtedness and
to raise sufficient additional capital, and the potential negative
regulatory consequences that may result
therefrom;
|
|
·
|
our
potential inability to return to profitability, particularly in light of
the significant losses we incurred in 2008 and the substantial diminution
in customer assets and accounts we experienced as a result of the losses
in our Balance Sheet Management segment in
2007;
|
|
·
|
potential
increases in our loan losses and provisions for loan losses if the
residential real estate and credit markets continue to deteriorate, which
could lead to concerns about our continued
viability;
|
|
·
|
our
potential inability to retain our current customer assets and accounts and
to rebuild our franchise by reclaiming customers and growing
assets;
|
|
·
|
our
potential inability to reduce the credit risk in our loan
portfolio;
|
|
·
|
liabilities
and costs associated with investigations and lawsuits, including those
relating to our losses from mortgage loans and asset-backed
securities;
|
|
·
|
our
potential inability to compete
effectively;
|
|
·
|
our
potential inability to reduce our operating
expenses;
|
|
·
|
adverse
changes in general economic conditions, including fluctuations in interest
rates;
|
|
·
|
adverse
changes in governmental regulations or enforcement practices;
and
|
|
·
|
other
factors described elsewhere in this prospectus supplement or the
accompanying prospectus or in our current and future filings with the
SEC.
|
We have
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or risks. New
information, future events or risks may cause the forward-looking events we
discuss in this prospectus supplement not to occur.
E*TRADE
FINANCIAL CORPORATION
E*TRADE
Financial Corporation is a financial services company that provides online
brokerage and related products and services primarily to individual retail
investors, under the brand “E*TRADE Financial”. Our products and
services include investor-focused banking, primarily sweep deposits and savings
products, and asset gathering. Our competitive strategy is to attract
and retain customers by emphasizing low-cost, ease of use and innovation, with
delivery of our products and services primarily through online and
technology-intensive channels.
We operate directly and through
numerous subsidiaries many of which are overseen by governmental and
self-regulatory organizations. Our most significant direct and
indirect subsidiaries are described below:
|
·
|
E*TRADE
Bank is a federally chartered savings bank that provides investor-focused
banking services to retail customers nationwide and deposit accounts
insured by the Federal Deposit Insurance Corporation
(“FDIC”);
|
|
·
|
E*TRADE
Capital Markets, LLC is a registered broker-dealer and
market-maker;
|
|
·
|
E*TRADE
Clearing LLC is the clearing firm for our brokerage subsidiaries and is a
wholly-owned operating subsidiary of E*TRADE Bank. Its main
purpose is to transfer securities from one party to another;
and
|
|
·
|
E*TRADE
Securities LLC is a registered broker-dealer and the primary provider of
brokerage services to our customers. See “Recent
Developments—E*TRADE Securities Became a Subsidiary of E*TRADE Bank” for a
discussion of the restructuring of this
subsidiary.
|
We
provide services primarily to customers in the U.S. through our website at
www.etrade.com. We also offer, either alone or with our partners,
branded retail websites in countries outside of the U.S., the most significant
of which are: Denmark, Estonia, Finland, France, Germany, Hong Kong,
Iceland, the Netherlands, Norway, Singapore, Sweden, the United Arab Emirates
and the United Kingdom.
In
addition to our websites, we also provide services through our network of
customer service representatives, relationship managers and investment
advisors. We provide these services over the phone or in person
through our 29 E*TRADE Financial Centers.
Our
corporate offices are located at 135 East 57th Street, New York, New York 10022
(tel: 646-521-4300). We were incorporated in California in
1982 and reincorporated in Delaware in July 1996. We maintain a
website at www.etrade.com where general information about us is
available. Information
on our website is not a part of this prospectus supplement or the accompanying
prospectus.
Recent
Developments
Debt
Exchange
On
June 22, 2009, we commenced an offer to all holders of our 8% Senior Notes
due 2011 (the “2011 Notes”) and our 12.5% Springing Lien Notes due 2017 (the
“2017 Notes”) to exchange (the “Debt Exchange”) (i) any and all outstanding 2011
Notes and (ii) up to $310 million aggregate principal amount of 2017 Notes held
by holders other than Citadel Equity Fund Ltd., an affiliate of Citadel
Investment Group, L.L.C. (“Citadel”), plus at least $600 million but not more
than $1 billion of 2017 Notes to be tendered by Citadel, in each case for an
equal aggregate principal amount of zero-coupon convertible debentures due 2019
(the “Debentures”). Holders tendering their 2011 Notes and 2017 Notes
will receive, upon closing of the Debt Exchange, cash in the amount of the
accrued and unpaid interest on the 2011 Notes and 2017 Notes
exchanged. As of June 12, 2009, there were $435.5 million aggregate
principal amount of 2011 Notes and $2,185.6 million aggregate principal amount
of 2017 Notes outstanding. The Debentures issued in the Debt Exchange
will be designated as either Class A Debentures or Class B Debentures and will
be identical except for the conversion price for each class of
Debentures. Holders tendering 2011 Notes and 2017 Notes in the period
that ended at midnight, New York City time, on July 1, 2009 (the “Early
Tender Period”), will be entitled to receive Class A Debentures in exchange for
their tendered 2011 Notes and 2017 Notes. Holders tendering their
2011 Notes in the Debt Exchange after the Early Tender Period will be entitled
to receive Class B Debentures in exchange for their tendered 2011 Notes. Holders
of 2017 Notes are
not able
to tender such Notes after the Early Tender Period because the Debt Exchange is
oversubscribed with respect to 2017 Notes. The initial conversion
price of the Class A Debentures will be $1.0340. The initial
conversion price for the Class B Debentures will be $1.5510, or 150% of the
initial conversion price applicable to the Class A
Debentures. Citadel tendered $230,245,000 aggregate principal amount
of its 2011 Notes and $1 billion aggregate principal amount of its 2017 Notes in
the Debt Exchange during the Early Tender Period on the same terms as the other
holders of the 2011 Notes and 2017 Notes. Completion of the Debt
Exchange is conditioned upon, among other things, receipt of stockholder
approval to increase our authorized common stock and approve the issuance of the
Debentures and receipt of OTS approval of Citadel’s participation in the Debt
Exchange, as described in “The Debt Exchange and Consent Solicitation –
Conditions to the Debt Exchange; Special Stockholder Meeting”.
At the
expiration of the Early Tender Period, approximately $429,616,000 principal
amount of 2011 Notes and approximately $1,407,178,248 principal aggregate amount
of 2017 Notes had been validly tendered, including the Notes tendered by
Citadel. Because the aggregate principal amount of 2017 Notes
tendered by holders other than Citadel exceeds $310 million, acceptance of the
2017 Notes tendered by such holders for exchange will be
pro-rated. No additional 2017 Notes will be accepted for tender in
the Debt Exchange and the aggregate principal amount of 2017 Notes that will be
accepted for exchange will be $1.31 billion.
In
connection with the Debt Exchange, we obtained consents to amendments and
waivers of certain provisions of the indentures governing the 2011 Notes and
2017 Notes, for which we will in certain circumstances pay a customary consent
fee. We obtained consents representing a majority of the aggregate
principal amount of each of the 2011 Notes and the 2017 Notes (both including
and excluding such 2011 Notes and 2017 Notes held by Citadel) to approve our
proposal to amend the indentures relating to such 2011 Notes and 2017 Notes to
permit us to participate in the U.S. Department of Treasury’s TARP Capital
Purchase Program in the event our application is approved and provided we obtain
at such time an analogous amendment to the indentures governing our 2013 Notes
and 2015 Notes. In addition, we obtained consents representing a
majority of the aggregate principal amount of the 2017 Notes (both including and
excluding such 2017 Notes held by Citadel) to approve our proposal to amend the
definition of “Change of Control” in the indenture relating to the 2017 Notes to
make clause (1) of the definition (concerning the beneficial ownership of our
capital stock) consistent with the analogous provision in the indentures
relating to the 2011 Notes, 2013 Notes and 2015 Notes. By tendering
their 2011 Notes and 2017 Notes in the Debt Exchange during the Early Tender
Period, holders were automatically deemed to have delivered consent to each such
amendment and waiver, and to have waived any consent fee, in each case as to
their tendered 2011 Notes and 2017 Notes. For further information on
the potential impact of the Debt Exchange on our financial position, see
“Capitalization” in this prospectus supplement. See also “The Debt
Exchange and Consent Solicitation”.
The
2011 Notes offered pursuant to this prospectus supplement and the accompanying
prospectus were tendered in the Debt Exchange during the Early Tender Period and
will represent the right to receive in exchange therefor Class A Debentures and
accrued but unpaid interest in cash through but excluding the settlement date of
the Debt Exchange, provided the Debt Exchange is completed.
Certain
2017 Notes offered pursuant to this prospectus supplement and the accompanying
prospectus were tendered in the Debt Exchange during the Early Tender Period and
will represent the right to receive in exchange therefor Class A Debentures and
accrued but unpaid interest in cash through but excluding the settlement date of
the Debt Exchange, provided the Debt Exchange is completed. Such 2017
Notes will have CUSIP numbers of one of 269246 BD5, 269246 BE3 or 269246
BF0.
Certain
2017 Notes offered pursuant to this prospectus supplement and the accompanying
prospectus were not tendered in the Early Tender Period in the Debt Exchange.
Such 2017 Notes will not be able to be tendered in exchange for Class A
Debentures due to the expiration of the Early Tender Period on July 1, 2009 and
will not be able to be tendered in exchange for Class B Debentures in the Debt
Exchange due to the fact that the Debt Exchange is oversubscribed with respect
to 2017 Notes and we will not accept any additional 2017 Notes. Such
2017 Notes will have one of the following CUSIP numbers: 269246 AS3, 269246 AT1
or 269246 AV6.
In
addition, the Notes offered hereby are not eligible to participate in the
consent solicitation (or to receive a consent fee).
Holders
who acquire 2011 Notes and 2017 Notes pursuant to this prospectus supplement
should read “The Debt Exchange and Consent Solicitation—Information for
Investors Purchasing 2011 Notes and 2017 Notes Pursuant to this Prospectus
Supplement” for important information regarding the effect of the Debt Exchange
on such Notes.
Public
Equity Offering
On June
24, 2009, we closed an underwritten public equity offering of 500 million shares
of our common stock (the “Public Equity Offering”) at a public offering price of
$1.10 per share. The net proceeds to us from the sale of the shares
of common stock was approximately $522.6 million, after deducting underwriting
discounts and commissions and estimated offering expenses. Citadel
purchased 90.9 million shares in the Public Equity Offering. We did
not pay any commissions and the underwriter did not receive any discounts on the
shares sold in the Public Equity Offering to Citadel.
Equity
Drawdown Program
On
May 8, 2009, we entered into a distribution agreement with J.P. Morgan
Securities Inc. (“J.P. Morgan”) pursuant to which we may offer and sell up to
$150 million of our common stock from time to time (the “Equity Drawdown
Program”) through J.P. Morgan as our distribution agent. During the
period from May 11, 2009 through June 2, 2009, we sold
40.7 million shares of our common stock pursuant to the Equity Drawdown
Program, resulting in gross proceeds to us of $65.1 million, or approximately
$63.2 million after deducting estimated expenses and an aggregate commission to
J.P. Morgan of approximately $1.6 million.
We have
suspended sales under the Equity Drawdown Program and may resume sales following
the expiration or waiver of the 90-day lock-up period following the Public
Equity Offering.
Revised
Segment Reporting
Beginning
in the first quarter of 2009, we revised our segment financial reporting to
reflect the manner in which our management had begun assessing our performance
and making resource allocation decisions. We filed a Current Report
on Form 8-K on May 14, 2009 to provide a presentation of our results for
the years ended December 31, 2008, 2007 and 2006 with our new segment
reporting. The Current Report on Form 8-K filed on May 14, 2009
also contained a revised presentation of portions of our Annual Reports on Form
10-K for the years ended December 31, 2008, 2007 and 2006 set forth in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Segment Results Review” solely to reflect the change in segment
reporting.
Amended
Order Flow Agreement
We and a
subsidiary entered into an Amended and Restated Equities and Options Order
Handling Agreement on June 15, 2009 (the “Amended and Restated Order Handling
Agreement”) with Citadel Derivatives Group, LLC, an affiliate of
Citadel. Subject to certain execution quality requirements and
regulatory approvals, the Amended and Restated Order Handling Agreement requires
us to route 97.5% of our marketable customer orders in Regulation NMS Stocks (an
increase from 40%) until the sixth anniversary of the commencement date and
97.5% (which is not a change) of our customer orders in exchange-listed options
to Citadel for order handling and execution until the third anniversary of the
commencement date. Citadel may extend the options order flow
commitment for an additional year on the third, fourth and fifth anniversaries
of the commencement date. The commencement date can be no later than
30 days after the later of: (i) June 15, 2009 and (ii) three (3)
business days following Citadel Derivative Group, LLC’s receipt of approval from
the Office of Thrift Supervision (“OTS”). In addition, for each
three-month period in which we route less than our options order flow
commitments to Citadel, the term of the options order flow commitment may be
extended until such commitments are met. We will receive an aggregate
cash payment of $100 million within three business days of the commencement
date, of which $65 million is in full consideration for the increase in NMS
Stock flow and $35 million is in exchange for a credit of $35 million toward
future payment for options order flow, which we will continue to earn on a
monthly basis. In light of the change from monthly volume based
payments to a substantial up-front payment, the liquidated damages payable upon
early termination of the Amended and Restated Order Handling Agreement will be
increased. As amended, we will be required to pay liquidated damages
of up to $200 million in the first year of the Amended and Restated Order
Handling Agreement to Citadel in the event of early termination, depending on
the event giving rise to termination (such as a failure to route the minimum
amount without justification), and the timing of the termination with such
amounts decreasing each year. Because the Amended and Restated Order
Handling Agreement is subject to approval by the OTS, there is no assurance that
the agreement will become effective on the terms negotiated, if at
all.
E*TRADE
Securities Became a Subsidiary of E*TRADE Bank
At the
request of the OTS, and as approved by our Board of Directors on November 11,
2008, E*TRADE Securities LLC became a subsidiary of E*TRADE Bank on June 9,
2009. See “Risk factors—Risks Relating to an Investment in Our
Company” for a discussion of the risks to investors in our Notes that result
from this transfer.
New
Board Member
On
June 8, 2009, our Board of Directors appointed Kenneth C. Griffin,
President and Chief Executive Officer of Citadel, as a Class II
Director. Mr. Griffin will stand for election at the 2010 annual
stockholder meeting.
FDIC
Special Assessment
On
May 22, 2009, the FDIC enacted a rule that would charge banks and thrifts a
special assessment based on their assets, rather than
deposits. Pursuant to this rule, the FDIC will charge banks and
thrifts a one-time fee in the second quarter of 2009 of 5 cents per $100 of an
institution’s assets minus its Tier 1 capital. For banks and thrifts
with large asset portfolios, the assessment will be capped at 10 basis points of
their domestic deposits. We estimate the total fees payable by us
pursuant to this rule to be approximately $20 million.
Special
Stockholder Meeting
On June
24, 2009, we filed a preliminary proxy statement on Schedule 14A to solicit
proxies for a Special Meeting of Stockholders (the “Special Meeting”) to
(1) increase the authorized shares of our common stock, (2) approve
the issuance of the consideration offered to holders of 2011 Notes and 2017
Notes (including Citadel) in the Debt Exchange and (3) approve the
potential issuance of 365 million shares of common stock or securities
convertible or exchangeable into or exercisable for, common stock in connection
with future debt exchange transactions. In addition, we will also ask
our stockholders for an advisory vote on whether to maintain our Stockholder
Rights Plan as described below. The record date of the Special
Meeting is June 26, 2009 and the meeting date is expected to be as soon as
practicable thereafter, based on SEC review of the proxy statement, and subject
to applicable law. Holders of shares of our common stock on the
record date will be able to vote their shares at the Special
Meeting. In connection with the Special Meeting, we expect to deliver
all stockholders entitled to vote at the Special Meeting a definitive proxy
statement, specifying the actual meeting date and other important
information.
Agreements
with Citadel Regarding Future Acquisitions of Our Common Stock; Stockholder
Rights Plan
In
connection with the Public Equity Offering and the Debt Exchange, we amended the
Rights Agreement, dated as of July 9, 2001, as amended, between the Company
and American Stock Transfer and Trust Company (the “Stockholder Rights Plan”)
to:
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exempt
Citadel from becoming an “Acquiring Person”, as defined in the Stockholder
Rights Plan, in connection with its purchase of shares in the Public
Equity Offering and its acquisition of Debentures in the Debt Exchange
(including the common stock issuable upon conversion thereof), as well as
pursuant to the exercise of its pre-emptive rights as described
below;
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increase
Citadel’s allowance for acquiring additional shares of our common stock
without becoming an Acquiring Person from approximately 8.5 million shares
to 25.0 million shares (excluding shares acquired by exercise of its
pre-emptive rights, acquired upon conversion of the Debentures, purchased
in the Public Equity Offering and purchased during any Rights Plan Holiday
Period), effective and contingent upon the settlement of the Debt
Exchange; and
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provide
that Citadel will be exempt from becoming an Acquiring Person with respect
to any acquisitions of additional shares of our common stock during any
Rights Plan Holiday Period, effective and contingent upon the settlement
of the Debt Exchange.
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A “Rights
Plan Holiday Period” means, at any time in which our Stockholder Rights Plan
remains in effect, the period commencing upon our public disclosure that E*TRADE
Bank has failed to satisfy the Financial Metrics Test
for any
quarter and ending upon the next public disclosure that E*TRADE Bank has once
again satisfied the Financial Metrics Test at the end of a quarter.
The
“Financial Metrics Test” means, at the balance sheet date for a fiscal quarter,
that E*TRADE Bank has both (i) at least $450 million in Excess Risk-Based
Capital and (ii) a Tier 1 Capital Ratio of at least 6.00%.
“Excess
Risk-Based Capital” means that portion of E*TRADE Bank’s total capital, as such
term is defined in 12 CFR 567.5(c) (as currently or hereafter in effect), that
is in excess of the amount of total capital that would be required in order for
E*TRADE Bank to have a total risk-based capital ratio of 10.0% as calculated in
accordance with 12 CFR Part 567 (as currently or hereafter in
effect).
“Tier 1
Capital Ratio” means E*TRADE Bank’s core capital, as such term is defined in 12
CFR 567.5(a) (as currently or hereafter in effect), divided by its adjusted
total assets, as such term is defined in 12 CFR 567.1 (as currently or hereafter
in effect).
In
addition, we have agreed that at the Special Meeting we will submit to our
stockholders an advisory resolution regarding whether we should retain or
terminate our Stockholder Rights Plan. We have agreed with Citadel
that neither our Board of Directors nor Citadel will take any position on
whether stockholders should vote to retain or terminate the Stockholders Rights
Plan or otherwise seek to influence the outcome of the advisory
vote. Citadel has agreed that it will vote its shares representing no
more than 9.9% of our shares outstanding and entitled to vote at the Special
Meeting on this advisory resolution to terminate the Stockholder Rights Plan,
and that it will vote the balance of its shares on the advisory resolution in
the same proportions, to retain or to terminate the Stockholder Rights Plan, as
the votes cast by all other stockholders. Following the vote, which
will not be binding, our Board of Directors will determine whether to maintain
our Stockholder Rights Plan, based on its consideration of all factors deemed
relevant to the exercise of its fiduciary duties.
We also
granted Citadel pre-emptive rights to allow Citadel to maintain its fully
diluted percentage ownership of our common stock in connection with future
issuances by us, subject to Citadel’s purchasing our securities on the same
terms and conditions as other purchasers and certain other
conditions. The pre-emptive rights became effective upon the
expiration of the Early Tender Period. If we fail to complete the
Debt Exchange, then Citadel’s pre-emptive rights will terminate and be of no
further force or effect.
The
pre-emptive rights will not apply to issuances of common stock or securities
convertible into or exercisable for shares of our common stock (i) in connection
with acquisitions by us of other companies or businesses, (ii) in exchange for
our 2011 Notes, 2013 Notes, 2015 Notes or 2017 Notes or (iii) pursuant to our
stock plans or otherwise in equity compensation arrangements with our directors,
officers, employees or consultants.
The
pre-emptive rights will be in effect so long as we have in effect a stockholder
rights plan, provided
that the pre-emptive rights shall terminate and be of no further force or effect
upon the earliest to occur of (i) the earlier of termination of the Exchange
Agreement with Citadel dated June 17, 2009 or failure to consummate the Debt
Exchange by October 31, 2009 or (ii) the date, after the consummation of the
Debt Exchange, that Citadel and its affiliates beneficially own less than 19.9%
of our outstanding common stock on a fully diluted basis assuming conversion of
all securities beneficially owned by Citadel and its affiliates (whether or not
such securities are convertible or exchangeable for shares of Common Stock at
such time in accordance with their terms or by reason of any condition precedent
to such conversion or exchange not been satisfied at such time). The
pre-emptive rights will be suspended upon the termination of our Stockholder
Rights Plan, but will be automatically reinstated if we reinstate our
Stockholder Rights Plan or if we subsequently adopt a new rights plan, “poison
pill” or similar plan.
RISK
FACTORS
In
addition to the other information set forth in this prospectus supplement, you
should carefully consider the following factors which could materially affect
our business, financial condition or future results. The risks
described below are not the only risks we are facing.
Risks
Relating to an Investment in Our Company
We
face negative regulatory actions, including a public form of supervisory action
by the Office of Thrift Supervision, or OTS, if we do not raise sufficient new
cash equity to support E*TRADE Bank and reduce debt at the
Company. Any such actions could have a material negative effect on
our business and the value of our common stock and Notes.
We are a
Savings and Loan Holding Company for E*TRADE Bank, our FDIC-insured thrift
subsidiary, and both we and E*TRADE Bank are subject to regulation by the OTS as
our primary federal banking regulator. The OTS has advised us, and we
agree, that we need to raise additional equity capital for E*TRADE Bank and
reduce substantially the amount of
the Company’s outstanding debt in order to withstand any further deterioration
in current credit and market conditions. Pursuant to a memorandum of
understanding we have
entered into with the OTS, the OTS is requiring us to submit
to the OTS and implement written plans to address these and related
matters.
Notwithstanding
the successful completion of the Public Equity Offering, if we are unable to
raise enough cash equity capital for E*TRADE Bank or to reduce our debt in the
near term, we would face negative regulatory consequences in the form of a
public supervisory action, such as a written agreement or a cease and desist
order, from the OTS. If the OTS were to take any such supervisory
action against us, we and E*TRADE Bank could, among other things, become subject
to significant restrictions on our ability to develop any new business, as well
as restrictions on our existing business, and we could be required to raise
additional capital and/or dispose of certain assets and liabilities within a
prescribed period of time. The terms of any public supervisory action
by the OTS could have a material negative effect on our business and financial
condition and the value of our common stock. Furthermore, any
significant reduction in E*TRADE Bank’s regulatory capital could result in
E*TRADE Bank being less than “well capitalized” or “adequately capitalized”
under applicable capital rules. Either condition could also lead to a
public supervisory action by the OTS. A failure of E*TRADE Bank to be
“adequately capitalized” which is not cured within time periods specified in the
indentures governing our high-yield debt securities, would constitute a default
under our high-yield debt securities and likely result in the high-yield debt
securities becoming immediately due and payable at their full face
value.
If we
were unable to comply with the terms of any supervisory action against us, we
and E*TRADE Bank could become subject to further regulatory actions by the OTS,
including more severe restrictions on E*TRADE Bank’s business. We and
E*TRADE Bank could also become subject to supervisory actions by the OTS if
market conditions were to deteriorate to such an extent that any additional
equity capital we raise proved to be insufficient for E*TRADE Bank’s or our
needs. In either event, in the worst case, the OTS has the authority
to place a thrift, such as E*TRADE Bank, into receivership, in which case the
FDIC would likely be appointed receiver of the thrift and would proceed to,
among other things: (i) enter into a purchase and assumption
agreement with a third party in which that third party would purchase and assume
all or some of the thrift’s assets and deposits and liquidate the remaining
assets and liabilities; (ii) transfer all or some of the thrift’s assets and
deposits to a “bridge bank” until such time as one or more purchasers may be
found for all or some of the “bridge bank’s” assets and deposits, and liquidate
the remaining assets and liabilities; or (iii) liquidate the thrift’s assets and
liabilities and pay insured depositors the amount of their deposits up to the
insured limits and, to the extent sufficient proceeds from the liquidation are
available, pay the remaining claims of insured depositors and the claims of
uninsured depositors and other creditors.
In the
event of our bankruptcy or liquidation and E*TRADE Bank’s receivership, E*TRADE
Financial Corporation would not be entitled to receive any cash or other
property or assets from its subsidiaries (including E*TRADE Bank and E*TRADE
Securities) until those subsidiaries pay in full their respective creditors,
including customers of those subsidiaries and, as applicable, the FDIC and
SIPC. At the request of the OTS, E*TRADE Securities became a
subsidiary of E*TRADE Bank on June 9, 2009. As a result, claims of
the FDIC would also have to be satisfied in full before any of E*TRADE
Securities’ assets would be available to holders of our common
stock. Furthermore,
in the event of our bankruptcy or liquidation, holders of common stock would not
be entitled to receive any cash or other property or assets until holders of our
high-yield debt securities and our other creditors have been paid in
full.
The
Debt Exchange and the Public Entity Offering are part of our plan to satisfy the
requirements by the OTS that we increase our equity and reduce our debt, but we
do not know whether the Debt Exchange and the Public Equity Offering will be
fully sufficient to avoid any public supervisory action. Any such
action could have a material negative effect on our or E*TRADE Bank’s business
and the value of our common stock and Notes.
In order
to raise capital, we have considered and engaged in transactions involving the
issuance of preferred stock, common stock, rights, warrants or other equity
securities, transactions involving the sale of businesses or assets, the
incurrence of secured or unsecured indebtedness, and transactions involving
specialized commercial arrangements, each of which may require, either in whole
or with respect to certain aspects of the transaction, approval by various
regulators, including the OTS, or holders of our securities. Certain
transactions are described above under “E*TRADE Financial Corporation—Recent
Developments”. Although we have improved our and E*TRADE Bank’s
capital position following the Public Equity Offering, we may still consider it
advantageous to raise additional cash equity capital. Additional cash
equity required could be issued at a discount to market, which would dilute
holders of our common stock.
We cannot
assure you that the Public Equity Offering together with the Debt Exchange, if
consummated, will satisfy the OTS’s requirements. The OTS is not, at
this time, confirming whether the completion of the Public Equity offering and
the Debt Exchange would improve ours and E*TRADE Bank’s capital position and
financial condition to the extent necessary to avoid the conditions that would
lead the OTS to take public supervisory actions against us or E*TRADE
Bank. Even if we
complete the Debt Exchange, the OTS, which we believe is currently considering
public supervisory actions against us in the absence of a satisfactory increase
in capital and reduction in debt, may still take such actions at any
time. If the OTS
takes any such public supervisory actions against us and E*TRADE Bank,
such as a cease and desist order, we believe that it could lead to a loss of
confidence in the Company and E*TRADE Bank by investors and customers, as
applicable, which could have a materially adverse impact on our business and
financial condition.
If
the Debt Exchange is not consummated, the value of our common stock and Notes
could be negatively impacted.
The
consummation of the Debt Exchange, which will extend the maturity of a
significant amount of our debt and substantially reduce our cash interest
expense, is subject to the satisfaction of a number of conditions, including,
among other things, the approval of our stockholders at the Special Meeting and
approval by the OTS of Citadel’s participation in the Debt
Exchange. If the conditions are not satisfied, then the existing debt
will remain in place without any extension of debt maturities or reduction in
cash interest expense. We believe that this would negatively impact
the value of our shares and Notes and would likely cause the OTS to conclude
that we had not adequately addressed our debt reduction
obligation. This could lead to public supervisory actions by the OTS
that would adversely affect our business and financial condition.
In
addition, we are not obligated to complete the Debt Exchange unless and until
each of the conditions to the Debt Exchange is satisfied or (to the extent
permitted) waived. If each of the conditions to the Debt Exchange is
not satisfied, we will not be obligated to accept any 2011 Notes and 2017 Notes
tendered in the Debt Exchange. The Debt Exchange is conditioned upon,
among other things, approval by our stockholders of the increase in authorized
shares of common stock, approval by our stockholders of issuance of the
Debentures and OTS approval with respect to Citadel’s participation in the Debt
Exchange.
Our
plans to reduce our debt will result in significant dilution to our
stockholders. We anticipate that the primary method for reducing our
debt will involve debt exchanges in which we raise no cash but reduce the
outstanding principal amount or extend the maturity profile of our debt, which
equaled approximately $3.2 billion as of March 31, 2009, and reduce the
associated interest expense, which equaled approximately $350 million on an
annualized basis for the three months ended March 31, 2009. A
reduction of our debt in sufficient size to meet our capital objectives will
require the participation of Citadel, which, we believe, owns more than 70% of
our outstanding high yield debt securities.
To reduce
the amount of debt we have outstanding, we anticipate engaging in debt exchange
transactions, including the Debt Exchange, in which we issue new shares of
common stock or securities convertible into or exchangeable or exercisable for
our common stock in exchange for our existing high-yield debt
securities. Such exchange transactions would reduce the amount of
interest we are required to pay in the future, reduce the principal amount due
at maturity or extend the maturity profile of our outstanding debt and allow us
to recognize income to the extent we retire the debt at a fair value that is
less than its face value, but would not result in our receiving cash
proceeds. If we are able to consummate these debt exchange
transactions, including the Debt Exchange, we expect that the fair market value
of the equity or convertible debt we issue would have to exceed the fair market
value of the debt offered in exchange in order to provide sufficient incentive
to debtholders to participate. As of March 31, 2009, we had
approximately $3.2 billion face amount of high-yield debt securities
outstanding. Although these high-yield debt securities trade
sporadically, the available trading data for the twenty trading days ended June
12, 2009 indicates the aggregate fair market value of these high-yield debt
securities is significantly less than the aggregate principal amount of such
high-yield debt securities. Based on the available trading data, we
estimate the fair market value of the high-yield debt securities to be
approximately $2.1 billion, compared to a fair market value of our common stock
of approximately $1.2 billion, based on the last reported sale price of our
common stock on June 12, 2009. Therefore, any meaningful reduction in
our leverage through debt exchange transactions, including the Debt Exchange,
would result in significant dilution to holders of our common
stock. In addition, a reduction of our debt in sufficient size to
meet our capital objectives will require some participation in these debt
exchanges by Citadel, which, we believe, owns more than 70% of our outstanding
high-yield debt securities.
Our
existing high-yield debt securities contain restrictive covenants and it may be
difficult to obtain any consents to amend these covenants which may be required
as part of our capital raising activities.
Our
existing high-yield debt securities contain restrictive financial
covenants. Although these covenants provide substantial flexibility,
for example to incur “refinancing indebtedness” and to incur up to $300 million
of secured debt under a credit facility, the covenants, among other things,
would generally limit our ability to incur additional debt even if we were to
substantially reduce our existing debt through debt exchange
transactions. We could be forced to repay immediately all our
outstanding high-yield debt securities at their full principal amount if we were
to breach these covenants and did not cure the breach within the cure periods
specified in the respective indentures. Further, if we experience a
“change of control”, we could be required to offer to purchase our high-yield
debt securities at 101% of their principal amount. Under our
high-yield debt securities a “change of control” would occur if a person became
the beneficial owner of more than 50% of the total voting power of our voting
stock and, with respect to the 2011 Notes, 2013 Notes and 2015 Notes, would need
to be coupled with a ratings downgrade before we would be required to offer to
purchase those securities.
We
obtained consents to an amendment to the 2017 Notes that eliminated the
“economic value of equity” test for a change of control and amendments to other
covenants in our 2017 Notes and 2011 Notes related to possible TARP financing as
part of the Debt Exchange. We could seek to amend the terms of one or
more of our other high-yield debt securities as part of a broad-based debt
exchange transaction. To the extent Citadel is deemed our affiliate,
we may need to obtain the consent of a majority of the non-Citadel holders of
the relevant series of high yield debt securities as well as the consent of
Citadel itself to amend the restrictive and other covenants. Because
Citadel owns a significant percentage of our high yield debt securities,
particularly of our 2017 Notes, if Citadel is deemed our affiliate, a holder of
a relatively small percentage of those notes could significantly delay or block
proposed transactions by refusing to grant consents on a timely
basis. The Debentures to be issued in the Debt Exchange will contain
substantially identical covenants and events of default to those in our existing
high-yield debt securities. Citadel may initially own a majority of
the Debentures, and therefore the possibility that a holder of a relatively
small percentage of the Debentures could delay or block proposed transactions
may continue into the future.
We
are substantially restricted by the terms of our high-yield debt
securities.
The
indentures governing our high-yield debt securities contain various covenants
and restrictions that limit our ability and certain of our subsidiaries’ ability
to, among other things:
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incur
additional indebtedness;
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pay
dividends or make other
distributions;
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repurchase
or redeem capital stock;
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make
investments or other restricted
payments;
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enter
into transactions with our stockholders or
affiliates;
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sell
assets or shares of capital stock of our
subsidiaries;
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receive
dividend or other payments from our subsidiaries;
and
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merge,
consolidate or transfer substantially all of our
assets.
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As a
result of the covenants and restrictions contained in the indentures, we are
limited in how we conduct our business and we may be unable to raise additional
debt or equity financing to compete effectively or to take advantage of new
business opportunities. Each series of our high-yield debt securities
contains a limitation, subject to important exceptions, on our ability to incur
additional debt if our Consolidated Fixed Charge Coverage Ratio (as defined in
the relevant indentures) is less than or equal to 2.50 to 1.0. Our
Consolidated Fixed Charge Coverage Ratio was (0.5) to 1.0 as of December 31,
2008 and (0.9) to 1.0 as of March 31, 2009. The terms of any
future indebtedness could include more restrictive covenants.
We cannot
assure that we will be able to remain in compliance with these covenants in the
future and, if we fail to do so, that we will be able to obtain waivers from the
appropriate parties and/or amend the covenants.
We
could as a result of the Debt Exchange and the Public Equity Offering, or as a
result of future transactions, experience an “ownership change” for tax purposes
that could cause us to permanently lose a significant portion of our U.S.
federal and state deferred tax assets.
The Debt
Exchange and the Public Equity Offering could cause us to experience an
“ownership change” as defined for U.S. federal income tax
purposes. Even if these transactions do not cause us to experience an
“ownership change”, these transactions materially increase the risk that we
could experience an “ownership change” in the future. As a result,
issuances or sales of common stock or other securities in the future (including
common stock issued on conversion of the convertible debentures issued pursuant
to the Debt Exchange and any debt-for-equity exchanges), or certain other direct
or indirect changes in ownership, could result in an “ownership change” under
Section 382 of the Internal Revenue Code of 1986, as amended. In the
event an “ownership change” were to occur, we could realize a permanent loss of
a significant portion of our U.S. federal and state deferred tax assets and lose
certain built-in losses that have not been recognized for tax
purposes. The amount of the permanent loss would depend on the size
of the annual limitation (which is in part a function of our market
capitalization at the time of an ownership change) and the remaining
carryforward period (U.S. federal net operating losses generally may be carried
forward for a period of 20 years). The resulting loss would have a
material adverse effect on our results of operations and financial
condition.
We have
not established a valuation allowance against our U.S. federal deferred tax
assets or against a portion of our state and local deferred tax assets as of
March 31, 2009, as we believed, based on our analysis as of that
date, that it was more likely than not that all of these assets would
be realized. Section 382 imposes restrictions on the use of a
corporation’s net operating losses, certain recognized built-in losses and other
carryovers after an “ownership change” occurs. An “ownership change”
is generally a greater than 50 percentage point increase by certain “5%
shareholders” during the testing period, which is generally the three
year-period ending on the transaction date. Upon an “ownership
change”, a corporation generally is subject to an annual limitation on its
pre-change losses and certain recognized built-in losses equal to the value of
the loss corporation immediately before the “ownership change”, multiplied by
the long-term tax-exempt rate (subject to certain adjustments). The
annual limitation is increased each year to the extent that there is an unused
limitation in a prior year. Since U.S. federal net operating losses
generally may be carried forward for up to 20 years, the annual limitation also
effectively provides a cap on
the
cumulative amount of pre-change losses and certain recognized built-in losses
that may be utilized. Pre-change losses and certain recognized
built-in losses in excess of the cap are effectively lost.
The
relevant calculations under Section 382 are technical and highly
complex. The Debt Exchange and the Public Equity Offering could cause
us to experience an “ownership change”. As of March 31, 2009, our deferred tax
asset reflected on our balance sheet was $1.1 billion. If an
“ownership change” were to occur, we believe we would permanently lose the
ability to realize a substantial amount of this asset, resulting in reduction to
our total stockholders’ equity. This could also decrease E*TRADE
Bank’s regulatory capital. We do not believe, however, that any such
decrease in regulatory capital would be material because, among other things,
only a small portion of the federal deferred tax asset is currently included in
E*TRADE Bank’s regulatory capital.
We
may need additional funds in the future, which may not be available and which
may result in dilution of the value of our common stock.
In the
future, we may need to raise additional funds via debt and/or equity
instruments, which may not be available on favorable terms, if at
all. If adequate funds are not available on acceptable terms, we may
be unable to fund our capital needs and our plans for the growth of our
business. In addition, if funds are available, the issuance of equity
securities could significantly dilute the value of our shares of our common
stock and cause the market price of our common stock to fall. If the
matters to be voted on at the Special Meeting are approved by stockholders, we
would have the ability to issue a significant number of shares of stock in
future transactions without seeking further stockholder approval. If
such approval is not granted, then our ability to raise additional funds may be
curtailed.
Since the
second half of 2008, the global financial markets were in turmoil and the equity
and credit markets experienced extreme volatility, which caused already weak
economic conditions to worsen. Continued turmoil in the global
financial markets could further restrict our access to the public equity and
debt markets.
In
October 2008, we applied to participate in the TARP Capital Purchase Program
established under the Emergency Economic Stabilization Act of
2008. To date, our application has not been approved or
rejected. If our application is approved, the acceptance of this
funding by us would result in significant dilution to the holders of our common
stock as the terms of this program would require us to issue equity instruments
to the federal government. In addition, the approval would likely be
conditioned upon additional capital raising activities by us, including possible
transactions with existing security holders, which likely would result in
further substantial dilution to the holders of our common stock. We
expect that our participation in the TARP program would require bondholder
consent and any additional capital raising activities may require stockholder
approval. No assurance can be given that our TARP application will be
approved or that, if required, we would receive bondholder consent or
stockholder approval. Recent announcements by the U.S. Treasury have
indicated that there will be changes to the program going forward, and our
application may be approved under a program with different terms than those of
the current Capital Purchase Program. If our application is rejected,
customers could view this as a negative assessment of our viability, which could
in turn lead to destabilization and asset and customer attrition.
Citadel
is our largest stockholder and debtholder, with approximately 16% of our common
stock, and, we believe owns, more than 70% of our outstanding high-yield debt
securities. Accordingly, Citadel’s interests may conflict with the
interests of other debtholders.
Citadel
is the largest holder of our common stock, and currently owns approximately 180
million shares (16%) of our common stock. In addition, although
Citadel is not required to disclose to us the amount of our outstanding
high-yield debt securities it owns, we believe it owns in the aggregate more
than 70% our high-yield debt securities, including, we believe, more than 85% of
our 2017 Notes and a majority of each of our 2011 Notes, 2013 Notes and 2015
Notes. In addition, Kenneth Griffin, President and CEO of Citadel,
joined the Board of Directors on June 8, 2009 pursuant to a director
nomination right granted to Citadel in 2007.
Citadel
is an independent entity with its own investors and is entitled to act in its
own economic interest with respect to its equity and debt investments in
E*TRADE. As discussed below, our 2017 Notes contain restrictive
covenants and as a holder of in excess of 25% of the 2017 Notes or 25% or more
of any other series of our high-yield debt securities, Citadel has a right to
declare defaults and enforce remedies just like any other lender for so
long as
Citadel retains 25% or more of the applicable series of high-yield debt
securities. In pursuing its economic interests, Citadel may make
decisions with respect to fundamental corporate transactions which may be
different than the decisions of investors who own only common shares or only
Notes.
Citadel
is a substantial holder of our common stock and has not entered into any
contractual arrangements to protect the interests of other
stockholders.
Citadel
currently owns approximately 16% of our outstanding common
shares. Following the consummation of the Debt Exchange, we believe
that the common stock owned by Citadel, together with the common stock issuable
on conversion of the securities acquired by Citadel in the Debt Exchange, could
potentially represent up to nearly 50% of the common stock on a fully diluted
basis. Under the law of Delaware, where the Company is incorporated,
this would most likely be sufficient to permit Citadel to elect a substantial
number of directors and control, or significantly impact, corporate policy,
including decisions to enter into mergers or other extraordinary
transactions. Citadel will be unable to accomplish these matters for
so long as it is subject to certain rules of the OTS regarding rebuttals of
control over thrifts and thrift holding companies. If these rules
change, or if Citadel receives a waiver or decides to become a thrift holding
company, it will be in a position to elect a substantial number of directors and
to control, or substantially impact, corporate policy. Further, if
Citadel acquires securities representing more than 50% of the total voting
power, holders of our debt securities would have the right to require the
Company to repurchase all such securities for cash at a premium to their face
amount. The Company’s Board of Directors has requested that Citadel
agree to certain arrangements to freeze the amount of Citadel’s common stock
ownership and to provide contractually that non-Citadel directors are permitted
to represent the stockholders other than Citadel in connection with a range of
affiliate and control-related transactions. Citadel is unwilling to
agree to these arrangements. In addition, as part of the negotiations
leading to our Public Equity Offering and the Debt Exchange, Citadel requested,
and the Board has agreed, to grant Citadel pre-emptive rights to maintain its
fully diluted percentage ownership of our common stock in the event of certain
issuances of securities by us, and to put the question of whether to retain our
Stockholder Rights Plan to an advisory vote at the Special
Meeting. Following this vote, the Board will determine whether to
terminate our Stockholder Rights Plan in which case it would no longer be
available in the event of acquisitions of additional common stock or certain
actions by Citadel that may be detrimental to the non-Citadel
stockholders.
The
market price of our common stock may continue to be volatile.
From
January 1, 2006 through June 30, 2009, the price per share of our common stock
ranged from a low of $0.59 to a high of $27.76. The market price of
our common stock has been, and is likely to continue to be, highly volatile and
subject to wide fluctuations. In the past, volatility in the market
price of a company’s securities has often led to securities class action
litigation. Such litigation could result in substantial costs to us
and divert our attention and resources, which could harm our
business. As discussed in “Note 23—Commitments, Contingencies and
Other Regulatory Matters” in “Item 8. Financial Statements and
Supplementary Data” in our Current Report on Form 8-K filed May 14, 2009, we are
currently a party to litigation related to the decline in the market price of
our stock, and such litigation could occur again in the
future. Declines in the market price of our common stock or failure
of the market price to increase could also harm our ability to retain key
employees, reduce our access to capital and otherwise harm our
business.
We
have various mechanisms in place that may discourage takeover
attempts.
Certain
provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a third party from acquiring control of us in a merger, acquisition
or similar transaction that a stockholder may consider
favorable. Such provisions include:
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authorization
for the issuance of “blank check” preferred
stock;
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provision
for a classified Board of Directors with staggered, three-year
terms;
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the
prohibition of cumulative voting in the election of
directors;
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a
super-majority voting requirement to effect business combinations or
certain amendments to our certificate of incorporation and
bylaws;
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limits
on the persons who may call special meetings of
stockholders;
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the
prohibition of stockholder action by written
consent;
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and
advance notice requirements for nominations to the Board of Directors or
for proposing matters that can be acted on by stockholders at stockholder
meetings.
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Attempts
to acquire control of the Company may also be delayed or prevented by our
Stockholder Rights Plan, which is designed to enhance the ability of our Board
of Directors to protect stockholders against unsolicited attempts to acquire
control of the Company that do not offer an adequate price to all stockholders
or are otherwise not in the best interests of the Company and our
stockholders. In connection with our Public Equity Offering and the
Debt Exchange, we have agreed to put the question of whether to retain or
terminate our Stockholder Rights Plan to an advisory vote of our
stockholders. Our Board of Directors, in the exercise of its
fiduciary duties, has discretion over whether to retain or terminate our
Stockholder Rights Plan and the advisory vote will not be binding. In
addition, certain provisions of our stock incentive plans, management retention
and employment agreements (including severance payments and stock option
acceleration), and Delaware law may also discourage, delay or prevent someone
from acquiring or merging with us.
Risks
Relating to Owning the Notes
Definitions
for certain terms used in this section but not defined are found below in this
prospectus supplement under “Description of Notes”.
Our
broker dealer and bank subsidiaries, which generate substantially all of our
revenues and net income (if any) and own substantially all of our assets, are
not subject to many of the restrictive covenants in the Indentures governing the
Notes.
Our
broker dealer and bank subsidiaries, which we refer to as our regulated
subsidiaries, including E*TRADE Bank, E*TRADE Mortgage Corporation, E*TRADE
Consumer Finance Corporation, E*TRADE Securities LLC, E*TRADE Clearing LLC and
E*TRADE Professional Trading, LLC, are generally not subject to many of the
restrictive covenants in the Indentures that place limitations on the Company’s
actions, and where they are subject to covenants there are numerous exceptions
and limitations. The Indentures do not restrict our regulated
subsidiaries from incurring secured or unsecured debt in certain circumstances,
which would be structurally senior to the Notes. Our broker dealer
and bank subsidiaries are also not subject to the same restrictions relating to
the sale of assets or making investments. The incurrence of debt, the
sale of assets or the making of investments, without certain Indenture
restrictions, by our regulated subsidiaries may impair our ability to make
payments on principal and interest on the Notes. As of March 31,
2009, our regulated subsidiaries represented substantially all of our total
consolidated assets. In 2008, our regulated subsidiaries generated
substantially all of our consolidated net revenues.
Our
regulated subsidiaries are subject to regulation by U.S. Federal and state
regulatory agencies and securities exchanges and by various non-U.S.
governmental agencies or regulatory bodies, securities exchanges and central
banks, each of which has been charged with the protection of the financial
markets and seek to protect the interests of our broker dealer and bank
clients. Such regulations may not serve, and you should not rely on
them, to protect your interests as a holder of the Notes. Depending
on these circumstances, these regulations may prevent our broker dealer or bank
subsidiaries from paying dividends or other distributions to us without which we
cannot make payments of interest or principal on the Notes.
We
may not be able to generate sufficient cash to service all of our indebtedness,
including the Notes, and may be forced to take other actions to satisfy our
obligations under our indebtedness, which may not be successful.
Our
ability to make scheduled payments on or to refinance our debt obligations
depends on our financial condition and operating performance, which is subject
to prevailing economic and competitive conditions and to certain financial,
business and other factors beyond our control. We may not be able to
maintain a level of cash flows from operating activities sufficient to permit us
to pay the principal, premium, if any, and interest on our indebtedness,
including the Notes.
If our
cash flows and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay investments and capital
expenditures, or to sell assets, seek additional capital or restructure or
refinance our indebtedness, including the Notes. These alternative
measures may not be successful and may not permit us to meet our scheduled debt
service obligations. In addition, the terms of existing or future
debt instruments and the Indentures governing the Notes may restrict us from
adopting some of these alternatives.
Our
ability to restructure or refinance our debt will depend on the condition of the
capital markets and our financial condition at such time. Any
refinancing of our debt could be at higher interest rates and may require us to
comply with more onerous covenants, which could further restrict our business
operations. In addition, any failure to make payments of interest and
principal on our outstanding indebtedness on a timely basis would likely result
in a reduction of our credit rating, which could harm our ability to incur
additional indebtedness. If our operating results and available cash
are insufficient to meet our debt service obligations, we could face substantial
liquidity problems and might be required to dispose of material assets or
operations to meet our debt service and other obligations. We may not
be able to consummate those dispositions or to obtain the proceeds that we could
realize from them, and these proceeds may not be adequate to meet any debt
service obligations then due.
We
depend almost entirely on the cash flow from our subsidiaries to meet our
obligations. The Notes are currently not guaranteed by any of our
subsidiaries, which means that your right to receive payment on the Notes will
be structurally subordinate to the obligations of our subsidiaries.
Our
subsidiaries are separate and distinct legal entities. Certain of our
subsidiaries will be required to guarantee the 2017 Notes upon the occurrence of
the Trigger Date. See “Description of Notes—Covenants—Future
Subsidiary Guarantees” under the caption “Description of Notes”. In
addition, if the Debentures are issued, the indenture governing the Debentures
will require the Debentures to be equally and ratably secured with the 2017
Notes and will require the Company to cause the Restricted Subsidiaries to
guarantee the Debentures. However, this requirement will not occur
until the Trigger Date occurs, and, even then, the requirement to guarantee the
2017 Notes and the Debentures will apply only to our restricted subsidiaries and
not to our regulated subsidiaries.
Our
non-guarantor subsidiaries (which include all of our subsidiaries as of the date
of this prospectus) have no obligation to pay any amounts due pursuant to the
Notes or to provide us with funds for our payment obligations. Our
cash flow and our ability to service our debt, including the Notes, may depend
in part on the earnings of our subsidiaries and on the distribution of earnings,
loans or other payments to us by our subsidiaries. As of December 31,
2008, our non-guarantor subsidiaries represented substantially all of our total
consolidated assets. In 2008, our non-guarantor subsidiaries
generated substantially all of our consolidated net revenues. In
addition, the ability of our non-guarantor subsidiaries to make any dividend,
distribution, loan or other payment to us could be subject to statutory or
contractual restrictions. Payments to us by our non-guarantor
subsidiaries will also be contingent upon their earnings and their business
considerations. Because we may depend in part on the cash flow of our
non-guarantor subsidiaries to meet our obligations, these types of restrictions
may impair our ability to make scheduled interest and principal payments on the
Notes.
Furthermore,
in the event of any bankruptcy, liquidation or reorganization of a non-guarantor
subsidiary, you will not have any claim as a creditor against that
subsidiary. As a result, all indebtedness and other liabilities,
including trade payables, of the non-guarantor subsidiaries, whether secured or
unsecured, must be satisfied before any of the assets of those subsidiaries
would be available for distribution, upon a liquidation or otherwise, to us in
order for us to meet our obligations with respect to the Notes. As of
March 31, 2009 our subsidiaries had liabilities of $43.1 billion, including
deposits of $27.2 billion.
Any
future guarantees of the Notes granted by our subsidiaries could be voided by
courts as fraudulent conveyances or on other grounds pursuant to federal and
state statutes. In such event, holders of the Notes could be required
to return payments received from the subsidiary guarantors and any claim you
make against the subsidiary guarantors for amounts payable on the Notes would be
subordinated to all liabilities of the subsidiary guarantors, including trade
payables.
In
addition, any future subsidiary guarantees are subject to certain defenses that
may limit your right to receive payment on the Notes. Although the
future subsidiary guarantees will provide the holders of the Notes with a direct
claim against the assets of the subsidiary guarantors, enforcement of such
guarantees against any subsidiary guarantor would be subject to certain
“suretyship” defenses available to guarantors generally. Enforcement
could also be subject to other defenses available to the guarantors in certain
circumstances. To the extent that future subsidiary guarantees are
not enforceable, the Notes would be effectively subordinated to all liabilities
of the subsidiary guarantors, including trade payables.
The
Notes are not currently secured and are subject to prior claims of our secured
creditors. Any future collateral securing the Notes may not provide
you with meaningful protection. If a default occurs, we may not have
sufficient funds to fulfill our obligations under the Notes.
The Notes
are not secured by any of our assets as of the date of this prospectus
supplement and will be effectively junior in right of payment to any secured
indebtedness to the extent of the realizable value of such
collateral. As of March 31, 2009 neither we nor our subsidiaries had
any secured indebtedness outstanding. The Indentures permit us and
our subsidiaries to incur additional secured debt under specified
circumstances. Our assets and the assets of our subsidiaries will be
subject to prior claims by our secured creditors. In the event of our
bankruptcy, liquidation, reorganization, dissolution or other winding up, assets
that secure debt will be available to pay obligations on the Notes only after
all debt secured by those assets has been repaid in full. Holders of
the Notes will participate in our remaining assets ratably with all of our
unsubordinated creditors, including trade creditors. If we incur any
additional obligations that rank equally with the Notes, including trade
payables, the holders of those obligations will be entitled to share ratably
with you in any proceeds distributed upon our bankruptcy, liquidation,
reorganization, dissolution or other winding up. This may have the
effect of reducing the amount of proceeds paid to you. If there are
not sufficient assets remaining to pay all these creditors, then all or a
portion of the Notes then outstanding would remain unpaid.
We will
be required to secure the 2017 Notes upon the occurrence of the Trigger Date
with certain of our property and assets. In addition, if the
Debentures are issued, the indenture governing the Debentures will require the
Debentures to be equally and ratably secured with the 2017 Notes. See
“Description of Notes—Covenants—Springing Lien” and “Description of
Debentures”. However, this requirement will not occur until the
Trigger Date occurs. The requirement to secure the 2017 Notes upon
the occurrence of the Trigger Date could be voided by courts as a fraudulent
conveyance or on other grounds pursuant to federal and state
statutes. In addition, the collateral granted to the holders of the
2017 Notes will include only certain of our assets and properties and will be
subject to certain first-priority liens. Future collateral securing
the 2017 Notes will be subject to control by the holders of first-priority
liens, which may include lenders under any then-existing senior secured credit
facility. If there is a default, the value of the collateral may not
be sufficient to repay amounts due to both the holders of first-priority liens
and the 2017 Notes and the Debentures (if issued). If the proceeds
from any realization of the collateral is not sufficient to repay both the
first-priority creditors and the holders of the 2017 Notes and the Debentures
(if issued), the first priority creditors will be entitled to receive proceeds
from any realization of the collateral to repay their obligations in full before
the holders of the 2017 Notes and the Debentures (if issued). In
addition, as a result of securing the 2017 Notes and the Debentures (if issued)
to the extent required by the Indentures governing the 2017 Notes and the
Debentures (if issued) upon the occurrence of the Trigger Date, the 2011 Notes,
2013 Notes and 2015 Notes will be effectively subordinated to the 2017 Notes and
the Debentures (if issued) to the extent of the collateral securing the 2017
Notes and the Debentures (if issued).
No
appraisal has been made of the value of any collateral that may in the future
secure the 2017 Notes and the Debentures (if issued). The value of
any such collateral in the event of bankruptcy, liquidation, reorganization,
dissolution or other winding up will depend on market and economic conditions,
the availability of buyers and other factors. By its nature, portions
of the collateral may be illiquid and may have no readily ascertainable market
value.
In the
event of a foreclosure, liquidation, bankruptcy or similar proceeding, the
collateral may not be sold in a timely or orderly manner and we cannot assure
you that the proceeds from the sale or sales of all of such collateral would be
sufficient to satisfy the amounts outstanding under the 2017 Notes and the
Debentures (if issued). If such proceeds were not sufficient to repay
amounts outstanding under the 2017 Notes and the Debentures (if issued), then
holders of the 2017 Notes and the Debentures (if issued) (to the extent not
repaid from the proceeds of the sale of the collateral) would only have an
unsecured claim against our remaining assets. We may incur additional
secured indebtedness under the Indentures, including the incurrence of other
forms of indebtedness secured equally and ratably with the 2017 Notes and the
Debentures (if issued) and borrowings under any then-existing senior secured
credit facility. Any such incurrences could dilute the value of the
collateral securing the 2017 Notes and the Debentures (if issued) in the
future.
The
rights of any secured creditors, including the holders of the 2017 Notes and the
Debentures (if issued), to foreclose upon and sell the collateral upon the
occurrence of an event of default may be subject to limitations under applicable
federal, state and foreign laws if we become subject to a bankruptcy or similar
proceeding.
Upon the occurrence of Trigger Date,
our 2011 Notes, 2013 Notes and 2015 Notes will be effectively subordinated to
the 2017 Notes and the Debentures (if issued) to the extent of the collateral
securing the 2017 Notes and the Debentures (if
issued).
Upon the
occurrence of the Trigger Date, we will be required to secure the 2017 Notes
with certain of our properties and assets. In addition, if the
Debentures are issued, the indenture governing the Debentures will require the
Debentures to be equally and ratably secured with the 2017 Notes. Any
outstanding 2011 Notes, 2013 Notes and 2015 Notes will be effectively
subordinated to the 2017 Notes and the Debentures (if issued) to the extent of
the collateral securing the 2017 Notes and the Debentures (if
issued). See the risk factor above entitled “The Notes are not
currently secured and are subject to prior claims of our secured creditors” and
“Description of Notes” for information regarding the occurrence of the Trigger
Date and the Company’s obligation to secure the 2017 Notes and the Debentures
(if issued).
Federal
and state statutes allow courts, under specific circumstances, to void the Notes
and subsidiary guarantees, if any.
Under the
federal bankruptcy laws and comparable provisions of state fraudulent transfer
laws, the Notes and subsidiary guarantees, if any, could be voided, or claims in
respect of the Notes could be subordinated to all of our other debts if, among
other things, we, at the time we incurred the indebtedness evidenced by the
Notes:
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were
insolvent or rendered insolvent by reason of such
indebtedness;
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were
engaged in a business or transaction for which our remaining assets
constituted unreasonably small
capital;
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intended
to incur, or believed that we would incur, debts beyond our ability to pay
such debts as they mature.
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In
addition, any payment by us pursuant to the Notes could be voided and required
to be returned to us, or to a fund for the benefit of our
creditors. The measures of insolvency for purposes of these
fraudulent transfer laws will vary depending upon the law applied in any
proceeding to determine whether a fraudulent transfer has
occurred. Generally, however, we would be considered insolvent
if:
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the
sum of our debts, including contingent liabilities, were greater than the
fair saleable value of all of our
assets;
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if
the present fair saleable value of our assets were less than the amount
that would be required to pay our probable liability on existing debts,
including contingent liabilities, as they become absolute and mature;
or
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we
could not pay our debts as they become
due.
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Any
future grants of collateral to secure the Notes (including any grant of
collateral to secure the 2017 Notes and Debentures that occurs due to the
occurrence of the Trigger Date) could be voided by courts as fraudulent
conveyances or on other grounds pursuant to federal, state or foreign
statutes. In such event, any claim you make against us would be
unsecured.
Although
we believe that we are not insolvent, do not have unreasonably small capital for
the business in which we are engaged and have not incurred debts beyond our
ability to pay such debts as they mature, there can be no assurance as to what
standard a court would apply in making such determinations or that a court would
agree with our conclusions in this regard.
Our
substantial level of indebtedness could adversely affect our ability to react to
changes in our business, and we may be limited in our ability to use debt to
fund future capital needs.
We have a
substantial amount of indebtedness. Our substantial indebtedness
could have important consequences for you by adversely affecting our financial
condition and thus making it more difficult for us to satisfy our obligations
with respect to the Notes. Our substantial indebtedness
could:
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require
us to dedicate a substantial portion of our cash flow from operations to
payments in respect of our indebtedness, thereby reducing the availability
of our cash flow to fund working capital, capital expenditures and other
general corporate expenditures;
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increase
our vulnerability to adverse general economic or industry
conditions;
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limit
our flexibility in planning for, or reacting to, competition and/or
changes in our business or our
industry;
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limit
our ability to borrow additional
funds;
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restrict
us from making strategic acquisitions, introducing new products or
services, making capital expenditures or exploiting business
opportunities;
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make
it more difficult for us to satisfy our obligations with respect to the
Notes; and
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place
us at a competitive disadvantage relative to competitors that have less
debt or greater financial
resources.
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We cannot
guarantee that we will be able to generate enough cash flow from operations or
that we will be able to obtain enough capital to service our debt, pay our
obligations under the Notes or fund our planned capital
expenditures. In addition, we may need to refinance some or all of
our indebtedness on or before maturity. We cannot guarantee that we
will be able to refinance our indebtedness on commercially reasonable terms or
at all. We have the ability under our debt instruments, including the
Indentures governing the Notes, to incur substantial additional indebtedness,
and any additional indebtedness we incur could exacerbate the risks described
above.
We
may not have sufficient funds to repurchase the Notes or any of our other
securities upon a change of control.
Upon the
occurrence of a change of control, we must offer to purchase all 2017 Notes and
Debentures then outstanding, at a purchase price equal to 101% of their
principal amount, plus accrued interest (if any) to the payment
date. We are not required to offer to purchase the 2011 Notes, 2013
Notes and 2015 Notes upon the occurrence of a change of control unless a rating
decline of the applicable series of Notes occurs directly as a result of a
change of control and such decline occurs within a specified period of time
after public notice of a change of control or the intention to effect a change
of control. See “Description of Notes—Repurchase of Notes upon a
Change of Control” for a more complete description. In connection
with the Debt Exchange, we obtained consents to amend the 2017 Notes to
eliminate the “economic value of equity” test for a change of
control. See the risk factor above entitled “Our existing high-yield
debt securities contain restrictive covenants and it may be difficult to obtain
any consents to amend these covenants which may be required as part of our
capital raising activities”.
There can
be no assurance that we will have sufficient funds available at the time of any
change of control to repurchase the Notes or any of our other securities that
might be outstanding at the time that may contain a similar requirement to be
repurchased upon certain change of control events. The covenant
requiring us to repurchase the Notes will, unless consents are obtained, require
us to repay all indebtedness outstanding which by its terms would prohibit such
Note repurchase, either prior to or concurrently with such Note
repurchase.
There
is no public market for the Notes.
The Notes
are not currently, and in the future will not be, listed on any securities
exchange or included in any automated quotation system. We cannot
assure you that a liquid market will develop for the Notes, that you will be
able to sell your Notes at a particular time or that the prices that you receive
when you sell the Notes will be favorable.
Even if a
trading market for the Notes does develop, you may not be able to sell your
Notes at a particular time, if at all, or you may not be able to obtain the
price you desire for your Notes. The liquidity of any market for the
Notes will depend on a number of factors, including:
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the
number of holders of Notes;
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our
operating performance and financial
condition;
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our
perceived business prospects;
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the
market for similar securities;
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the
interest of securities dealers in making a market in the Notes;
and
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general
economic conditions, including prevailing interest
rates.
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Historically,
the market for non-investment grade debt has been subject to disruptions that
have caused substantial volatility in the prices of these
securities. We cannot assure you that the market for the Notes will
be free from similar disruptions. Any such disruptions could have an
adverse effect on holders of the Notes.
Certain
restrictive covenants in the Indentures governing the Notes will no longer be in
effect if the Company achieves an investment grade rating from Moody’s or
S&P.
Most of
the restrictive covenants in the Indentures governing the Notes will no longer
be in effect if the Company achieves an investment grade rating from either
Moody’s Investors Service, Inc. or Standard & Poor’s Ratings
Group. The terminated covenants will not be reinstated regardless of
whether our credit rating is subsequently downgraded from investment grade
status. If these restrictive covenants cease to apply, we may take
actions, such as incurring additional debt, undergoing a change of control
transaction or making certain dividends or distributions that would otherwise be
prohibited under the Indentures. Ratings are given by these rating
agencies based upon analyses that include many subjective factors. We
cannot assure you that we will achieve an investment grade rating, nor can we
assure you that an investment grade rating, if granted, will reflect all of the
factors that would be important to holders of the Notes.
Risks
Relating to the Exchange Offer
If
the Debt Exchange is not consummated, the value of our common stock could be
negatively impacted.
The
consummation of the exchange offer, which will extend the maturity of a
significant amount of our debt and substantially reduce our cash interest
expense, is subject to the satisfaction of a number of conditions, including,
among other things, the approval of our stockholders at a special meeting to be
held in approximately two months from the date hereof. If these
conditions are not satisfied, then the existing debt will remain in place
without any extension of debt maturities or reduction in cash interest
expense. We believe that this would negatively impact the
value of
our shares and would likely cause the OTS to conclude that we had not adequately
addressed our debt reduction obligation. This could lead to public
supervisory actions by the OTS that would adversely affect our business and
financial condition.
You
may not be able to participate in the Debt Exchange and you will not be able to
participate in the related consent solicitation.
All of
the 2011 Notes and $1 billion aggregate principal amount of the 2017 Notes
offered pursuant to this prospectus supplement have been tendered in the Early
Tender Period of the Debt Exchange. In addition, the 2017 Notes
offered pursuant to this prospectus supplement that have not been tendered in
the Early Tender Period of the Debt Exchange will not be able to be tendered
because the Debt Exchange is oversubscribed with respect to 2017 Notes and no
further 2017 Notes will be accepted for tender. Because the Early
Tender Period ended on July 1, 2009, you will not have the ability to
participate in the consent solicitation or obtain a consent fee.
If
you acquire Notes that have been tendered in the Debt Exchange, such Notes
will represent the right to receive in exchange therefor Class A Debentures and
accrued but unpaid interest in cash through but excluding the settlement date of
the Debt Exchange, provided the Debt Exchange is completed.
If you
acquire Notes pursuant to this prospectus supplement which have already been
tendered during the Early Tender Period of the Debt Exchange, such Notes will
represent the right to receive in exchange therefor an equal principal amount of
Class A Debentures, plus the right to receive in cash all accrued and unpaid
interest on such Notes, provided the Debt Exchange is
completed. Notes tendered in the Debt Exchange during the Early
Tender Period have been assigned new temporary CUSIP numbers, as described below
under “The Debt Exchange and Consent Solicitation”. Holders acquiring
Notes pursuant to this prospectus supplement are urged to note the CUSIP number
of the Notes they acquire to determine whether such Notes have already been
tendered in the Debt Exchange during the Early Tender Period. Notes
tendered in the Early Tender Period of the Debt Exchange cannot be
withdrawn.
The
Debt Exchange may not be consummated.
We are
not obligated to complete the Debt Exchange unless and until each of the
conditions to the Debt Exchange is satisfied or (to the extent permitted)
waived. If each of the conditions to the Debt Exchange is not
satisfied, we will not be obligated to accept any Notes tendered in the Debt
Exchange. The Debt Exchange is conditioned upon, among other things,
approval by our stockholders of the increase in authorized shares of common
stock, approval by our stockholders of issuance of the Debentures and OTS
approval with respect to Citadel’s participation in the Debt
Exchange. If the Debt Exchange is not completed, holders who acquire
Notes pursuant to this prospectus supplement that have been tendered in the Debt
Exchange will not receive a cash payment of all accrued and unpaid interest up
to and including the settlement date of the Debt Exchange. Instead,
such holders will receive interest on the next interest payment date applicable
to each series of Notes in accordance with the indentures governing such
Notes. As described in “Description of Notes”, we currently intend to
capitalize future interest payments on the 2017 Notes through May
2010.
There
will be less liquidity in the market for Notes that are not accepted for
exchange, and the market prices for such Notes may therefore
decline.
If the
Debt Exchange is consummated, the aggregate principal amount of outstanding 2011
Notes will be reduced by approximately $429,616,000 and the aggregate principal
amount of outstanding 2017 Notes will be reduced by
$1,310,000,000. This would likely adversely affect the liquidity of
non-tendered Notes. An issue of securities with a small outstanding
principal amount available for trading, or float, generally commands a lower
price than does a comparable issue of securities with a greater
float. Therefore, the market price for Notes that are not tendered in
the Debt Exchange may be adversely affected. The reduced float also
may tend to make the trading prices of Notes that are not exchanged more
volatile. The Notes may trade at a discount to the price at which the
securities would trade if the amount outstanding were not reduced, depending on
prevailing interest rates, the market for similar securities and other
factors.
We
cannot assure holders of Notes that, if we consummate the Debt Exchange,
existing ratings for the Notes will be maintained.
We cannot
assure you that, as a result of the Debt Exchange, the rating agencies,
including Standard & Poor’s Ratings Service, Moody’s Investors Service and
Fitch Ratings, will not downgrade or negatively comment upon the
ratings
for non-tendered Notes. If this were to occur, the market price for
Notes that are not tendered in the Debt Exchange may be adversely
affected.
Risks
Relating to the Debentures
All 2011
Notes offered pursuant to this prospectus supplement and $1 billion aggregate
principal amount of the 2017 Notes offered pursuant to this prospectus
supplement were tendered in the Debt Exchange during the Early Tender
Period. Such Notes will be exchanged for an equal principal amount of
Class A Debentures plus a cash payment of accrued but unpaid interest through
but not including the settlement date of the Debt Exchange, provided the Debt
Exchange is completed. The following are risks associated with the
Debentures, if issued upon completion of the Debt Exchange.
The
Debentures will not bear interest.
The
Debentures will not bear interest. If you hold the Debentures to
maturity without converting, you will receive the face amount of your Debentures
and no yield. You will have to rely on the appreciation of the common
stock underlying the Debentures from the issue date to see any return on your
investment.
The
Debentures are a new issue of securities, and the trading market for such
Debentures may be limited.
The
Debentures will be securities for which there currently is no established
trading market. Although we have agreed to use reasonable best
efforts to list the Debentures on the NASDAQ Stock Market, listing is not a
condition to the Debt Exchange offer and we cannot assure you that the
Debentures will be listed for trading on any stock market or exchange or that
any liquid market will develop for the Debentures. If any of the
Debentures are traded after their initial issuance, they may trade at a discount
from their initial issue price or principal amount, depending upon many factors,
including prevailing interest rates, the market for similar securities and other
factors, including general economic conditions and our financial condition,
performance and prospects. Any decline in trading prices, regardless
of the cause, may adversely affect the liquidity and trading markets for the
Debentures.
General
market conditions and unpredictable factors could adversely affect market prices
for the Debentures.
There can
be no assurance about the market prices for the Debentures. Several
factors, many of which are beyond our control, will influence the market value
of the Debentures. Factors that might influence the market value of
the Debentures include, but are not limited to:
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our
creditworthiness, financial condition, performance and
prospects;
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the
market for similar securities; and
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economic,
financial, geopolitical, regulatory or judicial events that affect us or
the financial markets generally.
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Because
the Debentures are convertible into shares of our common stock, volatility or
depressed prices of our common stock could have a similar effect on the trading
price of our Debentures. Holders who receive common stock upon
conversion also will be subject to the risk of volatility and depressed prices
of our common stock. In addition, the existence of the Debentures may
encourage short selling in our common stock by market participants which could
depress the price of our common stock. See the discussion under the
risk factor titled “The market price of our common stock may continue to be
volatile.”
The
Debentures are unsecured, rank pari passu with our other senior debt and will be
subordinated to any secured debt and structurally subordinated to all
liabilities of our subsidiaries.
The
Debentures rank pari passu with our other senior debt. The Debentures
are not secured by any of our assets or those of our subsidiaries. As
a result, except as provided below, the Debentures will be effectively
subordinated to any secured debt we may incur in the future. In any
liquidation, dissolution, bankruptcy or other similar proceeding, holders of our
secured debt may assert rights against any assets securing such debt in order to
receive full payment of their debt before those assets may be used to pay the
holders of the Debentures.
Except as
provided below, none of our subsidiaries will guarantee our obligations under,
or have any obligation to pay any amounts due on, the Debentures. As
a result, the Debentures will be effectively subordinated to all liabilities of
our subsidiaries. Our rights and the rights of our creditors,
including holders of the Debentures, to participate in the assets of any of our
subsidiaries upon their liquidation or recapitalization will generally be
subject to the prior claims of those subsidiaries’ creditors.
We will
be required to secure the 2017 Notes upon the occurrence of the Trigger Date
with certain of our property and assets. The indenture governing the
Debentures will require the Debentures to be equally and ratably secured with
the 2017 Notes and will require the Company to cause the Restricted Subsidiaries
to guarantee the Debentures. See “—Covenants—Springing Lien” under
the caption “Description of Notes”. However, this requirement will
not occur until the Trigger Date occurs. See the risk factor entitled
“The Notes are not currently secured and are subject to prior claims of our
secured creditors. Any future collateral securing the Notes may not
provide you with meaningful protection. If a default occurs, we may
not have sufficient funds to fulfill our obligations under the Notes” for a
description of the risk related to the springing lien.
We
may not have the ability to repurchase the Debentures in cash when due as
required by the indenture governing the Debentures.
Holders
of the Debentures will have the right to require us to repurchase the Debentures
upon the occurrence of an event of default or a fundamental change as described
under “Description of the Debentures.” We may not have sufficient
funds to repurchase the Debentures in cash or to make the required repayment at
such time, or at maturity, or have the ability to arrange necessary financing on
acceptable terms. Our ability to repurchase the Debentures in cash
may be limited by law or the terms of other agreements relating to our
indebtedness outstanding at the time. Our failure to repurchase the
Debentures when required would result in an event of default with respect to the
Debentures. Our inability to pay for your Debentures that are
tendered for repurchase could result in your receiving substantially less than
the principal amount of the Debentures.
The
conversion rate of the Debentures may not be adjusted for all dilutive
events.
The
conversion rate of the Debentures will be subject to adjustment for certain
events, including, but not limited to, the issuance of stock dividends on our
common stock, the issuance of certain rights or warrants, subdivisions,
combinations, distributions of capital stock (including the stock of a
subsidiary), indebtedness or assets, cash dividends and certain issuer tender or
exchange offers as described under “Description of the Debentures— Conversion
Rights—Conversion Price Adjustments.” However, the conversion rate will not be
adjusted for other events, such as a third-party tender or exchange offer or an
issuance of our common stock for cash, that may adversely affect the trading
price of the Debentures or the common stock. An event that adversely
affects the value of the Debentures may occur, and that event may not result in
an adjustment to the conversion rate.
The
Debentures may not be rated or may receive a lower rating than
anticipated.
We do not
intend to seek a rating on the Debentures. However, if one or more
rating agencies rates the Debentures and assigns the Debentures a rating lower
than the rating expected by investors, or reduces their rating in the future,
the market price of the Debentures and our common stock could be
harmed.
If
you hold Debentures, you will not be entitled to any rights with respect to our
common stock, but you will be subject to all changes made with respect to our
common stock.
If you
hold Debentures, you will not be entitled to any rights with respect to our
common stock (including, without limitation, voting rights and rights to receive
any dividends or other distributions on our common stock, other than
extraordinary dividends that our Board of Directors designates as payable to the
holders of the Debentures), but if you subsequently convert your Debentures and
receive common stock upon such conversion, you will be subject to all changes
affecting the common stock. You will have rights with respect to our
common stock only if and when we deliver shares of common stock to you upon
conversion of your Debentures and, to a limited extent, under the conversion
rate adjustments applicable to the Debentures. For example, in the
event that an amendment is proposed to our certificate of incorporation or
bylaws requiring stockholder approval and the record date for determining the
stockholders of record entitled to vote on the amendment occurs prior to your
conversion of
the
Debentures into our common stock, you will not be entitled to vote on the
amendment, although you will nevertheless be subject to any changes in the
powers or rights of our common stock that result from such
amendment.
Sales
of a significant number of shares of our common stock in the public markets, or
the perception of such sales, could depress the market price of the
Debentures.
The
Debentures will be immediately convertible upon issuance. Sales, or
the perception that such sales may occur, of a substantial number of shares of
our common stock or other equity-related securities in the public markets could
depress the market price of the Debentures, our common stock, or both, and
impair our ability to raise capital through the sale of additional equity
securities. We cannot predict the effect that future sales of our
common stock or other equity-related securities would have on the market price
of our common stock or the value of the Debentures. The price of our
common stock could be affected by possible sales of our common stock by
investors who view the Debentures as a more attractive means of equity
participation in our company and by hedging or arbitrage trading activity which
we expect to occur involving our common stock. This hedging or
arbitrage could, in turn, affect the market price of the
Debentures.
The
risk factors set forth above under “Risks Relating to
Owning the Notes” also apply to
ownership of Debentures.
The risk
factors set forth above under “Risks Relating to
Owning the Notes” describe several
risks relating to ownership of Notes which also apply to ownership of
Debentures, including the following:
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our
broker dealer and bank subsidiaries are not subject to many of the
restrictive covenants contained in the indenture that will govern the
Debentures,
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we
may not be able to generate sufficient cash to permit us to pay the
principal and any premium on the
Debentures,
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we
depend on cash flow from our subsidiaries to meet our obligations and the
Debentures are not currently guaranteed by our
subsidiaries,
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the
Debentures are not currently secured and any future collateral may not
provide meaningful protection to holders of the
Debentures,
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bankruptcy
and fraudulent transfer laws could allow courts to void the Debentures and
any subsidiary guarantees, and
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due
to our substantial indebtedness, we may be limited in our ability to use
debt to fund future capital needs
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We urge
you to consider such risk factors set forth under “Risks Relating to Owning the
Notes” and their application to the Debentures in addition to those set forth in
this “Risks Relating to the Debentures” section.
Persons
considering the acquisition of a Note that has already been tendered during the
Early Tender Period, which will be identified by a temporary CUSIP number,
should consult their tax advisors.
Persons
considering the acquisition of a Note that has already been tendered during the
Early Tender Period, which will be identified by a temporary CUSIP number,
should consult their tax advisors with respect to the tax consequences of the
acquisition or ownership of such a Note, including the consequences of the
potential receipt and ownership of Class A Debentures.
Risks
Relating to the Nature and Operation of Our Business
We
have incurred significant losses and cannot assure that we will be
profitable.
We
incurred a net loss of $511.8 million, or $1.00 loss per share, for the year
ended December 31, 2008, and $232.7 million, or $0.41 loss per share, for the
three months ended March 31, 2009, and we expect to incur a net loss for
the three months ended June 30, 2009 (and a related decrease in stockholders’
equity as of such date), in each case due primarily to losses in our home equity
portfolio. Although we have taken a significant number of steps to
reduce our credit exposure, we likely will continue to suffer significant credit
losses in 2009 and 2010. In late 2007, we experienced a substantial
diminution of customer assets and accounts as a result of customer concerns
regarding our credit related exposures. While we were able to
stabilize and return our retail franchise to growth during 2008, it could take a
significant amount of time to fully mitigate the credit issues in our loan
portfolio and return to profitability.
We
will continue to experience losses in our mortgage loan portfolio.
At March
31, 2009, the principal balance of our home equity loan portfolio was $9.5
billion. During 2008 and the first quarter of 2009, the allowance for
loan losses in this portfolio increased by $374.7 million to $833.8 million and
decreased by $15.2 million to $818.6 million, respectively, primarily due to a
rapid deterioration in performance in the second half of 2007 and continuing
into 2008. While losses on the one-to-four family loan portfolio are
smaller in scope than the losses on the home equity loan portfolio, and may be
offset somewhat by the value of the real estate held upon foreclosure, the
allowance for loan losses in this portfolio increased by $166.3 million to
$185.2 million and by $123.6 million to $308.8 million during 2008 and the first
quarter of 2009, respectively. As the crisis in the residential real
estate and credit markets continues, we expect credit losses to continue at
historically high levels. There can be no assurance that our
provision for loan losses will be adequate if the residential real estate and
credit markets continue to deteriorate beyond our expectations. We
may be required under such circumstances to further increase our provision for
loan losses, which could have an adverse effect on our regulatory capital
position and our results of operations in future periods.
We
could experience significant losses on other securities held on the balance
sheet of E*TRADE Bank.
At March
31, 2009, we held $869.3 million in amortized cost of collateralized mortgage
obligations on the consolidated balance sheet. While the majority of
this portfolio remains AAA-rated, we incurred impairment charges of $95.0
million during 2008 and $18.8 million in the first quarter of 2009, which was a
result of the deterioration in the expected credit performance of the underlying
loans in the securities. In the event that these securities have a
further decline in credit quality, this could result in additional impairment
charges which would have an adverse effect on our regulatory capital position
and our results of operations in future periods.
Losses
of customers and assets could destabilize the Company or result in lower
revenues in future periods.
During
November 2007, well-publicized concerns about E*TRADE Bank’s holdings of
asset-backed securities led to widespread concerns about our continued
viability. From the beginning of this crisis through December 31,
2007 when the situation stabilized, customers withdrew approximately $5.6
billion of net cash and approximately $12.2 billion of net assets from our bank
and brokerage businesses. Many of the accounts that were closed
belonged to sophisticated and active customers with large cash and securities
balances. While we were able to stabilize and return our retail
franchise to growth in 2008, concerns about our viability may recur, which could
lead to destabilization and asset and customer attrition. If such
destabilization should occur, there can be no assurance that we will be able to
successfully rebuild our franchise by reclaiming customers and growing
assets. If we are not successful, our revenues and earnings in future
periods will be lower than we have experienced historically.
We
have a large amount of debt.
We have
issued a substantial amount of high-yield debt securities, with restrictive
financial and other covenants. As of March 31, 2009, our total
long-term debt is $3.2 billion and the expected annual interest cash outlay is
approximately $350 million, $257 million of which we have the option to pay in
the form of additional 2017 Notes through May 2010. Our ratio of debt
(our senior debt and term loans) to equity (expressed as a percentage) was 106%
at December 31, 2008 and 112% at March 31, 2009. The degree to which
we are leveraged could have important consequences, including (i) a
substantial portion of our cash flow from operations is dedicated to the payment
of principal and interest on our indebtedness, thereby reducing the funds
available for other purposes; (ii) our ability to obtain additional
financing for working capital, capital expenditures, acquisitions and other
corporate needs is significantly limited; and (iii) our substantial
leverage may place us at a competitive disadvantage, hinder our ability to
adjust rapidly to changing market conditions and make us more vulnerable in the
event of a further downturn in general economic conditions or our
business. If regulatory requirements change in the future to impose
capital ratios at the holding company level, we could be required to
significantly restructure our capital position. In addition, a
significant reduction in revenues could have a material adverse affect on our
ability to meet our obligations under our debt securities.
We
are subject to investigations and lawsuits as a result of our losses from
mortgage loans and asset-backed securities.
In 2007,
we recognized an increased provision expense totaling $640 million and asset
losses and impairments of $2.45 billion, including the sale of our asset-backed
securities portfolio to Citadel. As a result, various plaintiffs
filed class actions and derivative lawsuits, which have subsequently been
consolidated into one class action and one derivative lawsuit, alleging
disclosure violations regarding our home equity, mortgage and securities
portfolios during 2007. In addition, the SEC initiated an informal
inquiry into matters related to our loan and securities
portfolios. The defense of these matters has and will continue to
entail considerable cost and will be time-consuming for our
management. Unfavorable outcomes in any of these matters could have a
material adverse effect on our business, financial condition, results of
operations and cash flows.
Many
of our competitors have greater financial, technical, marketing and other
resources.
The
financial services industry is highly competitive, with multiple industry
participants competing for the same customers. Many of our
competitors have longer operating histories and greater resources than we do and
offer a wider range of financial products and services. Other of our
competitors offer a more narrow range of financial products and services and
have not been as susceptible to the disruptions in the credit markets that have
impacted our Company, and therefore have not suffered the losses we
have. The impact of competitors with superior name recognition,
greater market acceptance, larger customer bases or stronger capital positions
could adversely affect our revenue growth and customer retention. Our
competitors may also be able to respond more quickly to new or changing
opportunities and demands and withstand changing market conditions better than
we can. Competitors may conduct extensive promotional activities,
offering better terms, lower prices and/or different products and services or
combination of products and services that could attract current E*TRADE
customers and potentially result in price wars within the
industry. Some of our competitors may also benefit from established
relationships among themselves or with third parties enhancing their products
and services.
The
continuing turmoil in the global financial markets could reduce trade volumes
and margin borrowing and increase our dependence on our more active customers
who receive lower pricing.
Online
investing services to the retail customer, including trading and margin lending,
account for a significant portion of our revenues. The continuing
turmoil in the global financial markets could lead to changes in volume and
price levels of securities and futures transactions which may, in turn, result
in lower trading volumes and margin lending. In particular, a
decrease in trading activity within our lower activity accounts or our accounts
related to stock plan administration products and services would significantly
impact revenues and increase dependence on more active trading customers who
receive more favorable pricing based on their trade volume. A
decrease in trading activity or securities prices would also typically be
expected to result in a decrease in margin borrowing, which would reduce the
revenue that we generate from interest charged on margin
borrowing. More broadly, any reduction in overall transaction volumes
would likely result in lower revenues and may harm our operating results because
many of our overhead costs are fixed.
We
depend on payments from our subsidiaries.
We depend
on dividends, distributions and other payments from our subsidiaries to fund
payments on our obligations, including our debt
obligations. Regulatory and other legal restrictions may limit our
ability to transfer funds to or from our subsidiaries. Many of our
subsidiaries are subject to laws and regulations that authorize regulatory
bodies to block or reduce the flow of funds to us, or that prohibit such
transfers altogether in certain circumstances. For instance, just as
we may not pay dividends to our stockholders without approval from the OTS,
E*TRADE Bank may not pay dividends to us without approval from the
OTS. These laws and regulations may hinder our ability to access
funds that we may need to make payments on our obligations. Since
E*TRADE Securities LLC is a subsidiary of E*TRADE Bank, the OTS effectively
controls our ability to receive dividend payments from E*TRADE Securities
LLC.
We
rely heavily on technology, and technology can be subject to interruption and
instability.
We rely
on technology, particularly the Internet, to conduct much of our
activity. Our technology operations are vulnerable to disruptions
from human error, natural disasters, power loss, computer viruses, spam attacks,
unauthorized access and other similar events. Disruptions to or
instability of our technology or external technology that allows our customers
to use our products and services could harm our business and our
reputation. In addition, technology systems, whether they be our own
proprietary systems or the systems of third parties on whom we rely to conduct
portions of our operations, are potentially vulnerable to security breaches and
unauthorized usage. An actual or perceived breach of the security of
our technology could harm our business and our reputation.
Vulnerability
of our customers’ computers could lead to significant losses related to identity
theft or other fraud and harm our reputation and financial
performance.
Because
our business model relies heavily on our customers’ use of their own personal
computers and the Internet, our business and reputation could be harmed by
security breaches of our customers and third parties. Computer
viruses and other attacks on our customers’ personal computer systems could
create losses for our customers even without any breach in the security of our
systems, and could thereby harm our business and our reputation. As
part of our E*TRADE Complete Protection Guarantee, we reimburse our customers
for losses caused by a breach of security of the customers’ own personal
systems. Such reimbursements could have a material impact on our
financial performance.
Downturns
in the securities markets increase the credit risk associated with margin
lending or stock loan transactions.
We permit
customers to purchase securities on margin. A downturn in securities
markets may impact the value of collateral held in connection with margin
receivables and may reduce its value below the amount borrowed, potentially
creating collections issues with our margin receivables. In addition,
we frequently borrow securities from and lend securities to other
broker-dealers. Under regulatory guidelines, when we borrow or lend
securities, we must generally simultaneously disburse or receive cash
deposits. A sharp change in security market values may result in
losses if counterparties to the borrowing and lending transactions fail to honor
their commitments.
We
may be unsuccessful in managing the effects of changes in interest rates and the
enterprise interest-earning assets in our portfolio.
Net
operating interest income has become an increasingly important source of our
revenue. Our ability to manage interest rate risk could impact our
financial condition. Our results of operations depend, in part, on
our level of net operating interest income and our effective management of the
impact of changing interest rates and varying asset and liability
maturities. We use derivatives to help manage interest rate
risk. However, the derivatives we utilize may not be completely
effective at managing this risk and changes in market interest rates and the
yield curve could reduce the value of our financial assets and reduce net
operating interest income. Among other items, we periodically enter
into repurchase agreements to support the funding and liquidity requirements of
E*TRADE Bank. Several market participants have reduced or terminated
their participation in the repurchase agreement market. If we are
unsuccessful in maintaining our relationships with counterparties, we could
recognize substantial losses on the derivatives we utilized to hedge repurchase
agreements.
If
we do not successfully manage consolidation opportunities, we could be at a
competitive disadvantage.
There has
recently been significant consolidation in the financial services industry and
this consolidation is likely to continue in the future. Should we be
excluded from or fail to take advantage of viable consolidation opportunities,
our competitors may be able to capitalize on those opportunities and create
greater scale and cost efficiencies to our detriment.
We have
acquired a number of businesses and, although currently constrained by the terms
of our corporate debt, may continue to acquire businesses in the
future. The primary assets of these businesses are their customer
accounts. Our retention of these assets and the customers of
businesses we acquire may be impacted by our ability to successfully continue to
integrate the acquired operations, products (including pricing) and
personnel. Diversion of management attention from other business
concerns could have a negative impact. In the event that we are not
successful in our continued integration efforts, we may experience significant
attrition in the acquired accounts or experience other issues that would prevent
us from achieving the level of revenue enhancements and cost savings that we
expect with respect to an acquisition.
Risks
associated with principal trading transactions could result in trading
losses.
A
majority of our market-making revenues are derived from trading as a
principal. We may incur trading losses relating to the purchase, sale
or short sale of securities for our own account, as well as trading losses in
our market maker stocks. From time to time, we may have large
positions in securities of a single issuer or issuers engaged in a specific
industry. Sudden changes in the value of these positions could impact
our financial results.
Reduced
spreads in securities pricing, levels of trading activity and trading through
market makers could harm our market maker business.
Computer-generated
buy/sell programs and other technological advances and regulatory changes in the
marketplace may continue to tighten securities spreads. Tighter
spreads could reduce revenue capture per share by our market maker, thus
reducing revenues for this line of business.
Advisory
services subject us to additional risks.
We
provide advisory services to investors to aid them in their decision making and
also provide full service portfolio management. Investment decisions
and suggestions are based on publicly available documents and communications
with investors regarding investment preferences and risk
tolerances. Publicly available documents may be inaccurate and
misleading, resulting in recommendations or transactions that are inconsistent
with the investors’ intended results. In addition, advisors may not
understand investor needs or risk tolerances, failures that may result in the
recommendation or purchase of a portfolio of assets that may not be suitable for
the investor. To the extent that we fail to know our customers or
improperly advise them, we could be found liable for losses suffered by such
customers, which could harm our reputation and business.
Our
international operations subject us to additional risks and regulation, which
could impair our business growth.
We
conduct business in a number of international locations, sometimes through joint
venture and/or licensee relationships. Action or inaction in any of
these operations, including the failure to follow proper practices with respect
to regulatory compliance and/or corporate governance, could harm our operations
and/or our reputation.
We
have a significant deferred tax asset and cannot assure it will be fully
realized.
We had
net deferred tax assets of $1.1 billion as of March 31, 2009. We did
not establish a valuation allowance against our federal net deferred tax assets
as of March 31, 2009 as we believed, based on our analysis as of that date, that
it was more likely than not that all of these assets would be
realized. In evaluating the need for a valuation allowance, we
estimated future taxable income based on management approved
forecasts. This process required significant judgment by management
about matters that are by nature uncertain. If future events differ
significantly from our current forecasts, a valuation allowance may need to be
established, which would have a material adverse effect on our results of
operations, financial condition and our regulatory capital position at E*TRADE
Bank. In addition, a significant portion of the net deferred tax
asset relates to a $2.3 billion federal tax loss carryforward, the utilization
of which may be further limited in the event of certain material changes in the
ownership of the Company as described above regarding the ownership
change. For further discussion of this matter, please see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Current Report on Form 8-K filed May 14, 2009 and our
Quarterly Report of Form 10-Q for the three months ended March 31,
2009.
Risks
Relating to the Regulation of Our Business
We
are subject to extensive government regulation, including banking and securities
rules and regulations, which could restrict our business practices.
The
securities and banking industries are subject to extensive
regulation. All of our broker-dealer subsidiaries have to comply with
many laws and rules, including rules relating to sales practices and the
suitability of recommendations to customers, possession and control of customer
funds and securities, margin lending, execution and settlement of transactions
and anti money-laundering. We are also subject to additional laws and
rules as a result of our market maker operations.
Similarly,
E*TRADE Financial Corporation and ETB Holdings, Inc., as Savings and Loan
Holding Companies, and E*TRADE Bank, E*TRADE Savings Bank and United Medical
Bank, as federally chartered savings banks, are subject to extensive regulation,
supervision and examination by the OTS and, in the case of the savings banks,
also the FDIC. Such regulation covers all banking business, including
lending practices, safeguarding deposits, capital structure, recordkeeping,
transactions with affiliates and conduct and qualifications of
personnel.
If
we fail to comply with applicable securities and banking laws, rules and
regulations, either domestically or internationally, we could be subject to
disciplinary actions, damages, penalties or restrictions that could
significantly harm our business.
The SEC,
Financial Industry Regulatory Authority, or FINRA and other self-regulatory
organizations and state securities commissions, among other things, can censure,
fine, issue cease-and-desist orders or suspend or expel a broker-dealer or any
of its officers or employees. The OTS may take similar action with
respect to our banking activities. Similarly, the attorneys general
of each state could bring legal action on behalf of the citizens of the various
states to ensure compliance with local laws. Regulatory agencies in
countries outside of the U.S. have similar authority. The ability to
comply with applicable laws and rules is dependent in part on the establishment
and maintenance of a reasonable compliance system. The failure to
establish and enforce reasonable compliance procedures, even if unintentional,
could subject us to significant losses or disciplinary or other
actions.
If
we do not maintain the capital levels required by regulators, we may be fined or
even forced out of business.
The SEC,
FINRA, OTS and various other regulatory agencies have stringent rules with
respect to the maintenance of specific levels of net capital by securities
broker-dealers and regulatory capital by banks. Net capital
is the
net worth of a broker or dealer (assets minus liabilities), less deductions for
certain types of assets. Failure to maintain the required net capital
could result in suspension or revocation of registration by the SEC and
suspension or expulsion by FINRA, and could ultimately lead to the firm’s
liquidation. In the past, our broker-dealer subsidiaries have
depended largely on capital contributions by us in order to comply with net
capital requirements. If such net capital rules are changed or
expanded, or if there is an unusually large charge against net capital,
operations that require an intensive use of capital could be
limited. Such operations may include investing activities, marketing
and the financing of customer account balances. Also, our ability to
withdraw capital from brokerage subsidiaries could be restricted, which in turn
could limit our ability to repay debt and redeem or purchase shares of our
outstanding stock.
Similarly,
E*TRADE Bank is subject to various regulatory capital requirements administered
by the OTS. Failure to meet minimum capital requirements can trigger
certain mandatory, and possibly additional discretionary actions by regulators
that, if undertaken, could harm a bank’s operations and financial
statements. A bank must meet specific capital guidelines that involve
quantitative measures of a bank’s assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. A
bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about the strength of components of its capital,
risk weightings of assets, off-balance sheet transactions and other
factors. See the discussion above under the risk factor titled “If,
in the near term, we do not complete our plans to raise new capital,
specifically cash equity to support E*TRADE Bank, and to reduce our debt, we
would probably face negative regulatory consequences, which would likely include
a public form of supervisory action by the Office of Thrift Supervision, or
OTS”.
Quantitative
measures established by regulation to ensure capital adequacy require a bank to
maintain minimum amounts and ratios of Total and Tier 1 Capital to Risk-weighted
Assets and of Tier 1 Capital to adjusted total assets. To satisfy the
capital requirements for a “well capitalized” financial institution, a bank must
maintain higher Total and Tier 1 Capital to Risk-weighted Assets and Tier 1
Capital to adjusted total assets ratios.
As
a non-grandfathered Savings and Loan Holding Company, we are subject to
regulations that could restrict our ability to take advantage of certain
business opportunities.
We are
required to file periodic reports with the OTS and are subject to examination by
the OTS. The OTS also has certain types of enforcement powers over
us, ETB Holdings, Inc. and certain of its subsidiaries, including the ability to
issue cease-and-desist orders, force divestiture of E*TRADE Bank and impose
civil and monetary penalties for violations of federal banking laws and
regulations or for unsafe or unsound banking practices. In addition,
under the Gramm-Leach-Bliley Act, our activities are restricted to those that
are financial in nature and certain real estate-related
activities. We may make merchant banking investments in companies
whose activities are not financial in nature if those investments are made for
the purpose of appreciation and ultimate resale of the investment and we do not
manage or operate the company. Such merchant banking investments may
be subject to maximum holding periods and special recordkeeping and risk
management requirements. In 2007, the Company moved its subsidiary,
E*TRADE Clearing, LLC to become an operating subsidiary of E*TRADE Bank,
resulting in increased regulatory oversight and restrictions on the activities
of E*TRADE Clearing, LLC.
We
believe all of our existing activities and investments are permissible under the
Gramm-Leach-Bliley Act, but the OTS has not yet fully interpreted these
provisions. Even if our existing activities and investments are
permissible, we are unable to pursue future activities that are not financial in
nature. We are also limited in our ability to invest in other Savings
and Loan Holding Companies.
In
addition, E*TRADE Bank is subject to extensive regulation of its activities and
investments, capitalization, community reinvestment, risk management policies
and procedures and relationships with affiliated
companies. Acquisitions of and mergers with other financial
institutions, purchases of deposits and loan portfolios, the establishment of
new bank subsidiaries and the commencement of new activities by bank
subsidiaries require the prior approval of the OTS, and in some cases the FDIC,
which may deny approval or limit the scope of our planned
activity. These regulations and conditions could place us at a
competitive disadvantage in an environment in which consolidation within the
financial services industry is prevalent. Also, these regulations and
conditions could affect our ability to realize synergies from future
acquisitions, could negatively affect us following the acquisition and could
also delay or prevent the development, introduction and marketing of new
products and services.
USE
OF PROCEEDS
We will
not receive any of the proceeds from the sale of any of the securities offered
pursuant to this prospectus supplement.
PRICE
RANGE OF COMMON STOCK
Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“ETFC”. The following table sets forth, for the periods presented,
the high and low closing sales prices per share of our common stock as reported
on the NASDAQ Global Select Market.
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Fiscal
Year Ending December 31, 2009
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|
|
|
|
|
|
First
Quarter
|
|
$ |
1.40 |
|
|
$ |
0.59 |
|
Second
Quarter
|
|
$ |
2.58 |
|
|
$ |
1.19 |
|
|
|
|
|
|
|
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|
Fiscal
Year Ended December 31, 2008
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|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
5.17 |
|
|
$ |
2.25 |
|
Second
Quarter
|
|
|
4.36 |
|
|
|
3.10 |
|
Third
Quarter
|
|
|
4.05 |
|
|
|
2.46 |
|
Fourth
Quarter
|
|
|
3.23 |
|
|
|
0.88 |
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
25.45 |
|
|
$ |
21.18 |
|
Second
Quarter
|
|
|
25.60 |
|
|
|
21.09 |
|
Third
Quarter
|
|
|
23.51 |
|
|
|
11.89 |
|
Fourth
Quarter
|
|
|
13.98 |
|
|
|
3.37 |
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|
|
|
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RATIO
OF EARNINGS TO FIXED CHARGES
The
following table sets forth our consolidated ratio of earnings to fixed
charges:
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For
the three months ended March 31, 2009
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Ratio
of earnings to fixed charges
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(0.15 |
) |
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The ratio
of earnings to fixed charges is computed by dividing (i) income (loss) before
income taxes, discontinued operations and the cumulative effect of accounting
changes less equity in the income (loss) of investments plus fixed charges less
the preference securities dividend requirement of consolidated subsidiaries by
(ii) fixed charges. Fixed charges include, as applicable, interest expense,
amortization of debt issuance costs, the estimated interest component of rent
expense (calculated as one-third of net rent expense) and the preference
securities dividend requirement of consolidated subsidiaries.
THE
DEBT EXCHANGE AND CONSENT SOLICITATION
General
On
June 22, 2009, we commenced an offer to all holders of our 2011 Notes and
our 2017 Notes to exchange (i) any and all outstanding 2011 Notes and (ii) up to
$310 million aggregate principal amount of 2017 Notes held by holders other than
Citadel plus at least $600 million but not more than $1 billion of 2017 Notes to
be tendered by Citadel, in each case for an equal aggregate principal amount of
zero-coupon convertible debentures due 2019. Holders tendering their
2011 Notes and 2017 Notes will receive, upon closing of the Debt Exchange, cash
in the amount of the accrued and unpaid interest on the 2011 Notes and 2017
Notes exchanged. As of June 12, 2009, there were $435.5 million
aggregate principal amount of 2011 Notes and $2,185.6 million aggregate
principal amount of 2017 Notes outstanding. The Debentures issued in
the Debt Exchange will be designated as either Class A Debentures or Class B
Debentures and will be identical except for the conversion price for each class
of Debentures. Holders tendering 2011 Notes and 2017 Notes in the
period that expired at midnight, New York City time, July 1, 2009, will be
entitled to receive Class A Debentures in exchange for their tendered 2011 Notes
and 2017 Notes. Holders tendering their 2011 Notes in the Debt
Exchange after the Early Tender Period will be entitled to receive Class B
Debentures in exchange for their tendered 2011 Notes. Holders of 2017
Notes are not able to tender such Notes after the Early Tender Period because
the Debt Exchange is oversubscribed with respect to 2017 Notes. The
initial conversion price of the Class A Debentures will be
$1.0340. The initial conversion price for the Class B Debentures will
be $1.5510, or 150% of the initial conversion price applicable to the Class A
Debentures.
Citadel
tendered $230,245,000 aggregate principal amount of its 2011 Notes and $1
billion aggregate principal amount of its 2017 Notes in the Debt Exchange during
the Early Tender Period on the same terms as the other holders of the 2011 Notes
and 2017 Notes. At the end of the Early Tender Period, approximately
$429,616,000 principal amount of 2011 Notes and approximately $1,407,178,248
principal amount of 2017 Notes were tendered, including the Notes tendered by
Citadel. Because the aggregate principal amount of 2017 Notes
tendered by holders other than Citadel exceeds $310 million, acceptance of the
2017 Notes tendered by such holders for exchange will be
pro-rated. No additional 2017 Notes will be accepted for tender in
the Debt Exchange and the aggregate principal amount of 2017 Notes that will be
accepted for exchange will be $1.31 billion.
Completion
of the Debt Exchange is conditioned upon, among other things, receipt of
stockholder approval to increase our authorized common stock and approve the
issuance of the Debentures and receipt of OTS approval of Citadel’s
participation in the Debt Exchange, as described below.
In
connection with the Debt Exchange, we obtained consents to amendments and
waivers of certain provisions of the indentures governing the 2011 Notes and
2017 Notes, for which we will in certain circumstances pay stomary consent
fee. We obtained consents representing a majority of the aggregate
principal amount of each of the 2011 Notes and the 2017 Notes (both including
and excluding such 2011 Notes and 2017 Notes held by Citadel) to approve our
proposal to amend the indentures relating to such 2011 Notes and 2017 Notes to
permit us to participate in the U.S. Department of Treasury’s TARP Capital
Purchase Program in the event our application is approved and provided we obtain
an analogous amendment to the indentures governing our 2013 Notes and 2015
Notes. In addition, we obtained consents representing a majority of
the aggregate principal amount of the 2017 Notes (both including and excluding
such 2017 Notes held by Citadel) to approve our proposal to amend the definition
of “Change of Control” in the indenture relating to the 2017 Notes to make
clause (1) of the definition (concerning the beneficial ownership of our capital
stock) consistent with the analogous provision in the indentures relating to the
2011 Notes, 2013 Notes and 2015 Notes.
By
tendering their 2011 Notes and 2017 Notes in the Debt Exchange during the Early
Tender Period holders were automatically deemed to have delivered consent to
each such amendment and waiver, and to have waived any consent fee, in each case
as to their tendered 2011 Notes and 2017 Notes. Each of the
Debentures will: (i) have a ten year maturity; (ii) not bear
interest; (iii) be convertible into shares of our common stock at any time at
the election of the holder into a number of shares equal to the quotient of (x)
the principal amount of Debentures of such class to be converted and (y) the
conversion price applicable to such Debentures immediately prior to conversion;
provided that no holder may convert Debentures to the extent such conversion
would result in either (A) such holder beneficially owning in excess of 9.9% of
our outstanding common stock (which limitations may be waived by such holder),
or (B) such holder owning in excess of 24.9% of our outstanding common stock,
under the OTS control rules, which limitations may be amended or waived, as
applicable, upon the later of (a) one year notice to us and (b) receipt of any
necessary regulatory approvals; (iv) contain customary anti-dilution provisions;
and (v) will have covenants and events of default substantially similar to those
of our 2017 Notes. See “Description of Debentures”.
Conditions
to the Debt Exchange; Special Meeting of Stockholders
The Debt
Exchange will be subject to a number of closing conditions, including (a)
required regulatory approvals, including approvals from the OTS with respect to
Citadel’s participation in the Debt Exchange, (b) stockholder approval of the
Debt Exchange (including Citadel’s participation in the Debt Exchange) under
Nasdaq Rule 5635 and (c) stockholder approval of an increase in our authorized
common stock. We filed a preliminary proxy statement on Schedule 14A
to solicit proxies for the Special Meeting, at which we will seek stockholder
approval of the Debt Exchange, the increase of our authorized common stock and
certain other matters. Holders of shares of our common stock on
June 26, 2009, the record date for the Special Meeting, will be able to
vote their shares at the Special Meeting.
Information
for Investors Purchasing 2011 Notes and 2017 Notes Pursuant to this Prospectus
Supplement
All
holders who acquire 2011 Notes and 2017 Notes pursuant to this prospectus
supplement should note the following:
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regardless
of whether the Debt Exchange is completed, we will amend the 2011
Indenture and 2017 Indenture as described
above.
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holders
who acquire such Notes pursuant to this prospectus supplement will not be
entitled to any consent fee.
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Notes Tendered During the Early
Tender Period. All 2011 Notes offered pursuant to this prospectus
supplement and $1 billion aggregate principal amount of the 2017 Notes offered
pursuant to this prospectus supplement were tendered in the Debt Exchange during
the Early Tender Period. All 2011 Notes and 2017 Notes tendered
during the Early Tender Period have been assigned new temporary CUSIP numbers.
As soon as practicable following the Early Tender Period, each Note bearing an
appropriate new temporary CUSIP number will be released by the exchange agent
for the Debt Exchange and may be transferred and sold until the expiration date
of the Debt Exchange. Such Notes with temporary CUSIP numbers held by
the selling securityholders may be sold pursuant to this prospectus
supplement. Notes bearing such temporary CUSIP numbers pursuant to
this prospectus supplement represent the right to receive $1,000 principal
amount of Class A Debentures in exchange for $1,000 principal amount of such
Notes plus accrued and unpaid interest thereon in cash through but excluding the
settlement date of the Debt Exchange, provided the Debt Exchange is completed.
In the event the Debt Exchange is terminated prior to its expiration date or is
otherwise not completed, all 2011 Notes and 2017 Notes bearing temporary CUSIP
numbers will revert to their respective CUSIP numbers prior to being tendered.
Such holders will not receive a cash payment of all accrued and unpaid interest
up to and including the settlement date of the Debt
Exchange. Instead, such holders will receive interest on the next
interest payment date applicable to each series of Notes in accordance with the
indentures governing such Notes. As described in “Description of
Notes”, we currently intend to capitalize future interest payments on the 2017
Notes through May 2010.
In
addition, holders who acquire Notes that were tendered during the Early Tender
Period pursuant to this prospectus supplement will not be entitled to any
consent fee under any circumstances.
The
temporary CUSIP numbers assigned to Notes tendered during the Early Tender
Period are as follows:
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the
2011 Notes with permanent CUSIP No. 269246 AF1 have been
assigned 269246 BC7 as a temporary CUSIP
number.
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·
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the
2017 Notes with permanent
CUSIP Nos. 269246 AS3, 269246 AT1 and 269246 AV6 have been assigned
one of 269246 BD5, 269246 BE3 or 269246 BF0 as a temporary CUSIP
number.
|
Any
holders who acquire 2011 Notes pursuant to this prospectus supplement will
acquire 2011 Notes that have been assigned a temporary CUSIP
number. Any holders who acquire 2017 Notes pursuant to this
prospectus supplement are urged to note the CUSIP numbers for the 2017 Notes
they are acquiring to determine whether such 2017 Notes were tendered in the
Debt Exchange during the Early Tender Period.
Any
holders of 2011 Notes acquired pursuant to this prospectus supplement and any
holder of 2017 Notes acquired pursuant to this prospectus supplement that were
tendered during the Early Tender Period are strongly urged to read the Offering
Memorandum and related Letter of Transmittal dated June 22, 2009, and the form
of indenture which will govern the Debentures, all of which are filed as
exhibits to our Form T-3 filed on June 22, 2009 (together, the “Offering
Documents”), and our public filings, including our Current Report on Form 8-K
filed on June 30, 2009, which corrects and supersedes certain information in the
Offering Documents. In addition, further information about the Class
A Debentures can be found in “Description of Debentures”.
Notes Not Tendered During the Early
Tender Period. Holders who acquire 2017 Notes pursuant to this prospectus
supplement that were not tendered in the Debt Exchange during the Early Tender
Period (1) will not receive 2017 Notes with temporary CUSIP numbers, (2) will
not be entitled to receive Class A Debentures in exchange for their Notes as
described above or any accrued and unpaid interest thereon in connection with
the settlement of the Debt Exchange and (3) will not be able to participate in
the Debt Exchange because the Debt Exchange is oversubscribed with respect to
2017 Notes and further 2017 Notes will not be accepted for
tender. Such holders will retain their interest in the 2017 Notes
regardless of whether the Debt Exchange is completed.
DESCRIPTION
OF CAPITAL STOCK
The
following description of our capital stock is based upon our Restated
Certificate of Incorporation (“Certificate of Incorporation”), our Bylaws
(“Bylaws”) and applicable provisions of law. We have summarized
certain portions of the Certificate of Incorporation and Bylaws
below. The summary is not complete. The Certificate of
Incorporation and Bylaws are incorporated by reference in the registration
statement of which this prospectus supplement forms a part and are exhibits to
our Annual Report on Form 10-K for the year ended December 31,
2008. In addition, our Bylaws were amended on June 8, 2009 and the
text of the amendment is filed as Exhibit 3.1 to our Current Report on Form 8-K
filed on June 10, 2009. You should read the Certificate of
Incorporation and Bylaws for the provisions that are important to
you.
Certain
provisions of the Delaware General Corporation Law (“DGCL”), the Certificate of
Incorporation and the Bylaws summarized in the following paragraphs may have an
anti-takeover effect. This may delay, defer or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interests,
including those attempts that might result in a premium over the market price
for its shares.
General
Our
authorized capital stock consists of 1,200,000,000 shares of common stock, $0.01
par value per share and 1,000,000 shares of preferred stock, $0.01 par value per
share, of which 1 share has been designated Series A Preferred Stock and 500,000
shares have been designated Series B Participating Cumulative Preferred
Stock. As of June 26, 2009, we had outstanding 1,115,429,538 shares
of our common stock. As of June 26, 2009, we had 1,832 stockholders
of record. We have no shares of preferred stock
outstanding.
At the
Special Meeting, we will, among other matters, seek stockholder approval for an
amendment to our Certificate of Incorporation that will, if approved, increase
our authorized shares of common stock to 4,000,000,000.
Each
holder of common stock is entitled to one vote per share held on all matters to
be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably the dividends, if any, as may be declared from time
to time by our Board of Directors out of funds legally available for the payment
of dividends. If we liquidate, dissolve or wind-up our business, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The common stock has no preemptive
or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
non-assessable, and any shares of common stock to be issued upon completion of
our offering will be fully paid and non-assessable.
Our
Series B Preferred Stock (“Series B Preferred Stock”) is entitled to receive
quarterly dividends in an amount per share equal to the greater of $1.00 and one
thousand times the aggregate per share amount of all cash and non-cash dividends
declared on our common stock (excluding dividends payable in shares of common
stock or subdivisions of common stock (by reclassification or otherwise)). Each
share of Series B Preferred Stock is entitled to 1,000 votes on all matters
submitted to a vote of our stockholders. If dividends on any Series B Preferred
Stock are unpaid for six quarters or more, the holders of Series B Preferred
Stock have the right to elect two directors to our Board of Directors, which
right extends until all accrued and unpaid dividends on the Series B Preferred
Stock have been paid in full. Our Series B Preferred Stock has a liquidation
preference of $1.00 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment. Our Series B Preferred Stock is not redeemable and will rank
junior to all existing and future series of our preferred stock unless
specifically provided for otherwise by such series of preferred stock. The
Series B Preferred Stock may be issued in fractions of a share.
Stockholder
Rights Plan
Our Board
of Directors adopted the Stockholder Rights Plan in July 2001. In
connection with the Stockholder Rights Plan, our Board of Directors declared and
paid a dividend of one participating preferred share purchase right for each
share of common stock outstanding on July 17, 2001. In addition, each
share of common stock issued after July 17, 2001 was issued, or will be issued,
with an accompanying participating preferred share purchase
right.
Each
right entitles the holder, under certain circumstances, to purchase from us one
one-thousandth of a share of Series B Participating Cumulative Preferred Stock,
par value $0.01 per share, at an exercise price of $50.00 per one-thousandth of
a share of Series B Participating Cumulative Preferred Stock.
The
rights are evidenced by the certificates for, and are transferred with, our
common stock and will not separate from the underlying common stock and will not
be exercisable until the earlier of either (i) 10 days following a public
announcement that a person or group of affiliated or associated persons has
acquired, or obtained the right to acquire, beneficial ownership of securities
representing 10% or more of the outstanding shares of the Company’s common stock
(an “Acquiring Person”) or (ii) 10 business days (or such later date as may be
determined by our Board of Directors before any person has become an Acquiring
Person) following the commencement of a tender offer or exchange offer which
would result in any person or group of persons becoming an Acquiring
Person. The rights will expire on the earlier of (a) July 9, 2011 or
(b) redemption of exchange of the rights by the Company, as described
below.
The Board
of Directors may exchange the rights at a ratio of one share of common stock for
each right at any time after a person or group of affiliated or associated
persons has become an Acquiring Person but before such person or group of
affiliated or associated persons acquires beneficial ownership of 50% or more of
the outstanding shares of our common stock. The Board of Directors
may also redeem the rights at a price of $0.01 per right at any time before any
person has become an Acquiring Person.
If, after
the rights become exercisable, we agree to merge into another entity, another
merges into us or we sell more than 50% of our assets, each right will entitle
the holder to purchase, at a price equal to the exercise price of the right, a
number of shares of common stock of such surviving or acquiring entity having a
then-current value of two times the exercise price of the rights.
ARTICLE
21 Agreements
with Citadel Regarding Future Acquisitions of Our Common Stock; Stockholder
Rights Plan
In
connection with our Public Equity Offering and the Debt Exchange, we amended our
Stockholder Rights Plan to:
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exempt
Citadel from becoming an “Acquiring Person”, as defined in the Stockholder
Rights Plan, in connection with its purchase of shares in our Public
Equity Offering and its acquisition of Debentures in the
Debt Exchange (including the common stock issuable upon conversion
thereof), as well as pursuant to the exercise of its pre-emptive rights as
described below;
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increase
Citadel’s allowance for acquiring additional shares of our common stock
without becoming an Acquiring Person from approximately 8.5 million shares
to 25.0 million shares (excluding shares acquired by (i) exercise of its
preemptive rights, (ii) conversion of the Debentures, (iii) the purchase
of shares of common stock in the Public Equity Offering and (iv) the
purchase of shares of common stock during any Rights Plan Holiday Period),
effective and contingent upon the settlement of the Debt Exchange;
and
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provide
that Citadel will be exempt from becoming an Acquiring Person with respect
to any acquisitions of additional shares of our common stock during any
Rights Plan Holiday Period, effective and contingent upon the settlement
of the Debt Exchange.
|
A “Rights
Plan Holiday Period” means, at any time in which our Stockholder Rights Plan
remains in effect, the period commencing upon our public disclosure that E*TRADE
Bank has failed to satisfy the Financial Metrics Test for any quarter and ending
upon the next public disclosure that E*TRADE Bank has once again satisfied the
Financial Metrics Test at the end of a quarter.
The
“Financial Metrics Test” means, at the balance sheet date for a fiscal quarter,
that E*TRADE Bank has both (i) at least $450 million in Excess Risk-Based
Capital and (ii) a Tier 1 Capital Ratio of at least 6.00%.
“Excess
Risk-Based Capital” means that portion of E*TRADE Bank’s total capital, as such
term is defined in 12 CFR 567.5(c) (as currently or hereafter in effect), that
is in excess of the amount of total capital that would be
required
in order for E*TRADE Bank to have a total risk-based capital ratio of 10.0% as
calculated in accordance with 12 CFR Part 567 (as currently or hereafter in
effect).
“Tier 1
Capital Ratio” means E*TRADE Bank’s core capital, as such term is defined in 12
CFR 567.5(a) (as currently or hereafter in effect), divided by its adjusted
total assets, as such term is defined in 12 CFR 567.1 (as currently or hereafter
in effect).
In
addition, we have agreed that at the Special Meeting we will submit to our
stockholders an advisory resolution regarding whether we should retain or
terminate our Stockholder Rights Plan (the “Rights Plan
Proposal”). We have agreed with Citadel that neither our Board of
Directors nor Citadel will take any position on whether stockholders should vote
to retain or terminate the Stockholder Rights Plan or otherwise seek to
influence the outcome of the advisory vote. Citadel has agreed that
it will vote its shares representing no more than 9.9% of our shares outstanding
and entitled to vote at the Special Meeting on this advisory resolution to
terminate the Stockholder Rights Plan, and that it will vote the balance of its
shares on this advisory resolution in the same proportions, to retain or to
terminate the Stockholder Rights Plan, as the votes cast by all other
stockholders. Following the vote, which will not be binding, our
Board of Directors will determine whether to retain or terminate our Stockholder
Rights Plan, based on its consideration of all factors deemed relevant to the
exercise of its fiduciary duties.
We also
granted Citadel pre-emptive rights to allow Citadel to maintain its percentage
ownership of our common stock in connection with future issuances by us, subject
to Citadel’s purchasing our securities on the same terms and conditions as other
purchasers and certain other conditions. The pre-emptive rights became effective
upon the expiration of the Early Tender Period. If we fail to complete the Debt
Exchange, then Citadel’s pre-emptive rights will terminate and be of no further
force or effect.
The
pre-emptive rights will not apply to issuances of common stock or securities
convertible into or exercisable for shares of our common stock (i) in connection
with acquisitions by us of other companies or businesses, (ii) in exchange for
our 2011 Notes, 2013 Notes, 2015 Notes or 2017 Notes or (iii) pursuant to our
stock plans or otherwise in equity compensation arrangements with our directors,
officers, employees or consultants.
The
pre-emptive rights will be in effect so long as we have in effect a stockholder
rights plan, provided that the pre-emptive rights shall terminate and be of no
further force or effect upon the earliest to occur of (i) the earlier of
termination of the Exchange Agreement or failure to consummate the Debt Exchange
by October 31, 2009 or (ii) the date, after the consummation of the Debt
Exchange, that Citadel and its affiliates beneficially own less than 19.9% of
our outstanding common stock on a fully diluted basis assuming conversion of all
securities beneficially owned by Citadel and its affiliates (whether or not such
securities are convertible or exchangeable for shares of our common stock at
such time in accordance with their terms or by reason of any condition precedent
to such conversion or exchange not been satisfied at such time). The pre-emptive
rights will be suspended upon the termination of our Stockholder Rights Plan,
but will be automatically reinstated if we reinstate our Stockholder Rights Plan
or we subsequently adopt a new rights plan, “poison pill” or similar
plan.
This
description is not complete and is qualified, in its entirety, by reference to
the Rights Agreement dated as of July 9, 2001, a copy of which was filed as
Exhibit 99.2 to our Current Report on Form 8-K filed on July 10, 2001, the First
Amendment to Rights Agreement, dated November 29, 2007, a copy of which was
filed as Exhibit 4.3 to our Current Report of Form 8-K filed on December 4,
2007, the Second Amendment to Rights Agreement, dated as of June 17, 2009, a
copy of which was filed as Exhibit 4.1 to our Current Report on 8-K filed June
17, 2009, and the Third Amendment to Rights Agreement, dated as of June 30,
2009, a copy of which was filed as Exhibit 4.1 to our Current Report on 8-K
filed June 30, 2009, including any amendments or reports filed for the purpose
of updating such description.
Anti-takeover
Effects or Provisions of our Certificate of Incorporation, Bylaws, Stockholder
Rights Plan and Delaware Law
Certificate
of Incorporation and Bylaws
Our
Certificate of Incorporation and Bylaws contain provisions that could discourage
potential takeover attempts and make more difficult attempts by stockholders to
change management.
Our
Certificate of Incorporation and Bylaws provide for a classified board of
directors and permit the board to create new directorships and to elect new
directors to serve for the full term of the class of directors in which the new
directorship was created. The terms of the directors are staggered to
provide for the election of approximately one-third of the board members each
year, with each director serving a three-year term. In uncontested
elections, each director must be elected to the board by the majority of the
votes cast with respect to the director’s election, and must submit his or her
resignation to the board if he or she does not obtain the required
majority. The board has the power to decide whether or not to accept
the resignation, but must publicly disclose its decision and, if the resignation
is rejected, its rationale within 90 days following certification of the
stockholder vote. In contested elections, each director must be
elected by a plurality of the votes cast with respect to the director’s
election. The board (or its remaining members, even though less than
a quorum) is also empowered to fill vacancies on the board occurring for any
reason, including a vacancy from an enlargement of the board; however, a vacancy
created by the removal of a director by the stockholders or court order may be
filled only by the vote of a majority of the shares at a meeting at which a
quorum is present. Any director so elected according to the preceding
sentence shall hold office for the remainder of the term of the class of
directors in which the new directorship was created or the vacancy
occurred. A director or the entire board may be removed by
stockholders, with or without cause, by the affirmative vote of two-thirds of
the outstanding voting stock. Our Certificate of Incorporation does
not provide for cumulative voting in the election of directors.
Our
Certificate of Incorporation provides that stockholders may take action only at
an annual meeting or special meeting and may not take action by written
consent. Special meetings of our stockholders may only be called by
our Chairman of the Board, our President, a majority of the number of directors
constituting the full board, or the holders of not less than 10% of our
outstanding voting stock.
Under the
terms of our Bylaws, stockholders who intend to present business or nominate
persons for election to the board at annual meetings of stockholders must
provide notice to our corporate secretary no more than 150 days and no less than
120 days prior to the date of the proxy statement for the prior annual meeting,
as more fully set forth in our Bylaws.
Our
Certificate of Incorporation provides that, in addition to the requirements of
the Delaware General Corporation Law described below, any business combination
with an interested stockholder, as these terms are defined in our Certificate of
Incorporation and summarized below, requires the affirmative vote of two-thirds
of the outstanding voting stock, unless two-thirds of the number of directors
constituting the full board approve the transaction.
A
business combination is defined for purposes of this provision of our
Certificate of Incorporation as:
|
·
|
a
merger or consolidation of us or any of our subsidiaries with an
interested stockholder or with a corporation that is or would become an
affiliate or associate, with these terms defined for purposes of this
provision of our Certificate of Incorporation as they are defined in the
Exchange Act, of an interested
stockholder,
|
|
·
|
any
sale, lease, exchange, mortgage, pledge, transfer or other disposition to
or with, or proposed by or on behalf of, an interested stockholder or any
affiliate or associate of an interested stockholder involving any assets
of ours or our subsidiaries that constitute 5% or more of our total
assets,
|
|
·
|
the
issuance or transfer by us or by any of our subsidiaries of any of our or
their securities to, or proposed by or on behalf of, an interested
stockholder or any affiliate or associate of an interested stockholder in
exchange for cash, securities or other property that constitute 5% or more
of our total assets,
|
|
·
|
the
adoption of any plan or proposal for our liquidation or dissolution or any
spin-off or split-up of any kind of us or any of our subsidiaries,
proposed by or on behalf of an interested stockholder or an affiliate or
associate of an interested stockholder,
or
|
|
·
|
any
reclassification, recapitalization, or merger or consolidation of us with
any of our subsidiaries or any similar transaction that has the effect,
directly or indirectly, of increasing the percentage of the outstanding
shares of (i) any class of equity securities of us or any of our
subsidiaries or (ii) any class of securities of us or any of our
subsidiaries convertible into equity securities of us or any of our
subsidiaries, in either case, which are directly or indirectly owned by an
interested stockholder or an affiliate or associate of an interested
stockholder.
|
An
interested stockholder is defined for purposes of this provision of our
Certificate of Incorporation as an individual, corporation or other entity
which, as of the record date for notice of the transaction or immediately prior
to the transaction:
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·
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is
one of our associates or affiliates and at any time within the prior
two-year period was the beneficial owner, directly or indirectly, of 10%
or more of our outstanding voting securities,
or
|
|
·
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is,
or was at any time within the prior two-year period, the beneficial owner,
directly or indirectly, of 10% or more of our outstanding voting
securities, or
|
|
·
|
is,
under circumstances described in more detail in our Certificate of
Incorporation, an assignee of any of the persons described
above.
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A person
is the beneficial owner of any voting securities which:
|
·
|
that
person or any of its affiliates or associates, beneficially owns, directly
or indirectly,
|
|
·
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that
person or any of its affiliates or associates has, directly or indirectly,
the right to acquire (whether such right is exercisable immediately or
subject only to the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights,
exchange rights, warrants or options, or otherwise, or the right to vote
pursuant to any agreement, arrangement or understanding,
or
|
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·
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are
beneficially owned, directly or indirectly, by any other person with which
the person in question or any of its affiliates or associates has any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of capital
stock.
|
Our Board
of Directors has the authority to issue preferred stock in one or more series
and to fix the powers, rights, designations preferences, qualifications,
limitations and restrictions applicable to the preferred stock. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing potential takeover attempts without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of our common stock.
These
provisions of our Certificate of Incorporation and Bylaws may deter any
potential unfriendly offers or other efforts to obtain control of us that are
not approved by our Board of Directors. Such provisions could deprive
our stockholders of opportunities to realize a premium on their common stock and
could make removal of incumbent directors more difficult. At the same
time, these provisions may have the effect of inducing any persons seeking to
control us or seeking a business combination with us to negotiate terms
acceptable to our Board of Directors. These provisions of our
Certificate of Incorporation and Bylaws can be changed or amended only by the
affirmative vote of the holders of at least two-thirds of our outstanding voting
stock.
Stockholder
Rights Plan
The
Stockholder Rights Plan approved by our Board of Directors is designed to
protect and maximize the value of our outstanding equity interests in the event
of an unsolicited attempt to acquire us in a manner or on terms not approved by
our Board of Directors and that prevents our stockholders from realizing the
full value of their shares of our common stock. The rights are not
intended to prevent a takeover of us.
We may
redeem the rights at a price of $0.01 per right at any time prior to the
acquisition of 10% or more of our outstanding common stock by a single acquiror
or group. Accordingly, the rights should not interfere with any
merger or business combination approved by our Board of Directors.
However,
the rights may have the effect of rendering more difficult or discouraging an
acquisition of us that is deemed undesirable by our Board of
Directors. The rights may cause substantial dilution to a person or
group that attempts to acquire us on terms or in a manner not approved by our
Board of Directors, except pursuant to an offer conditioned upon the
negotiation, purchase or redemption of the rights.
In
connection with our Public Equity Offering and the Debt Exchange, we have agreed
to put the question of whether to retain or terminate our Stockholder Rights
Plan to an advisory vote of our stockholders. Our Board of Directors,
in the exercise of its fiduciary duties, has discretion over whether to retain
or terminate our Stockholder Rights Plan and the advisory vote will not be
binding. For additional details, please see “Relationship with
Citadel – Exchange Agreement” and “Description of Capital Stock – Stockholder
Rights Plan”.
Delaware
Law
We are
subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. In general,
Section 203 prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that the stockholder became an interested stockholder,
unless:
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·
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the
transaction is approved by the board before the date the interested
stockholder attained that status;
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|
·
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upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced; or
|
|
·
|
on
or after the date the business combination is approved by the board and
authorized at a meeting of stockholders by at least two-thirds of the
outstanding voting stock that is not owned by the interested
stockholder.
|
Section 203
defines “business combination” to include the following:
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·
|
any
sale, lease, exchange, mortgage, transfer, pledge or other disposition of
10% or more of the assets of the corporation involving the interested
stockholder;
|
|
·
|
any
merger or consolidation involving the corporation or any majority-owned
subsidiary and the interested
stockholder;
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation or by any majority-owned subsidiary of any
stock of the corporation or of such subsidiary to the interested
stockholder;
|
|
·
|
any
transaction involving the corporation or any majority-owned subsidiary
that has the effect of increasing the proportionate share of the stock of
any class or series of the corporation beneficially owned by the
interested stockholder; or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or any majority-owned
subsidiary.
|
In
general, Section 203 defines “interested stockholder” to be any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by any of these entities or persons within the prior three-year
period.
A
Delaware corporation may opt out of this provision either with an express
provision in its original Certificate of Incorporation or in an amendment to its
Certificate of Incorporation or Bylaws approved by its
stockholders. We
have not
opted out of this provision. Section 203 could prohibit or delay
mergers or other takeover or change in control attempts and, accordingly, may
discourage attempts to acquire us.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company, N.A.
Listing
Our
common stock is listed for trading on the NASDAQ Global Select Market under the
trading symbol “ETFC”.
DESCRIPTION
OF NOTES
The
following is a description of the 2011 Notes, 2013 Notes, 2015 Notes and 2017
Notes. Only the 2011 Notes and the 2017 Notes are being offered for
resale under this prospectus supplement. In this section, we
sometimes refer to the 2011 Notes, 2013 Notes and 2015 Notes collectively as the
“Senior Notes” in order to distinguish them from the 2017 Notes. For
purposes of this “Description of Notes”, except as expressly stated or where the
context otherwise requires, the term the “Notes” includes the Senior Notes and
the 2017 Notes.
Overview
The
2011 Notes
Pursuant
to an indenture dated as of June 8, 2004, between E*TRADE Financial
Corporation (the “Company”) and The Bank of New York, as trustee (the
“Trustee”), the Company issued $400,000,000 aggregate principal amount of 8.0%
Senior Notes Due 2011 on June 8, 2004 and $100,000,000 aggregate principal
amount of 8.0% Senior Notes Due 2011 on September 19, 2005. Such
indenture, as supplemented by the first supplemental indenture thereto dated
September 19, 2005 and the second supplemental indenture thereto dated
November 1, 2006, is referred to in this “Description of Notes” as the
“2011 Notes Indenture”. As described under “The Debt Exchange
and Consent Solicitation”, the Company has obtained consents to amend the 2011
Notes Indenture, which will be modified by a supplemental indenture giving
effect to such amendments.
The
2013 Notes
Pursuant
to an indenture dated as of September 19, 2005, between the Company and the
Trustee, the Company issued $350,000,000 aggregate principal amount of 7.375%
Senior Notes Due 2013 on September 19, 2005 and $250,000,000 aggregate
principal amount of 7.375% Senior Notes Due 2013 on November 10,
2005. Such indenture, as supplemented by the first supplemental
indenture thereto dated November 10, 2005 and the second supplemental
indenture thereto dated November 1, 2006, is referred to in this
“Description of Notes” as the “2013 Notes Indenture”.
The
2015 Notes
Pursuant
to an indenture dated as of November 22, 2005, between the Company, and the
Trustee, the Company issued $300,000,000 aggregate principal amount of 7.875%
Senior Notes Due 2015 on November 22, 2005. Such indenture, as
supplemented by the supplemental indenture thereto dated November 1, 2006,
is referred to in this “Description of Notes” as the “2015 Notes
Indenture”.
The
2017 Notes
Pursuant
to an indenture dated as of November 29, 2007, between the Company and the
Trustee, the Company issued $1,786,000,000 aggregate principal amount of 12.5%
Springing Lien Notes Due 2017 on November 29, 2007 (plus capitalized
interest, the “Initial 2017 Notes”) and $150,000,000 aggregate principal amount
of 12.5% Springing Lien Notes Due 2017 on January 18, 2008 (plus
capitalized interest, the “Additional 2017 Notes”). Such indenture,
as supplemented by the first supplemental indenture thereto dated December 27,
2007 and the second supplemental indenture thereto dated January 18, 2008,
is referred to in this “Description of Notes” as the “2017 Notes
Indenture”. Through June 30, 2009, the Company had elected to
capitalize interest payable on the 2017 Notes on certain previous interest
payment dates such that there was approximately $2.016 billion outstanding
aggregate principal amount of Initial 2017 Notes and approximately $169.3
million outstanding aggregate principal amount of Additional 2017 Notes as of
such date. The Company currently expects to capitalize future
interest payments through May 2010. Although the Initial 2017 Notes and the
Additional 2017 Notes were issued in two tranches and are not fungible, for
purposes of this “Description of Notes”, except as expressly stated or where the
context otherwise requires, the term the “2017 Notes” includes the Initial 2017
Notes and the Additional 2017 Notes. If in the future the Company so
elects to capitalize all or a portion of the interest payable on the 2017 Notes
on interest payment dates occurring on or prior to May 31, 2010 as
permitted by the 2017 Notes Indenture, the term the “2017 Notes” will also
include such additional principal amount. As described under “The
Debt Exchange and Consent Solicitation”, the Company has obtained consents to
amend the 2017 Notes Indenture, which will be modified by
a
supplemental indenture giving effect to such amendments. As also
described under “The Debt Exchange and Consent Solicitation”, if the Debt
Exchange closes, holders of 2017 Notes tendered in the Debt Exchange will
receive, upon the closing thereof, cash in the amount of the accrued and unpaid
interest on the 2017 Notes exchanged.
The
Debentures
If the
Debt Exchange is consummated, the Company will issue Class A Senior Convertible
Debentures due 2019 and Class B Senior Convertible Debentures due 2019 in an
aggregate principal amount equal to the aggregate principal amount of 2011 Notes
and 2017 Notes tendered in the Debt Exchange. The amount of Class A
Senior Convertible Debentures due 2019 will be approximately $1,739,616,000,
which is the aggregate principal amount of 2011 Notes and 2017 Notes tendered
prior to 12:00 midnight, New York City time, on July 1, 2009 that will be
accepted after proration of the 2017 Notes. The Debentures will have
a maturity of 10 years and will be convertible into shares of common stock at an
initial conversion price of $1.0340 per share for Class A Debentures and $1.5510
per share for Class B Debentures, which is 150% of the initial conversion price
of the Class A Debentures. The terms of the Class A Debentures and
the Class B Debentures will be identical except for the initial conversion
price. The Debentures will contain covenants comparable to the 2013
Notes and 2015 Notes. Investors who acquire 2011 Notes and 2017 Notes
that were tendered during the Early Tender Period in the Debt Exchange pursuant
to this prospectus supplement will receive Class A Debentures if the Debt
Exchange is consummated. See “The Debt Exchange and Consent
Solicitation”.
The 2011
Notes Indenture, 2013 Notes Indenture, 2015 Notes Indenture and 2017 Notes
Indenture are collectively referred to in this prospectus as the “Indentures”
and each as an “Indenture”. In addition, we may refer to the 2011
Notes Indenture, 2013 Notes Indenture and the 2015 Notes Indenture as the
“Senior Notes Indentures”. The terms of the Notes include those
stated in their respective Indentures and those made part of the Indentures by
reference to the Trust Indenture Act of 1939, as amended (the
“TIA”).
The
following is a summary of the material provisions of the Indentures but does not
restate the Indentures in their entirety. Definitions of certain
capitalized terms used in the following summary can be found under the
subheading “—Definitions”. We urge holders of the Notes to read the
Indentures because they, and not this description, define the rights of such
holders as holders of the Notes. Copies of the Indentures are
available upon request from the Company. For purposes of this
“Description of Notes”, the terms “we”, “us”, “our” and the “Company” mean
E*TRADE Financial Corporation and its successors under the Indentures, in each
case excluding its subsidiaries.
Our
broker dealer and bank regulated subsidiaries, which we refer to as our
Regulated Subsidiaries, are generally not subject to many of the restrictive
covenants in the Indentures which place limitations on the Company’s actions,
and where they are subject to covenants, there are numerous exceptions and
limitations. As of December 31, 2008, our Regulated Subsidiaries
represented substantially all of our total consolidated assets. In
2008 and 2006, our Regulated Subsidiaries generated substantially all of
our consolidated net revenues, and in 2007 certain of our Regulated Subsidiaries
generated substantially all of the losses that caused us to have negative
consolidated net revenues.
General
The 2011
Notes will mature on June 15, 2011 and are initially limited to
$500,000,000 aggregate principal amount. The 2013 Notes will mature
on September 15, 2013 and are initially limited to $600,000,000 aggregate
principal amount. The 2015 Notes will mature on December 1, 2015
and are initially limited to $300,000,000 aggregate principal
amount. The 2017 Notes will mature on November 30, 2017 and are
initially limited to $1,936,000,000 (plus capitalized interest, if any)
aggregate principal amount.
The Notes
are general senior obligations of the Company. The Notes rank equal
in right of payment with all of the Company’s existing and future unsubordinated
indebtedness, and rank senior in right of payment to all of the Company’s
existing and future subordinated indebtedness. The Notes are not
currently secured by any property or assets or guaranteed by the subsidiaries
through which the Company currently conducts substantially all of its
operations. Accordingly, currently the Notes are effectively
subordinated to any currently secured debt to the extent of the collateral
securing such debt. The Notes are not currently guaranteed by any of
our subsidiaries. Unless and
until one
or more of our subsidiaries guarantee the Notes, the Notes will be effectively
subordinated to the liabilities of all of our subsidiaries.
In the
future, upon the occurrence of the Trigger Date the Company will be required to
secure the 2017 Notes and cause the Restricted Subsidiaries to guarantee the
2017 Notes as described below under “—Covenants—Springing Lien” and
“—Covenants—Future Subsidiary Guarantees”. In addition, if the
Debentures are issued, the indenture governing the Debentures will require the
Debentures to be equally and ratably secured with the 2017 Notes and will
require the Company to cause the Restricted Subsidiaries to guarantee the
Debentures. Even if the 2017 Notes become guaranteed by certain of
our subsidiaries and secured by certain of our assets following the occurrence
of the Trigger Date, such guarantees and security may not provide holders of the
2017 Notes with any further protection and holders of the 2017 Notes could lose
some or all of their investment in the 2017 Notes. In addition, upon
the occurrence of the Trigger Date, any outstanding Senior Notes will be
effectively subordinated to the 2017 Notes and the Debentures to the extent of
the collateral securing the 2017 Notes and the Debentures unless and until such
outstanding Senior Notes are equally and ratably secured. For further
information regarding risks related to owning the Notes, please see “Risk
Factors”.
The Notes
are represented in the form of global notes in fully registered book-entry form
without interest coupons that are on deposit with the Trustee as custodian for
The Depository Trust Company, also referred to as DTC, in New York, New York and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant as described below. See
“—Book-Entry; Delivery and Form”.
Interest
Interest
on the 2011 Notes accrues at a rate of 8.0% per annum and is payable
semi-annually in cash on each June 15 and December 15, commencing
December 15, 2004. We make interest payments to the persons who
are registered holders at the close of business on the June 1 and
December 1 immediately preceding the applicable interest payment
date.
Interest
on the 2013 Notes accrues at a rate of 7.375% per annum and is payable
semi-annually in cash on each March 15 and September 15, commencing
March 15, 2006. We make interest payments to the persons who are
registered holders at the close of business on the March 1 and
September 1 immediately preceding the applicable interest payment
date.
Interest
on the 2015 Notes accrues at a rate of 7.875% per annum and is payable
semi-annually in cash on each June 1 and December 1, commencing
June 1, 2006. We make interest payments to the persons who are
registered holders at the close of business on the May 15 and
November 15 immediately preceding the applicable interest payment
date.
Interest
on the 2017 Notes accrues at a rate of 12.5% per
annum and is payable semi-annually in cash on each May 31 and
November 30, commencing May 31, 2008; provided, however, that on any
interest payment date occurring on or prior to May 31, 2010, the Company
shall have the option to capitalize and to add to the principal amount of the
2017 Notes all or a portion of the interest payable on the 2017 Notes on such
interest payment date and, provided further, that on any interest payment date
occurring after May 31, 2010, all interest on the 2017 Notes shall be
payable in cash. The interest so capitalized is referred to herein as
“Capitalized Interest” and shall constitute principal amount of the 2017 Notes
for all purposes of the 2017 Notes and the 2017 Notes Indenture. We
will make interest payments to the persons who are registered holders at the
close of business on the May 15 and November 15 immediately preceding
the applicable interest payment date. As described under “The Debt
Exchange and Consent Solicitation”, if the Debt Exchange closes, holders of 2017
Notes tendered in the Debt Exchange will receive, upon the closing thereof, cash
in the amount of the accrued and unpaid interest on the 2017 Notes exchanged
through but excluding the settlement date.
Interest
on the Notes accrues from the most recent date on which interest on the Notes
was paid or, if no interest has been paid, from and including the date on which
the Notes were originally issued. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
Optional
Redemption
General
The
Company may redeem the 2011 Notes, in whole or in part, at any time and from
time to time on or after June 15, 2008. The redemption price for
the 2011 Notes (expressed as a percentage of principal amount), will be as
follows, plus accrued and unpaid interest to the redemption date:
If
Redeemed During the Twelve-Month
Period
Commencing June 15
|
|
Redemption
Price
|
|
2009
|
|
|
102.000
|
% |
2010
and thereafter
|
|
|
100.000
|
% |
The
Company may redeem the 2013 Notes, in whole or in part, at any time and from
time to time on or after September 15, 2009. The redemption
price for the 2013 Notes (expressed as a percentage of principal amount), will
be as follows, plus accrued and unpaid interest to the redemption
date:
If
Redeemed During the Twelve-Month
Period
Commencing September 15
|
|
Redemption
Price
|
|
2009
|
|
|
103.688
|
% |
2010
|
|
|
101.844
|
% |
2011
and thereafter
|
|
|
100.000
|
% |
The
Company may redeem the 2015 Notes, in whole or in part, at any time and from
time to time on or after December 1, 2010. The redemption price
for the 2015 Notes (expressed as a percentage of principal amount), will be as
follows, plus accrued and unpaid interest to the redemption date:
If
Redeemed During the Twelve-Month
Period
Commencing December 1
|
|
Redemption
Price
|
|
2010
|
|
|
103.938
|
% |
2011
|
|
|
102.625
|
% |
2012
|
|
|
101.313
|
% |
2013
and thereafter
|
|
|
100.000
|
% |
The
Company may redeem the 2017 Notes, in whole or in part, at any time and from
time to time on or after November 30, 2012. The redemption price
for the Notes (expressed as a percentage of principal amount), will be as
follows, plus accrued and unpaid interest to the redemption date:
If
Redeemed During the Twelve-Month
Period
Commencing December 1
|
|
Redemption
Price
|
|
2012
|
|
|
112.500
|
% |
2013
|
|
|
109.375
|
% |
2014
|
|
|
106.250
|
% |
2015
|
|
|
103.125
|
% |
2016
and thereafter
|
|
|
100.000
|
% |
The
Company may also redeem the 2013 Notes, 2015 Notes and the 2017 Notes with the
proceeds of public equity offerings, and the 2017 Notes in connection with a
Change of Control.
Optional
Redemption of the 2017 Notes in connection with Public Equity
Offerings
At any
time and from time to time after May 31, 2008 and prior to
November 30, 2012, the Company may redeem the 2017 Notes with the Net Cash
Proceeds received by the Company from one or more sales of its Capital Stock
(other than Disqualified Stock) at a redemption price of 112.5% of their
principal amount, plus accrued and unpaid interest; provided that at least 65% of
the aggregate principal amount of the 2017 Notes originally issued
remains
outstanding after each such redemption and notice of any such redemption is
mailed within 90 days of each such sale of Capital Stock. The Company
currently does not expect to exercise this repurchase right.
Ranking
The Notes
are general senior obligations of the Company. The Notes rank equal
in right of payment with all of the Company’s existing and future unsubordinated
indebtedness, and rank senior in right of payment to all of the Company’s
existing and future subordinated indebtedness. The Senior Notes are
not, and the 2017 Notes are not initially, secured by any property or assets and
are not guaranteed by the subsidiaries through which the Company currently
conducts substantially all of its operations. Accordingly, the Senior
Notes are, and the 2017 Notes are at least initially, effectively subordinated
to the liabilities of our subsidiaries and to any secured debt to the extent of
the collateral securing such debt.
In the
future, upon the occurrence of the Trigger Date the Company will be required to
secure the 2017 Notes and cause the Restricted Subsidiaries to guarantee the
2017 Notes as described below under “—Covenants—Springing Lien” and
“—Covenants—Future Subsidiary Guarantees”. In addition, if the
Debentures are issued, the indenture governing the Debentures will require the
Debentures to be equally and ratably secured with the 2017 Notes and will
require the Company to cause the Restricted Subsidiaries to guarantee the
Debentures. Even if the 2017 Notes become guaranteed by certain of
our subsidiaries and secured by certain of our assets following the occurrence
of the Trigger Date, such guarantees and security may not provide holders of the
2017 Notes with any further protection and holders of the 2017 Notes could lose
some or all of their investment in the 2017 Notes. In addition, upon
the occurrence of the Trigger Date, any outstanding Senior Notes will be
effectively subordinated to the 2017 Notes and the Debentures to the extent of
the collateral securing the 2017 Notes and the Debentures unless and until such
outstanding Senior notes are equally and ratably secured. For further
information regarding the risks related to owning the Notes, please see “Risk
Factors”.
Absence
of FDIC Insurance and Guarantees
The Notes
are not savings accounts or deposits with E*TRADE Bank or any other Subsidiary
of the Company nor are they insured by the FDIC or by the United States or any
agency or fund of the United States. In addition, the Notes are not
obligations of, or guaranteed by any of our Subsidiaries. Subject to
the occurrence of the Trigger Date and the occurrence of the actions set forth
under “—Covenants—Springing Lien” (which apply only to the 2017 Notes), the
Notes are not secured by our assets or those of any of our
Subsidiaries.
Sinking
Fund
There
will be no sinking fund payments for the Notes.
Governing
Law
The
Indentures, including the Note Guarantees, and the Notes are governed by, and
construed in accordance with, the laws of the State of New York.
Covenants
Overview
In the
Indentures, the Company has agreed to covenants that limit its and its
Restricted Subsidiaries’ and, in certain limited cases, Regulated Subsidiaries’,
ability, among other things, to:
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incur
additional debt and issue Preferred
Stock;
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·
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pay
dividends, acquire shares of Capital Stock, make payments on subordinated
debt or make investments;
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place
limitations on distributions from Regulated Subsidiaries or Restricted
Subsidiaries;
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issue
or sell Capital Stock of Regulated Subsidiaries or Restricted
Subsidiaries;
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sell
or exchange assets;
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enter
into transactions with stockholders and
Affiliates;
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Pursuant
to the Indentures, the covenants under “—Limitation on Indebtedness and
Issuances of Preferred Stock”, “—Limitation on Restricted Payments”,
“—Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries or Regulated Subsidiaries” “—Limitation on the Issuance and Sale of
Capital Stock of Restricted Subsidiaries or Regulated Subsidiaries”, “—Future
Subsidiary Guarantees”, “—Limitation on Transactions with Stockholders and
Affiliates”, “—Limitation on Liens”, “—Limitation on Sale-Leaseback
Transactions”, and “—Limitation on Asset Sales”, apply to the Company and the
Restricted Subsidiaries, but in certain cases do not apply to Regulated
Subsidiaries to the same extent or at all.
If a
Change of Control occurs, each holder of Notes will have the right to require
the Company to repurchase all or a part of the holder’s Notes at a price equal
to 101% of their principal amount, plus any accrued interest to the date of
repurchase.
Limitation
on Indebtedness and Issuances of Preferred Stock
(a) The
Company will not, and will not permit any of its Restricted Subsidiaries to,
Incur any Indebtedness, including Disqualified Stock (other
than: (i) the 2011 Notes, any 2011 Notes Guarantees and other
Indebtedness existing on the Closing Date under the 2011 Notes Indenture;
(ii) the 2013 Notes, any 2013 Notes Guarantees, the 2011 Notes and other
Indebtedness existing on the Closing Date under the 2013 Notes Indenture;
(iii) the 2015 Notes, any 2015 Notes Guarantees, the 2013 Notes, the 2011
Notes and other Indebtedness existing on the Closing Date under the 2015 Notes
Indenture; and (iv) the 2017 Notes, any 2017 Notes Guarantees and other
Indebtedness existing on the Closing Date under the 2017 Notes Indenture) and
the Company will not permit any Restricted Subsidiary to issue Preferred Stock;
provided that the
Company or any Subsidiary Guarantor may Incur Indebtedness and any Restricted
Subsidiary may Incur Acquired Indebtedness if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the proceeds
therefrom, the Consolidated Fixed Charge Coverage Ratio would be greater than
2.50 to 1.0.
Notwithstanding
the foregoing, the Company and any Restricted Subsidiary (except as specified
below) may Incur each and all of the following:
(1) Indebtedness
of the Company under any Credit Facility in an aggregate principal amount at any
one time outstanding (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of the Company and its
Restricted Subsidiaries thereunder) not to exceed $300 million;
(2) Indebtedness
owed (A) to the Company or any Subsidiary Guarantor evidenced by an
unsubordinated promissory note or (B) to any Restricted Subsidiary or
Regulated Subsidiary; provided that (x) any
event which results in any such Restricted Subsidiary or Regulated Subsidiary
ceasing to be a Restricted Subsidiary or Regulated Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary or Regulated Subsidiary) shall be deemed, in each case, to constitute
an Incurrence of such Indebtedness not permitted by this clause (2) and
(y) if the Company (or any Subsidiary that is a Subsidiary Guarantor at the
time such Indebtedness is Incurred) is the obligor on such Indebtedness, such
Indebtedness must be expressly contractually subordinated in right of payment to
the Notes, in the case of the Company, or the Note Guarantee, in the case of a
Subsidiary Guarantor;
(3) Indebtedness
issued in exchange for, or the net proceeds of which are used to refinance or
refund, then outstanding Indebtedness (other than Indebtedness outstanding under
clause (1), (2) or (4)) and any refinancings thereof in an amount not
to exceed the amount so refinanced or refunded (plus premiums, accrued interest,
fees and expenses); provided
that (a) Indebtedness the proceeds of which are used to refinance or
refund the Notes or
Indebtedness
that is pari passu
with, or subordinated in right of payment to, the Notes or a Note Guarantee
shall only be permitted under this clause (3) if (x) in case the Notes
are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes or
a Note Guarantee, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is outstanding,
is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes or
the Note Guarantee, or (y) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Notes or a Note Guarantee, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is issued or remains outstanding, is
expressly made subordinate in right of payment to the Notes or the Note
Guarantee at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes or the Note Guarantee, (b) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded and
(c) such new Indebtedness is Incurred by the Company or a Subsidiary
Guarantor or by the Restricted Subsidiary that is the obligor on the
Indebtedness to be refinanced or refunded;
(4) a) In
the case of the 2011 Notes, Indebtedness of the Company, to the extent the net
proceeds thereof are promptly (A) used to purchase 2011 Notes tendered in
an Offer to Purchase made as a result of a Change in Control or
(B) deposited to defease the 2011 Notes as described under
“—Defeasance”;
(b) In
the case of the 2013 Notes, Indebtedness of the Company, to the extent the net
proceeds thereof are promptly (A) used to purchase 2013 Notes or 2011 Notes
tendered in an Offer to Purchase made as a result of a Change in Control or
(B) deposited to defease the 2013 Notes or 2011 Notes as described under
“—Defeasance”;
(c) In
the case of the 2015 Notes, Indebtedness of the Company, to the extent the net
proceeds thereof are promptly (A) used to purchase 2015 Notes, 2013 Notes
or 2011 Notes tendered in an Offer to Purchase made as a result of a Change in
Control or (B) deposited to defease the 2015 Notes, 2013 Notes or 2011
Notes as described under “—Defeasance”;
(d) In
the case of the 2017 Notes, Indebtedness of the Company, to the extent the net
proceeds thereof are promptly (A) used to purchase 2017 Notes, 2015 Notes,
2013 Notes or 2011 Notes tendered in an Offer to Purchase made as a result of a
Change in Control or (B) deposited to defease the 2017 Notes, 2015 Notes,
2013 Notes or 2011 Notes as described under “—Defeasance”; and
(5) Guarantees of
Indebtedness of the Company or of any Restricted Subsidiary by any Restricted
Subsidiary provided the Guarantee of such Indebtedness is permitted by and made
in accordance with the “Future Subsidiary Guarantees” covenant.
(e) Notwithstanding
any other provision of this “Limitation on Indebtedness and Issuances of
Preferred Stock” covenant, the maximum amount of Indebtedness that may be
Incurred pursuant to this “Limitation on Indebtedness and Issuances of Preferred
Stock” covenant will not be deemed to be exceeded, with respect to any
outstanding Indebtedness due solely to the result of fluctuations in the
exchange rates of currencies or due to fluctuations in the value of commodities
or securities which underlie such Indebtedness. For the purposes of
determining compliance with any restriction on the Incurrence of Indebtedness
(x), the U.S dollar equivalent principal amount of any Indebtedness denominated
in a foreign currency shall be calculated based on the relevant currency
exchange rate in effect on the date such Indebtedness was Incurred, in the case
of term debt, or first committed, in the case of revolving credit debt and
(y) the principal amount of any Indebtedness which is calculated by
reference to any underlying security or commodity shall be calculated based on
the relevant closing price of such commodity or security on the date such
Indebtedness was incurred.
(f) For
each series of Notes, for purposes of determining any particular amount of
Indebtedness under this “Limitation on Indebtedness and Issuances of Preferred
Stock” covenant, (x) Indebtedness outstanding under any Credit Facility on
the applicable Closing Date for such series of Notes shall be treated as
Incurred pursuant to clause (1) of the second paragraph of clause
(a) of this “Limitation on Indebtedness and Issuances of Preferred Stock”
covenant, (y) Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and (z) any Liens granted pursuant
to the equal and ratable provisions referred to in the “Limitation on Liens”
covenant shall not be treated as
Indebtedness. For
purposes of determining compliance with this “Limitation on Indebtedness and
Issuances of Preferred Stock” covenant, if an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described above (other
than Indebtedness referred to in clause (x) of the preceding sentence),
including under the first paragraph of part (a), the Company, in its sole
discretion, shall classify, and from time to time may reclassify, such item of
Indebtedness.
(g) Neither
the Company nor any Subsidiary Guarantor will Incur any Indebtedness if such
Indebtedness is subordinate in right of payment to any other Indebtedness unless
such Indebtedness is also subordinate in right of payment to the Notes or the
applicable Note Guarantee to the same extent.
(h) The
Company will not permit any Regulated Subsidiary (x) to Incur any
Indebtedness the proceeds of which are not invested in the business of such Bank
Regulated Subsidiary (or any Subsidiary of such Bank Regulated Subsidiary) or
such Broker Dealer Regulated Subsidiary (or any Subsidiary of such Broker Dealer
Regulated Subsidiary which is also a Regulated Subsidiary) and (y) to Incur
any Indebtedness for the purpose, directly or indirectly, of dividending or
distributing the proceeds of such Indebtedness to the Company or any Restricted
Subsidiary; except that
the Incurrence of Indebtedness by a Regulated Subsidiary that does not comply
with (x) or (y) above shall be permitted provided that such Incurrence
complies with paragraph (a) of this “—Limitation on Indebtedness and
Issuances of Preferred Stock” covenant as if such paragraph applied to such
Regulated Subsidiary.
Limitation
on Restricted Payments
(a) The
Company will not, and will not permit any Restricted Subsidiary or Regulated
Subsidiary to, directly or indirectly,
(1) declare or pay
any dividend or make any distribution on or with respect to its Capital Stock
held by Persons other than the Company or any of its Restricted Subsidiaries or
Regulated Subsidiaries (other than (w) dividends or distributions payable
solely in shares of its Capital Stock (other than Disqualified Stock) or in
options, warrants or other rights to acquire shares of such Capital Stock,
(x) pro rata dividends or distributions on Common Stock of Restricted
Subsidiaries or Regulated Subsidiaries held by minority stockholders,
(y) dividends or distributions on non-voting Preferred Stock the proceeds
from the sale of which were invested in the business of such Regulated
Subsidiary (or any Subsidiary of such Regulated Subsidiary which is also a
Regulated Subsidiary), and (z) pro rata dividends on Preferred Stock of
Subsidiaries that are real estate investment trusts, including Highland REIT,
Inc., held by minority stockholders;
(2) purchase, call
for redemption or redeem, retire or otherwise acquire for value any shares of
Capital Stock of (A) the Company or any Subsidiary Guarantor (including
options, warrants or other rights to acquire such shares of Capital Stock) held
by any Person (other than the Company, any Restricted Subsidiary or any
Regulated Subsidiary) or (B) a Restricted Subsidiary or Subsidiary
Guarantor (including options, warrants or other rights to acquire such shares of
Capital Stock) held by any Affiliate of the Company (other than the Company or a
Wholly Owned Restricted Subsidiary or Wholly Owned Regulated
Subsidiary);
(3) make
any voluntary or optional principal payment, or voluntary or optional
redemption, repurchase, defeasance, or other acquisition or retirement for
value, of Indebtedness of the Company that is subordinated in right of payment
to the Notes or any Indebtedness of a Subsidiary Guarantor that is subordinated
in right of payment to a Note Guarantee; or
(4) (a) with respect to the
Company and any Restricted Subsidiary, make any Investment, other than a
Permitted Investment, in any Person, and (b) with respect to any Regulated
Subsidiary, make any Investment in an Unrestricted Subsidiary (such payments or
any other actions described in clauses (1) through (4) above being
collectively “Restricted Payments”);
if, at the time of, and after giving
effect to, the proposed Restricted Payment:
(A) a
Default or Event of Default shall have occurred and be continuing;
(B) the
Company could not Incur at least $1.00 of Indebtedness under the first paragraph
of part (a) of the “Limitation on Indebtedness and Issuances of Preferred
Stock” covenant;
(C) the
subsidiary subject to the Restricted Payment is both a Regulated Subsidiary and
a Significant Subsidiary that is not in compliance with applicable regulatory
capital or other material requirements of its regulators, such as the OTS or
FDIC, or any applicable state, federal or self regulatory organization, or would
fail to be in compliance with applicable regulatory requirements as a
consequence of the payment; or
(D) the
aggregate amount of all Restricted Payments made after the applicable Closing
Date shall exceed the sum of:
(1) 50%
of the aggregate amount of the Adjusted Consolidated Net Income (or, if the
Adjusted Consolidated Net Income is a loss, minus 100% of the amount of such
loss) accrued on a cumulative basis during the period (taken as one accounting
period) beginning on April 1, 2004 and ending on the last day of such
fiscal quarter preceding the Transaction Date for which reports have been filed
with the SEC or provided to the Trustee, provided that such Adjusted
Consolidated Net Income may only be recognized during those quarters for which
the Company has filed reports with the SEC to the extent provided in “—SEC
Reports and Reports to Holders” or has furnished comparable financial
information to the Trustee; plus
(2) the
aggregate Net Cash Proceeds received by the Company after the Closing Date (in
the case of the 2011 Notes) or April 1, 2004 (in the case of the 2013, 2015
and 2017 Notes) as a capital contribution or from the issuance and sale of its
Capital Stock (other than Disqualified Stock or Preferred Stock) to a Person who
is not a Subsidiary of the Company, including an issuance or sale permitted by
the Indentures of Indebtedness of the Company for cash subsequent to the Closing
Date (in the case of the 2011 Notes) or April 1, 2004 (in the case of the
2013, 2015 and 2017 Notes) upon the conversion of such Indebtedness into Capital
Stock (other than Disqualified Stock) of the Company, or from the issuance to a
Person who is not a Subsidiary of the Company of any options, warrants or other
rights to acquire Capital Stock of the Company (in each case, exclusive of any
Disqualified Stock or any options, warrants or other rights that are redeemable
at the option of the holder, or are required to be redeemed, prior to the Stated
Maturity of the Notes); plus
(3) an
amount equal to the net reduction in Investments (other than reductions in
Permitted Investments) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or any Restricted Subsidiary or Regulated
Subsidiary or from the Net Cash Proceeds from the sale of any such Investment
(except, in each case, to the extent any such payment or proceeds are included
in the calculation of Adjusted Consolidated Net Income), from the release of any
Guarantee or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
“Investments”), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary or Regulated
Subsidiary in such Person or Unrestricted Subsidiary; plus
(4) $100
million.
(b) The
foregoing provision shall not be violated by reason of:
(1) the
payment of any dividend or redemption of any Capital Stock within 60 days after
the related date of declaration or call for redemption if, at said date of
declaration or call for redemption, such payment or redemption would comply with
the preceding paragraph;
(2) the
redemption, repurchase, defeasance or other acquisition or retirement for value
of Indebtedness that is subordinated in right of payment to the Notes or any
Note Guarantee including premium, if any, and accrued interest, with the
proceeds of, or in exchange for, Indebtedness Incurred under clause (3) of
the second paragraph of part (a) of the “Limitation on Indebtedness and
Issuances of Preferred Stock” covenant;
(3) the
repurchase, redemption or other acquisition of Capital Stock of the Company, a
Subsidiary Guarantor, a Restricted Subsidiary or a Regulated Subsidiary (or
options, warrants or other rights to acquire such Capital Stock) or a dividend
on such Capital Stock in exchange for, or out of the proceeds of a capital
contribution
or a
substantially concurrent offering of, shares of Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); provided that such options,
warrants or other rights are not redeemable at the option of the holder, or
required to be redeemed, in each case other than in connection with a Change of
Control of the Company (provided that prior to any such repurchase, redemption
or other acquisition in connection with a change of control, the Company has
made an Offer to Purchase and purchased all Notes validly tendered for payment
in accordance with the “Repurchase of Notes Upon a Change of Control” covenant),
prior to the respective Stated Maturity of the Notes;
(4) the
making of any principal payment or the repurchase, redemption, retirement,
defeasance or other acquisition for value of Indebtedness which is subordinated
in right of payment to the Notes or any Note Guarantee in exchange for, or out
of the proceeds of a capital contribution or a substantially concurrent offering
of, shares of the Capital Stock (other than Disqualified Stock) of the Company
(or options, warrants or other rights to acquire such Capital Stock); provided that such options,
warrants or other rights are not redeemable at the option of the holder, or
required to be redeemed, in each case other than in connection with a Change of
Control of the Company (provided that prior to any such repurchase, redemption
or other acquisition in connection with a change of control, the Company has
made an Offer to Purchase and purchased all Notes validly tendered for payment
in accordance with the “—Repurchase of Notes Upon a Change of Control”
covenant), prior to the respective Stated Maturity of the Notes;
(5) payments or
distributions to dissenting stockholders pursuant to applicable law, pursuant to
or in connection with a consolidation, merger or transfer of assets of the
Company, any Restricted Subsidiary or any Regulated Subsidiary and that, in the
case of the Company, comply with the provisions of the Indentures applicable to
mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company;
(6) Investments
acquired as a capital contribution to, or in exchange for, or out of the
proceeds of a substantially concurrent offering of, Capital Stock (other than
Disqualified Stock) of the Company;
(7) the
repurchase of Capital Stock deemed to occur upon the exercise of options or
warrants if such Capital Stock represents all or a portion of the exercise price
thereof;
(8) the
repurchase, redemption or other acquisition of the Company’s Capital Stock (or
options, warrants or other rights to acquire such Capital Stock) from Persons
who are or were formerly employees of the Company and their Affiliates, heirs
and executors; provided
that the aggregate amount of all such repurchases pursuant to this clause
(8) shall not exceed $50 million;
(9) the
repurchase of Common Stock of the Company, or the declaration or payment of
dividends on Common Stock (other than Disqualified Stock) of the Company; provided that the aggregate
amount of all such declarations, payments or repurchases pursuant to this clause
(9) shall not exceed $100 million in any fiscal year; provided further that at the
time of declaration of such dividend or at the time of such repurchase
(x) no Default or Event of Default has occurred and is continuing, and
(y) the Company is able to Incur at least an additional $1.00 of
Indebtedness pursuant to the first paragraph of the “—Limitation on Indebtedness
and Issuances of Preferred Stock” covenant; or
(10) the repurchase,
redemption or other acquisition of the Outstanding Convertible
Notes,
provided that, except in the
case of clause (1), no Default or Event of Default (excluding, in each case,
clause (i) of “Events of Default”) shall have occurred and be continuing or
occur as a consequence of the actions or payments set forth
therein.
(c) Each
Restricted Payment permitted pursuant to the preceding paragraph (other than the
Restricted Payment referred to in clause (10) thereof, clause
(2) thereof, an exchange of Capital Stock for Capital Stock or Indebtedness
referred to in clause (3) or (4) thereof, an Investment acquired as a
capital contribution or in exchange for Capital Stock referred to in clause
(6) thereof, the repurchase of Capital Stock referred to in clause
(7) thereof, the repurchase of Common Stock referred to in clause
(9) thereof), and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clause (3), (4) or (6), shall be included in calculating
whether the conditions of clause (D) of the first paragraph of this
“Limitation on Restricted Payments” covenant have been met with respect to any
subsequent
Restricted Payments. If the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu with the Notes or any Note
Guarantee, then the Net Cash Proceeds of such issuance shall be included in
clause (D) of the first paragraph of this “Limitation on Restricted
Payments” covenant only to the extent such proceeds are not used for such
redemption, repurchase or other acquisition of Indebtedness.
(d) For
purposes of determining compliance with this “—Limitation on Restricted
Payments” covenant, (x) the amount, if other than in cash, of any
Restricted Payment shall be determined in good faith by the Board of Directors,
whose determination shall be conclusive and evidenced by a Board Resolution and
(y) if a Restricted Payment meets the criteria of more than one of the
types of Restricted Payments described in the above clauses, including the first
paragraph of this “—Limitation on Restricted Payments” covenant, the Company, in
its sole discretion, may order and classify, and from time to time may
reclassify, such Restricted Payment if it would have been permitted at the time
such Restricted Payment was made and at the time of such
reclassification.
In
connection with the Debt Exchange and the successful consent solicitation, this
covenant will be amended upon the execution of supplemental indentures amending
the 2011 Notes Indenture and 2017 Notes Indenture in the following
manner:
(A) deleting
the word “or” after the semicolon in clause (b)(9), replacing the comma after
the word “Notes” with a semicolon in clause (b)(10) and adding the following
after such clause (b)(10):
“(11) any
payment of dividends with respect to the TARP Preferred Stock, any Substitution
Permanent Equity or any Capital Stock issued by the Company in any Qualified
Equity Offering; provided the aggregate face
amount of any Preferred Stock issued by the Company in all Qualified Equity
Offerings does not exceed $500,000,000 and the dividend rate on any Preferred
Stock issued in a Qualified Equity Offering does not exceed 9.9% per annum;
or
(12) any
redemption or repurchase of any shares of TARP Preferred Stock, any TARP
Warrants, any Substitution Permanent Equity or any Capital Stock issued by the
Company in any Qualified Equity Offering, in each case using the Net Cash
Proceeds of one or more Qualified Equity Offerings; provided the aggregate face
amount of any Preferred Stock issued by the Company in all Qualified Equity
Offerings does not exceed $500,000,000 and the dividend rate on any Preferred
Stock issued in a Qualified Equity Offering does not exceed 9.9% per
annum,”
(B) amending
and restating clause (c) in its entirety as follows:
“Each
Restricted Payment permitted pursuant to the preceding paragraph (other than the
Restricted Payment referred to in clauses (10), (11) or (12) thereof, clause (2)
thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred
to in clause (3) or (4) thereof, an Investment acquired as a capital
contribution or in exchange for Capital Stock referred to in clause (6) thereof,
the repurchase of Capital Stock referred to in clause (7) thereof or the
repurchase of Common Stock referred to in clause (9) thereof), and the Net Cash
Proceeds from any issuance of Capital Stock referred to in clause (3), (4) or
(6), shall be included in calculating whether the conditions of clause (D) of
the first paragraph of this Section 4.04 have been met with respect to any
subsequent Restricted Payments. If the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu with the Notes or any Note
Guarantee, then the Net Cash Proceeds of such issuance shall be included in
clause (D) of the first paragraph of this Section 4.04 only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.”
Limitation
on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries or
Regulated Subsidiaries
The
Company will not, and will not permit any Restricted Subsidiary or Regulated
Subsidiary to, create or otherwise cause or suffer to exist or become effective
any consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary or Regulated Subsidiary (other than any Subsidiary
Guarantor) to:
(1) pay
dividends or make any other distributions permitted by applicable law on any
Capital Stock of such Restricted Subsidiary or Regulated Subsidiary owned by the
Company or any other Restricted Subsidiary or Regulated Subsidiary;
(2) pay
any Indebtedness owed to the Company or any other Restricted Subsidiary or
Regulated Subsidiary;
(3) make
loans or advances to the Company or any other Restricted Subsidiary or Regulated
Subsidiary; or
(4) transfer
any of its property or assets to the Company or any other Restricted Subsidiary
or Regulated Subsidiary.
The
foregoing provisions shall not restrict any encumbrances or
restrictions:
(1) existing
on the applicable Closing Date for each series of Notes in any Credit Facility,
the Indentures or any other agreements in effect on such Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements; provided that the
encumbrances and restrictions in any such extensions, refinancings, renewals or
replacements taken as a whole are no less favorable in any material respect to
the holders than those encumbrances or restrictions that are then in effect and
that are being extended, refinanced, renewed or replaced;
(2) existing
under or by reason of applicable law including rules and regulations of and
agreements with any regulatory authority having jurisdiction over the Company,
any Restricted Subsidiary, or any Regulated Subsidiary, including, but not
limited to the OTS, the FDIC, the SEC or any self regulatory organization of
which such Regulated Subsidiary is a member, or the imposition of conditions or
requirements pursuant to the enforcement authority of any such regulatory
authority;
(3) existing
with respect to any Person or the property or assets of such Person acquired by
the Company or any Restricted Subsidiary or Regulated Subsidiary, existing at
the time of such acquisition and not incurred in contemplation thereof, which
encumbrances or restrictions are not applicable to any Person or the property or
assets of any Person other than such Person or the property or assets of such
Person so acquired and any extensions, refinancings, renewals or replacements
thereof; provided that
the encumbrances and restrictions in any such extensions, refinancings, renewals
or replacements taken as a whole are no less favorable in any material respect
to the holders than those encumbrances or restrictions that are then in effect
and that are being extended, refinanced, renewed or replaced;
(4) in
the case of clause (4) of the first paragraph of this “—Limitation on
Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries or
Regulated Subsidiaries” covenant:
(A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or similar
property or asset;
(B) existing by
virtue of any transfer of, agreement to transfer, option or right with respect
to, or Lien on, any property or assets of the Company, any Restricted Subsidiary
or any Regulated Subsidiary not otherwise prohibited by the Indentures;
or
(C) arising or
agreed to in the ordinary course of business, not relating to any Indebtedness,
and that do not, individually or in the aggregate, detract from the value of
property or assets of the Company or any Restricted Subsidiary or Regulated
Subsidiary in any manner material to the Company or any Restricted Subsidiary or
Regulated Subsidiary taken as a whole; or
(5) with
respect to a Restricted Subsidiary or Regulated Subsidiary and imposed pursuant
to an agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary or Regulated Subsidiary.
Nothing
contained in this “—Limitation on Dividends and Other Payment Restrictions
Affecting Restricted Subsidiaries or Regulated Subsidiaries” covenant shall
prevent the Company, any Restricted Subsidiary or any Regulated Subsidiary from
(1) creating, incurring, assuming or suffering to exist any Liens otherwise
permitted in the “Limitation on Liens” covenant or (2) restricting the sale
or other disposition of property or assets of the
Company
or any of its Restricted Subsidiaries or Regulated Subsidiaries that secure
Indebtedness of the Company or any of its Restricted Subsidiaries or Regulated
Subsidiaries.
Limitation
on the Issuance and Sale of Capital Stock of Restricted Subsidiaries or
Regulated Subsidiaries
The
Company will not sell, and will not permit any Restricted Subsidiary or
Regulated Subsidiary, directly or indirectly, to issue or sell, any shares of
Capital Stock of a Restricted Subsidiary or Regulated Subsidiary (including
options, warrants or other rights to purchase shares of such Capital Stock)
except:
(1) (i) with
respect to the capital stock of a Restricted Subsidiary, to the Company or a
Wholly Owned Restricted Subsidiary or, (ii) in the case of Regulated
Subsidiary, to the Company, a Wholly Owned Restricted Subsidiary or a Wholly
Owned Regulated Subsidiary;
(2) issuances
of director’s qualifying shares or sales to foreign nationals of shares of
Capital Stock of foreign Restricted Subsidiaries, to the extent required by
applicable law;
(3) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary and any Investment
in such Person remaining after giving effect to such issuance or sale would have
been permitted to be made under the “—Limitation on Restricted Payments”
covenant if made on the date of such issuance or sale;
(4) (i) sales
of Common Stock (including options, warrants or other rights to purchase shares
of such Common Stock but excluding Disqualified Stock) of a Restricted
Subsidiary or a Regulated Subsidiary by the Company, a Restricted Subsidiary or
a Regulated Subsidiary, provided that the Company or
such Restricted Subsidiary or Regulated Subsidiary applies the Net Cash Proceeds
of any such sale in accordance with clause (A) or (B) of the
“—Limitation on Asset Sales” covenant and (ii) issuances of Preferred Stock
of a Restricted Subsidiary if such Restricted Subsidiary would be entitled to
Incur such Indebtedness under the “—Limitations on Indebtedness and Issuances of
Preferred Stock” covenant; or
(5) sales
of Capital Stock, other than Common Stock, by a Regulated Subsidiary or a
Subsidiary of such Regulated Subsidiary, the proceeds of which are invested in
the business of such Regulated Subsidiary.
Future
Subsidiary Guarantees
The
Company will not permit any Restricted Subsidiary or Regulated Subsidiary,
directly or indirectly, to Guarantee any Indebtedness (“Guaranteed
Indebtedness”) of the Company or any Restricted Subsidiary (other than a Foreign
Subsidiary), unless (a) such Restricted Subsidiary or Regulated Subsidiary,
to the extent permitted by law, simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee (a “Subsidiary
Guarantee”) of payment of the Notes by such Restricted Subsidiary or Regulated
Subsidiary and (b) such Restricted Subsidiary or Regulated Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any other
rights against the Company or any other Restricted Subsidiary or Regulated
Subsidiary as a result of any payment by such Restricted Subsidiary or Regulated
Subsidiary under its Subsidiary Guarantee until the Notes have been paid in
full. The obligations of any such future Subsidiary Guarantor will be
limited so as not to constitute a fraudulent conveyance under applicable federal
or state laws. In addition, in the case of the 2017 Notes, on the
Trigger Date, the Company shall cause each of its Restricted Subsidiaries to
execute and deliver a Subsidiary Guarantee of payment of the 2017 Notes by each
such Restricted Subsidiary, to the extent permitted by law. Also on the Trigger
Date, if the Debentures are issued, the indenture governing the Debentures will
require the Company to cause the Restricted Subsidiaries to guarantee the
Debentures.
If the
Guaranteed Indebtedness is (A) pari passu in right of
payment with the Notes or any Note Guarantee, then the Guarantee of such
Guaranteed Indebtedness shall be pari passu in right of
payment with, or subordinated to, the Subsidiary Guarantee or
(B) subordinated in right of payment to the Notes or any Note Guarantee,
then the Guarantee of such Guaranteed Indebtedness shall be subordinated in
right of payment to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the Notes or the Notes
Guarantee.
Notwithstanding
the foregoing, any Subsidiary Guarantee by a Restricted Subsidiary or Regulated
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon any:
(1) sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company’s and each Restricted Subsidiary’s and Regulated Subsidiary’s
Capital Stock in, or all or substantially all the assets of, such Restricted
Subsidiary or Regulated Subsidiary (which sale, exchange or transfer is not
prohibited by the Indentures) or upon the designation of such Restricted
Subsidiary or Regulated Subsidiary as an Unrestricted Subsidiary in accordance
with the terms of the Indentures; or
(2) the
release or discharge of the Guarantee which resulted in the creation of such
Subsidiary Guarantee, except a discharge or release by or as a result of payment
under such Guarantee.
Limitation
on Transactions with Stockholders and Affiliates
The
Company will not, and will not permit any Restricted Subsidiary or Regulated
Subsidiary to, directly or indirectly, enter into, renew or extend any
transaction (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any
Affiliate of the Company or any Affiliates of any Restricted Subsidiary or
Regulated Subsidiary, except upon fair and reasonable terms no less favorable to
the Company or such Restricted Subsidiary or Regulated Subsidiary than could be
obtained, at the time of such transaction or, if such transaction is pursuant to
a written agreement, at the time of the execution of the agreement providing
therefor, in a comparable arm’s-length transaction with a Person that is not
such a holder or an Affiliate.
The
foregoing limitation does not limit, and shall not apply to:
(1) transactions
(A) approved by a majority of the disinterested members of the Board of
Directors or (B) for which the Company, a Restricted Subsidiary or a
Regulated Subsidiary delivers to the Trustee a written opinion of a nationally
recognized investment banking, accounting, valuation or appraisal firm stating
that the transaction is fair to the Company or such Restricted Subsidiary or
Regulated Subsidiary from a financial point of view;
(2) any
transaction solely among the Company, its Wholly Owned Restricted Subsidiaries
or its Wholly Owned Regulated Subsidiaries or any combination
thereof;
(3) the
payment of reasonable and customary regular fees to directors of the Company who
are not employees of the Company and customary indemnification arrangements
entered into by the Company;
(4) any
payments or other transactions pursuant to any tax-sharing agreement between the
Company and any other Person with which the Company files a consolidated tax
return or with which the Company is part of a consolidated group for tax
purposes;
(5) any
sale of shares of Capital Stock (other than Disqualified Stock) of the
Company;
(6) the
granting or performance of registration rights under a written agreement and
approved by the Board of Directors of the Company, containing customary terms,
taken as a whole;
(7) loans
to an Affiliate who is an officer, director or employee of the Company, a
Restricted Subsidiary or a Regulated Subsidiary by a Regulated Subsidiary in the
ordinary course of business in accordance with Sections 7 and 13(k) of the
Exchange Act;
(8) deposit,
checking, banking and brokerage products and services typically offered to our
customers on substantially the same terms and conditions as those offered to our
customers, or in the case of a Bank Regulated Subsidiary, as otherwise permitted
under Regulation O promulgated by the Board of Governors of under the Federal
Reserve System; or
(9) any
Permitted Investments or any Restricted Payments not prohibited by the
“—Limitation on Restricted Payments” covenant.
Notwithstanding
the foregoing, any transaction or series of related transactions covered by the
first paragraph of this “—Limitation on Transactions with Stockholders and
Affiliates” covenant and not covered by clauses (2) through (6) of
this paragraph, (a) the aggregate amount of which exceeds $15 million in
value, must be approved or determined to be fair in the manner provided for in
clause (1)(A) or (B) above and (b) the aggregate amount of which
exceeds $25 million in value, must be determined to be fair in the manner
provided for in clause (1)(B) above.
Limitation
on Liens
The
Company will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or suffer to exist any Lien on any of its assets or properties of
any character, or any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, without making effective provision for all of the Notes and all
other amounts due under the Indentures to be directly secured equally and
ratably with (or, if the obligation or liability to be secured by such Lien is
subordinated in right of payment to the Notes, prior to) the obligation or
liability secured by such Lien.
The
foregoing limitation does not apply to:
(1) (a) In
the case of the 2011 Notes, 2013 Notes or 2015 Notes, Liens existing on the
applicable Closing Date;
(b) In the
case of the 2017 Notes, Liens existing on the Closing Date (other than the Liens
securing Indebtedness (including Hedging Obligations with respect thereto) under
any Credit Facility);
(2) Liens
granted after the applicable Closing Date for each series of Notes on any assets
or Capital Stock of the Company or its Restricted Subsidiaries created in favor
of the holders;
(3) Liens
with respect to the assets of a Restricted Subsidiary granted by such Restricted
Subsidiary to the Company or a Wholly Owned Restricted Subsidiary or Wholly
Owned Regulated Subsidiary to secure Indebtedness owing to the Company or such
other Restricted Subsidiary or Regulated Subsidiary;
(4) Liens
securing Indebtedness which is Incurred to refinance secured Indebtedness which
is permitted to be Incurred under clause (3) of the second paragraph of the
“Limitation on Indebtedness and Issuances of Preferred Stock” covenant; provided that such Liens do
not extend to or cover any property or assets of the Company or any Restricted
Subsidiary or Regulated Subsidiary other than the property or assets securing
the Indebtedness being refinanced;
(5) (a)
For the 2011 Notes, Liens securing Indebtedness of the Company under any Credit
Facility in an aggregate principal amount at any one time outstanding (with
letters of credit being deemed to have a principal amount equal to the maximum
potential liability of the Company and its Restricted Subsidiaries thereunder)
not to exceed $300 million;
(b) For
the 2013 Notes and 2015 Notes, Liens securing Indebtedness (including Hedging
Obligations with respect thereto) in an aggregate amount not to exceed the
greater of (x) $300 million or (y) an amount equal to the Secured
Indebtedness Cap on the dates on which such Lien is to be incurred;
(c) For
the 2017 Notes, Liens securing Indebtedness (including Hedging Obligations with
respect thereto) under any Credit Facility in an amount not to exceed $300
million.
(6) Liens
(including extensions and renewals thereof) upon real or personal property
acquired after the applicable Closing Date; provided that (a) any
such Lien is created solely for the purpose of securing Indebtedness Incurred,
in accordance with the “—Limitation on Indebtedness and Issuances of Preferred
Stock” covenant, to finance the cost (including the cost of improvement or
construction and fees and expenses related to the acquisition) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within twelve months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property, (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and (c) any such Lien shall not extend to
or cover any property or assets other than such item of property or assets and
any improvements on such item;
(7) Liens
on cash set aside at the time of the Incurrence of any Indebtedness, or
government securities purchased with such cash, in either case to the extent
that such cash or government securities pre-fund the payment of interest on such
Indebtedness and are held in a collateral or escrow account or similar
arrangement to be applied for such purpose;
(8) Liens
incurred by the Company or a Restricted Subsidiary for the benefit of a
Regulated Subsidiary in the ordinary course of business including Liens incurred
in the Broker Dealer Regulated Subsidiary’s securities business with respect to
obligations that do not exceed $200 million at any one time outstanding and that
are not incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of business);
or
(9) Permitted
Liens.
Limitation
on Sale-Leaseback Transactions
The
Company will not, and will not permit any Restricted Subsidiary or Regulated
Subsidiary to, enter into any Sale-Leaseback Transaction involving any of its
assets or properties whether now owned or hereafter acquired.
The
foregoing restriction does not apply to any Sale-Leaseback Transaction
if:
(1) the
lease is for a period, including renewal rights, of not in excess of three
years;
(2) the
lease secures or relates to industrial revenue or pollution control
bonds;
(3) the
transaction is solely among the Company, its Wholly Owned Restricted
Subsidiaries or its Wholly Owned Regulated Subsidiaries or any combination
thereof; or
(4) the
Company or such Restricted Subsidiary or Regulated Subsidiary, within 12 months
after the sale or transfer of any assets or properties is completed, applies an
amount not less than the net proceeds received from such sale in accordance with
clause (A) or (B) of the third paragraph of the “—Limitation on Asset
Sales” covenant.
Limitation
on Asset Sales
The
Company will not, and will not permit any Restricted Subsidiary to, consummate
any Asset Sale, unless (1) the consideration received by the Company or
such Restricted Subsidiary is at least equal to the Fair Market Value of the
assets sold or disposed of and (2) at least 75% of the consideration
received consists of (a) cash or Temporary Cash Investments, (b) the
assumption of unsubordinated Indebtedness of the Company or any Subsidiary
Guarantor or Indebtedness of any other Restricted Subsidiary (in each case,
other than Indebtedness owed to the Company), provided that the Company,
such Subsidiary Guarantor, such Restricted Subsidiary, as the case may be is
irrevocably and unconditionally released from all liability under such
Indebtedness or (c) Replacement Assets.
The
Company will not, and will not permit any Restricted Subsidiary or Regulated
Subsidiary to consummate any Regulated Sale unless (1) the consideration
received by the Company or such Restricted Subsidiary or Regulated Subsidiary is
at least equal to the Fair Market Value of the assets sold or disposed of and
(2) at least 75% of the consideration received consists of (a) cash or
Temporary Cash Investments, (b) the assumption of unsubordinated
Indebtedness of the Company or any Subsidiary Guarantor or Indebtedness of any
other Restricted Subsidiary or Regulated Subsidiary (in each case, other than
Indebtedness owed to the Company), provided that the Company,
such Subsidiary Guarantor, such Restricted Subsidiary or such Regulated
Subsidiary, as the case may be is irrevocably and unconditionally released from
all liability under such Indebtedness or (c) Replacement
Assets.
If and to
the extent that the Net Cash Proceeds received by the Company or any of its
Restricted Subsidiaries or Regulated Subsidiaries (excluding the first $300
million of Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries or Regulated Subsidiaries from Asset Sales and Regulated Sales
after the applicable Closing Date) from one or more Asset Sales or Regulated
Sales in any period of 12 consecutive months exceed 10% of Consolidated Net
Worth (determined as of the date closest to the commencement of such 12-month
period for which a consolidated balance sheet of the Company and its
Subsidiaries has been filed with the SEC or provided to the Trustee), then the
Company shall or shall cause the relevant Restricted Subsidiary or Regulated
Subsidiary to:
(1) within
twelve months after the date Net Cash Proceeds so received exceed 10% of
Consolidated Net Worth,
(A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company or Indebtedness or to redeem or
repurchase Capital Stock, otherwise permitted by the Indentures, of any
Restricted Subsidiary or Regulated Subsidiary, in each case owing to or owned by
a Person other than the Company or any Affiliate of the Company; or
(B) invest
an equal amount, or the amount not so applied pursuant to clause (A) (or
enter into a definitive agreement committing to so invest within 12 months after
the date of such agreement), in Replacement Assets; and
(2) apply
(no later than the end of the 12-month period referred to in clause
(1)) such excess Net Cash Proceeds (to the extent not applied pursuant to
clause (1)) as provided in the following paragraphs of this “—Limitation on
Asset Sales” covenant.
If and to
the extent that the Net Cash Proceeds received by the Company or any of its
Restricted Subsidiaries or Regulated Subsidiaries from one or more Regulated
Sales in any period of 12 consecutive months exceed 10% of Consolidated Net
Worth (determined as of the date closest to the commencement of such 12-month
period for which a consolidated balance sheet of the Company and its
Subsidiaries has been filed with the SEC or provided to the Trustee), then the
Company shall or shall cause the relevant Restricted Subsidiary or Regulated
Subsidiary to apply (no later than the end of the 12-month period referred to in
clause (1)) such excess Net Cash Proceeds (to the extent not applied
pursuant to clause (1)) as provided in the following paragraphs of this
“—Limitation on Asset Sales” covenant.
The
amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 12-month period as set forth in clause
(1) of the preceding sentence and not applied as so required by the end of
such period shall constitute “Excess Proceeds”.
If, as of
the first day of any calendar month, the aggregate amount of Excess Proceeds not
theretofore subject to an Offer to Purchase pursuant to this “—Limitation on
Asset Sales” covenant totals at least $50 million, the Company must commence,
not later than the fifteenth Business Day of such month, and consummate an Offer
to Purchase from the holders (and if required by the terms of any Indebtedness
that is pari passu with the Notes (“Pari Passu Indebtedness”), from the holders
of such Pari Passu Indebtedness) on a pro rata basis an aggregate principal
amount of Notes (and Pari Passu Indebtedness) equal to the Excess Proceeds on
such date, at a purchase price equal to 100% of their principal amount, plus, in
each case, accrued interest (if any) to the Payment Date.
To the
extent that the aggregate amount of Notes and Pari Passu Indebtedness so validly
tendered and not properly withdrawn pursuant to an Offer to Purchase is less
than the Excess Proceeds, the Company may use any remaining Excess Proceeds for
any other purpose which is permitted by the Indentures.
If the
aggregate principal amount of Notes surrendered by holders thereof and other
Pari Passu Indebtedness surrendered by holders or lenders, collectively, exceeds
the amount of Excess Proceeds, the Trustee shall select the Notes and Pari Passu
Indebtedness to be purchased on a pro rata basis on the basis of the aggregate
principal amount of tendered Notes and Pari Passu Indebtedness. Upon
completion of such Offer to Purchase, the amount of Excess Proceeds shall be
reset to zero.
Limitation
on Lines of Business
The
Company will not, and will not permit any Restricted Subsidiary or Regulated
Subsidiary to, engage in any business other than a Related
Business.
Maintenance
of Capitalization under the 2017 Notes Indenture
Under the
2017 Notes Indenture, the Company will not permit any Bank Regulated Subsidiary
that constitutes a federally insured depositary institution to fail to be at
least Well Capitalized for a period of more than 30 consecutive days in any
fiscal quarter of the Company.
Repurchase
of Notes upon a Change of Control
Under the
2017 Notes Indenture, the Company must commence, within 30 days of the
occurrence of a Change of Control, and consummate an Offer to Purchase for all
2017 Notes then outstanding, at a purchase price equal to 101% of their
principal amount, plus accrued interest (if any) to the Payment
Date.
Under the
Senior Notes Indentures, the Company must commence, within 30 days of the later
of (1) the occurrence of a Change of Control, and (2) a Rating
Decline, and consummate an Offer to Purchase for all 2011, 2013 and 2015 Notes
then outstanding, at a purchase price equal to 101% of their principal amount,
plus accrued interest (if any) to the Payment Date; provided that the Company
shall not be required to make an Offer to Purchase unless a Rating Decline
occurs.
There can
be no assurance that the Company will have sufficient funds available at the
time of any Change of Control to make any debt payment (including repurchases of
Notes) required by the foregoing covenant (as well as may be contained in other
securities of the Company which might be outstanding at the time).
The above
covenant requiring the Company to repurchase the Notes will, unless consents are
obtained, require the Company to repay all Indebtedness then outstanding which
by its terms would prohibit such Note repurchase, either prior to or
concurrently with such Note repurchase.
The
Company will not be required to make an Offer to Purchase upon the occurrence of
a Change of Control, if a third party makes an offer to purchase the Notes in
the manner, at the times and price and otherwise in compliance with the
requirements of the Indentures applicable to an Offer to Purchase for a Change
of Control and purchases all Notes validly tendered and not withdrawn in such
offer to purchase.
SEC
Reports and Reports to Holders
The
Company will deliver to the Trustee within 30 days after the filing of the same
with the Securities and Exchange Commission, copies of the quarterly and annual
reports and of the information, documents and other reports, if any, which the
Company is required to file with the Securities and Exchange Commission pursuant
to Section 13 or 15(d) of the Exchange Act. Notwithstanding that
the Company may not be subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act, the Company will file with the Securities and
Exchange Commission, to the extent permitted, and provide the Trustee and
holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act, provided that the Company
need not file such reports or other information if, and so long as, it would not
be required to do so pursuant to Rule 12h-5 under the Exchange
Act. The Company will also comply with the other provisions of the
TIA, Section 314(a).
Springing
Lien under the 2017 Notes Indenture
Promptly
following the occurrence of the Trigger Date, the Company will take such actions
as are reasonably necessary and as the Trustee may reasonably request (including
delivery of security agreements, pledge agreements, financing statements and
other security documents, authorization documents and opinions of counsel) to
ensure and confirm that the obligations of the Company under the 2017 Notes and
of each Subsidiary Guarantor that is a Restricted Subsidiary under any
Subsidiary Guarantee (up to a maximum amount of Indebtedness under the 2017
Notes that would not result in or require any of the 2011 Notes, the 2013 Notes
or the 2015 Notes becoming directly secured equally and ratably with the 2017
Notes pursuant to the provisions of the 2011 Notes Indenture, the 2013 Notes
Indenture or the 2015 Notes Indenture, as the case may be) are secured by a
first priority ((i) junior only to (x) the Liens existing on the Closing
Date for the 2017 Notes and (y) Liens securing any Credit Facility in the
amount not to exceed $300,000,000 and (ii) otherwise, subject only to Liens
permitted by the covenants described under “—Limitation on Liens”) perfected
Lien on (I) the ownership interest of the Company and each such Subsidiary
Guarantor in the stock and other equity interests of each Domestic Subsidiary;
(II) the ownership interest of the Company and each such Subsidiary Guarantor in
the stock and other equity interests of each direct Foreign Subsidiary of the
Company and of each Domestic Subsidiary; provided that neither the Company nor
any Domestic Subsidiary shall be required to pledge more than 65% of the stock
and other equity interest in any Foreign Subsidiary; and (III) all other present
and future assets and properties (including, without limitation, accounts
receivable,
inventory, real property, machinery, equipment, contracts, trademarks,
copyrights, patents, license rights, intercompany notes and other investment
property, and general intangibles) of the Company and each such Subsidiary
Guarantor, except in each of (I), (II) and (III) such property and assets
constituting Excluded Collateral.
In
furtherance of the foregoing, the Company will, and will cause each Domestic
Subsidiary to, execute and deliver to the Trustee (A) from time to time
prior to the Trigger Date, such documents as are reasonably necessary and as the
Trustee may reasonably request to ensure that the Liens described above on
substantially all personal property (other than property described in clause
(ii) of the preceding sentence) of the Company and its Domestic
Subsidiaries will be created and perfected promptly after the Trigger Date;
(B) not later than 30 days after the Trigger Date, a mortgage or deed of
trust with respect to each parcel of real estate owned by the Company or any
Domestic Subsidiary; (C) as soon as reasonably practicable after the
Trigger Date, such documentation (including title insurance policies, flood
plain certifications and other customary documents) as is reasonably necessary
and as the Trustee may reasonably request in connection with the mortgages and
deeds of trust described in clause (B) above and (D) as soon as
reasonably practicable after the Trigger Date, all documents necessary to create
and perfect the Liens described in clause (ii) of the preceding
sentence. The Company agrees that after the Trigger Date it will use,
and will cause each applicable Subsidiary to use, commercially reasonable
efforts to promptly deliver all items required by clauses (C) and
(D) of the preceding sentence.
For the
avoidance of doubt, (a) the Company shall not, and shall not permit the
Subsidiary Guarantors to, secure Indebtedness under the 2017 Notes and the
Subsidiary Guarantees in excess of the amount that is permitted to be secured
under the provisions of the 2013 Notes Indenture and the 2015 Notes Indenture
without granting equal and ratable security to the holders of the 2015 Notes,
the 2013 Notes and/or the 2011 Notes and (b) at any time the Consolidated
EBITDA of the Company for the most recently ended Four Quarter Period exceeds
the amount of Indebtedness under the 2017 Notes heretofore secured in compliance
with the provisions of this section, the Company shall secure the additional
amount of Indebtedness under the 2017 Notes, such that the aggregate amount of
Indebtedness under the 2017 Notes secured in compliance with the provisions of
this section equals the amount of the Consolidated EBITDA of the Company for the
most recently ended Four Quarter Period.
Beyond
the exercise of reasonable care in the custody thereof, the Trustee shall have
no duty as to any Collateral in its possession or control or in the possession
or control of any agent or bailee or any income thereon or as to preservation of
rights against prior parties or any other rights pertaining thereto and the
Trustee shall not be responsible for filing any financing or continuation
statements or recording any documents or instruments in any public office at any
time or times or otherwise perfecting or maintaining the perfection of any
security interest in the Collateral. The Trustee shall be deemed to
have exercised reasonable care in the custody of the Collateral in its
possession if the Collateral is accorded treatment substantially equal to that
which it accords its own property and shall not be liable or responsible for any
loss or diminution in the value of any of the Collateral, by reason of the act
or omission of any carrier, forwarding agency or other agent or bailee selected
by the Trustee in good faith. The Trustee shall not be responsible
for the existence, genuineness or value of any of the Collateral or for the
validity, perfection, priority or enforceability of the Liens in any of the
Collateral, whether impaired by operation of law or by reason of any of any
action or omission to act on its part hereunder, except to the extent such
action or omission constitutes gross negligence, bad faith or willful misconduct
on the part of the Trustee, for the validity or sufficiency of the Collateral or
any agreement or assignment contained therein, for the validity of the title of
the Company to the Collateral, for insuring the Collateral or for the payment of
taxes, charges, assessments or Liens upon the Collateral or otherwise as to the
maintenance of the Collateral.
Effectiveness
of Covenants
The
covenants described under “—Limitation on Indebtedness and Issuances of
Preferred Stock”, “—Limitation on Restricted Payments”, “—Limitation on
Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries or
Regulated Subsidiaries” “—Limitation on the Issuance and Sale of Capital Stock
of Restricted Subsidiaries or Regulated Subsidiaries”, “—Future Subsidiary
Guarantees”, “—Limitation on Transactions with Stockholders and Affiliates”,
“—Limitation on Sale-Leaseback Transactions”, “—Limitation on Asset Sales”,
“—SEC reports”, “—Limitation on Lines of Business”, “—Maintenance of
Capitalization”, and “—Springing Lien” (the “Terminated Covenants”) will no
longer be in effect upon the Company attaining Investment Grade
Status. The Terminated Covenants will not be reinstated regardless of
whether the Company’s credit rating is subsequently downgraded from Investment
Grade Status.
Collateral
Documents and Security under the 2017 Notes Indenture
Upon
securing the 2017 Notes in accordance with the “—Covenants—Springing Lien”
covenant described above, the following provisions shall apply:
(1) The
Company shall appoint a Collateral Agent which shall be entitled to the
protections, immunities and indemnities as provided in a supplemental indenture
attached to the 2017 Notes Indenture.
(2) In
order to secure the due and punctual payment of the 2017 Notes, the Company and
the Subsidiary Guarantors will enter into the Collateral Documents to create the
Note Liens on the Collateral in accordance with the terms thereof.
Upon any
realization upon the Collateral, the proceeds thereof shall be applied, subject
to the terms of the Intercreditor Agreement, in accordance with the Collateral
Documents and the 2017 Notes Indenture.
The Note
Liens will be released automatically:
|
(i)
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as
to all of the Collateral, upon payment in full of the principal of, and
accrued and unpaid interest and premium, if any, on the 2017
Notes;
|
|
(ii)
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as
to all of the Collateral, upon defeasance or discharge of the 2017 Notes
in accordance with the provisions described in “—Defeasance”
below;
|
|
(iii)
|
as
to any property or assets constituting Collateral that is sold,
transferred or otherwise disposed of by the Company or any of its
Subsidiaries in a transaction not prohibited by the 2017 Notes Indenture,
at the time of such sale, transfer or disposition;
or
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|
(iv)
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as
to any property constituting Collateral that is owned by a Subsidiary
Guarantor that has been released from its obligations under its Subsidiary
Guarantee in accordance with “—Covenants—Future Subsidiary Guarantees”,
concurrently with the release of such
Guarantee.
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The
Company and each Subsidiary Guarantor may, without any release or consent by the
Trustee or the Collateral Agent, perform a number of activities in the ordinary
course in respect of the Collateral to the extent not restricted or prohibited
by the Collateral Documents and the 2017 Notes Indenture, including, without
limitation, (i) selling or otherwise disposing of, in any transaction or
series of related transactions, any property subject to the Note Liens which has
become worn out, defective or obsolete or not used or useful in the business,
(ii) abandoning, terminating, canceling, releasing or making alternations
in or substitutions of any leases or contracts subject to the Note Liens,
(iii) surrendering or modifying any franchise, license or permit subject to
the Note Liens which it may own or under which it may be operating;
(iv) altering, repairing, replacing, changing the location or position of
and adding to its structures, machinery, systems, equipment, fixtures and
appurtenances; (v) granting a license of any intellectual property;
(vi) selling, transferring or otherwise disposing of inventory in the
ordinary course of business; (vii) selling, collecting, liquidating,
factoring or otherwise disposing of accounts receivable in the ordinary course
of business; (viii) making cash payments (including for the repayment of
Indebtedness) from cash that is at any time part of the Collateral in the
ordinary course of business that are not otherwise prohibited by the 2017 Notes
Indenture; and (ix) abandoning any property which is not longer used or
useful in the Company’s business. The release of any Collateral from
the Note Liens pursuant to the terms of the 2017 Notes Indenture and the
Collateral Documents shall not be deemed to impair the security under the 2017
Notes Indenture in contravention of the provisions thereof if and to the extent
that the Collateral is released pursuant to the terms described in this
paragraph.
In the
event that the Company delivers an Officers’ Certificate certifying that
(a) its obligations under the 2017 Notes Indenture have been defeased or
discharged by complying with the provisions described in “—Defeasance” or
(b) a Subsidiary Guarantor shall have been released from its obligations
under its Subsidiary Guarantee the Note Liens on all property and assets
(including any Capital Stock) constituting Collateral (in the case of clause
(a)) or the property and assets (including any Capital Stock) constituting
Collateral owned by such Subsidiary Guarantor (in the case of clause (b)) shall
be released, and the Collateral Agent shall (i) at the Company’s expense,
promptly execute and deliver such releases, termination statements and other
instruments (in recordable form, where appropriate) as
the
Company or any Subsidiary Guarantor, as applicable, may reasonably request to
evidence the termination of such Note Liens and (ii) not be deemed to hold
such Note Liens for the benefit of the Trustee and the holders of 2017
Notes.
Events
of Default
The
following events are defined as “Events of Default” in the
Indentures:
(a) default
in the payment of principal of (or premium, if any, on) any Note when the same
becomes due and payable at maturity, upon acceleration, redemption or
otherwise;
(b) default
in the payment of interest on any Note when the same becomes due and payable,
and such default continues for a period of 30 days;
(c) default
in the performance or breach of the provisions of the Indentures applicable to
mergers, consolidations and transfers of all or substantially all of the assets
of the Company or the failure by the Company to make or consummate an Offer to
Purchase in accordance with the “—Limitation on Asset Sales” or “—Repurchase of
Notes upon a Change of Control” covenant;
(d) the
Company or any Subsidiary Guarantor defaults in the performance of or breaches
any other covenant or agreement in one or more of the Indentures or under a
series of Notes (other than a default specified in clause (a), (b) or
(c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the holders of 25% or
more in aggregate principal amount of the applicable series of
Notes;
(e) there
occurs with respect to any issue or issues of Indebtedness of the Company or any
Significant Subsidiary having an outstanding principal amount of $20 million or
more in the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of
default that has caused the holder thereof to declare such Indebtedness to be
due and payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 45 days of such acceleration or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended;
(f) any
final judgment or order (not covered by insurance), that is non-appealable, for
the payment of money in excess of $20 million in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 45 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $20 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in
effect;
(g) a
court having jurisdiction in the premises enters a decree or order for
(A) relief in respect of the Company or any Significant Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, (B) appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up
or liquidation of the affairs of the Company or any Significant Subsidiary and,
in each case, such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days;
(h) the
Company or any Significant Subsidiary (A) commences a voluntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consents to the entry of an order for relief in an involuntary case
under any such law, (B) consents to the appointment of or taking possession
by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any Significant
Subsidiary or (C) effects any general assignment for the benefit of
creditors;
(i) failure
by any Broker Dealer Regulated Subsidiary that is a Significant Subsidiary to
meet the minimum capital requirements imposed by applicable regulatory
authorities, and such condition continues for a period of 30 days after the
Company or such Broker Dealer Regulated Subsidiary first becomes aware of such
failure;
(j) failure
by any Bank Regulated Subsidiary that is a Significant Subsidiary to be at least
“adequately capitalized”, as defined in regulations of applicable regulatory
authorities; provided that an Event of Default under this clause (j) shall
not have occurred until (x) 45 days from the time that such Bank Regulated
Subsidiary has notice or is deemed to have notice of such failure unless a capital restoration
plan has been filed the with OTS within that time (y) the expiration of a
90-day period commencing on the earlier of the date of initial submission of a
capital restoration plan to the OTS (unless such capital plan is approved by the
OTS before the expiration of such 90-day period or, if the OTS has notified us
that it needs additional time to determine whether to approve such capital plan,
in which case such 90-day period shall be extended until the OTS determines
whether to approve such capital plan, such capital plan is approved by the OTS
upon the expiration of such extended period);
(k) if
the Company or any Subsidiary that holds Capital Stock of a Broker Dealer
Regulated Subsidiary that is a Significant Subsidiary shall become ineligible to
hold such Capital Stock by reason of a statutory disqualification or
otherwise;
(l) the
Commission shall revoke the registration of any Broker Dealer Regulated
Subsidiary that is a Significant Subsidiary as a broker-dealer under the
Exchange Act or any such Broker Dealer Regulated Subsidiary shall fail to
maintain such registration;
(m) the
Examining Authority (as defined in Rule 15c3-1) for any Broker Dealer Regulated
Subsidiary that is a Significant Subsidiary shall suspend (and shall not
reinstate within 10 days) or shall revoke such Broker Dealer Regulated
Subsidiary’s status as a member organization thereof;
(n) the
occurrence of any event of acceleration in a subordination agreement, as defined
in Appendix D to Rule 15c3-1 of the Exchange Act, to which the Company or any
Broker Dealer Regulated Subsidiary that is a Significant Subsidiary is a party;
or
(o) any
Subsidiary Guarantor that is a Significant Subsidiary repudiates its obligations
under its Note Guarantee or, except as permitted by the Indentures, any Note
Guarantee is determined to be unenforceable or invalid or shall for any reason
cease to be in full force and effect;
In
addition, the following events are defined as Events of Default under the 2017
Notes Indenture: (a) failure of the Company to comply with the
“—Maintenance of Capitalization” covenant of the 2017 Notes Indenture; and
(b) any Lien on property or assets with a Fair Market Value in excess of
$5,000,000 purported to be created under any Collateral Document shall cease to
be, or shall be asserted by the Company or any of its Subsidiaries not to be, a
valid and perfected Lien on any Collateral, with the priority required by the
applicable Collateral Document, except (i) as a result of the sale or other
disposition of the applicable Collateral in a transaction permitted under the
2017 Notes Indenture or (ii) as a result of the failure by the Trustee or a
collateral agent appointed by the trustee to maintain possession of any stock
certificates, promissory notes or other instruments delivered to it under the
Collateral Documents.
If an
Event of Default (other than an Event of Default specified in clause (g) or
(h) above that occurs with respect to the Company or any Subsidiary
Guarantor) occurs and is continuing under one of more of the Indentures, the
Trustee or the holders of at least 25% in aggregate principal amount of the
Notes under each Indenture, then outstanding, by written notice to the Company
(and to the Trustee if such notice is given by the holders), may, and the
Trustee at the request of such holders shall, declare the principal of, premium,
if any, and accrued interest on the applicable series of Notes to be immediately
due and payable. Upon a declaration of acceleration, such principal
of, premium, if any, and accrued interest shall be immediately due and
payable. In the event of a declaration of acceleration because an
Event of Default set forth in clause (e) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (e) shall be remedied or cured by the Company or the relevant
Significant Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect
thereto. If an Event of Default specified in clause (g) or
(h) above occurs with respect to the Company,
the
principal of, premium, if any, and accrued interest on the Notes then
outstanding shall automatically become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any
holder. The holders of at least a majority in principal amount of the
outstanding Notes of a series by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences with respect to such series of Notes if
(x) all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the applicable series of Notes
that have become due solely by such declaration of acceleration, have been cured
or waived and (y) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see “—Modification and Waiver”.
The
holders of at least a majority in aggregate principal amount of the outstanding
Notes of a series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to
follow any direction that conflicts with law or the applicable Indenture, that
may involve the Trustee in personal liability, or that the Trustee determines in
good faith may be unduly prejudicial to the rights of holders of Notes of such
series not joining in the giving of such direction and may take any other action
it deems proper that is not inconsistent with any such direction received from
holders of Notes of such series. A holder may not pursue any remedy
with respect to the Indentures or the Notes unless:
(1) the
holder gives the Trustee written notice of a continuing Event of
Default;
(2) the
holders of at least 25% in aggregate principal amount of outstanding Notes under
the applicable Indenture make a written request to the Trustee to pursue the
remedy;
(3) such
holder or holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense;
(4) the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity; and
(5) during
such 60-day period, the holders of a majority in aggregate principal amount of
the outstanding Notes under the applicable Indenture do not give the Trustee a
direction that is inconsistent with the request.
However,
such limitations do not apply to the right of any holder of a Note to receive
payment of the principal of, premium, if any, or interest on, such Note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Notes, which right shall not be impaired or affected without
the consent of the holder.
Officers
of the Company must certify, on or before a date not more than 90 days after the
end of each fiscal year, that a review has been conducted of the activities of
the Company and its Restricted Subsidiaries and Regulated Subsidiaries and the
Company’s and its Restricted Subsidiaries’ and its Regulated Subsidiaries’
performance under the Indentures and that, to their knowledge, the Company has
fulfilled all obligations thereunder, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default and the nature
and status thereof. The Company will also be obligated to notify the
Trustee of any default or defaults in the performance of any covenants or
agreements under the Indentures.
Consolidation,
Merger and Sale of Assets
The
Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into it unless:
(1) it
shall be the continuing Person, or the Person (if other than it) formed by such
consolidation or into which it is merged or that acquired or leased such
property and assets of (the “Surviving Person”) shall be an entity organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the Company’s obligations under
the Indentures and the Notes; provided, that if such
continuing Person or Person shall not be a corporation, such entity shall
organize or have a wholly-owned Subsidiary in the form of a corporation
organized
and
validly existing under the laws of the United States or any jurisdiction
thereof, and shall cause such corporation to expressly assume, as a party to the
supplemental indenture referenced above, as a co-obligor, each of such
continuing Person or Person’s obligations under the Indentures and the
Notes;
(2) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing;
(3) immediately
after giving effect to such transaction on a pro forma basis, the Company
or the Surviving Person, as the case may be, shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction;
(4) immediately
after giving effect to such transaction on a pro forma basis the Company
or the Surviving Person, as the case may be, could Incur at least $1.00 of
Indebtedness under the first paragraph of the “—Limitation on Indebtedness and
Issuances of Preferred Stock” covenant;
(5) it
delivers to the Trustee an Officers’ Certificate (attaching the arithmetic
computations to demonstrate compliance with clauses (3) and (4)) and
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; and
(6) each
Subsidiary Guarantor, unless such Subsidiary Guarantor is the Person with which
the Company has entered into a transaction under this “—Consolidation, Merger
and Sale of Assets” section, shall have by amendment to its Note Guarantee
confirmed that its Note Guarantee shall apply to the obligations of the Company
or the Surviving Person in accordance with the Notes and the Indentures; provided, however, that
clauses (3) and (4) above do not apply if, in the good faith
determination of the Board of Directors of the Company, whose determination
shall be evidenced by a board resolution, the principal purpose of such
transaction is to change the state of organization or convert the form of
organization of the Company to another form, and any such transaction shall not
have as one of its purposes the evasion of the foregoing
limitations.
Defeasance
Defeasance
and Discharge
Each
Indenture provides that the Company will be deemed to have paid and will be
discharged from any and all obligations in respect of the Notes issued
thereunder on the 123rd day after the deposit referred to below, and the
provisions of the Indenture will no longer be in effect with respect to the
Notes issued thereunder (except for, among other matters, certain obligations to
register the transfer or exchange of the Notes, to replace stolen, lost or
mutilated Notes, to maintain paying agencies and to hold monies for payment in
trust) if, among other things:
(A) the
Company has deposited with the Trustee, in trust, money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes issued pursuant to such Indenture on the Stated Maturity of such payments
in accordance with the terms of the Indenture and the Notes issued
thereunder;
(B) the
Company has delivered to the Trustee (1) either (x) an Opinion of
Counsel to the effect that the holders of the applicable series of Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of the Company’s exercise of its option under this “—Defeasance” provision and
will be subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit, defeasance
and discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the applicable Closing Date such that a ruling is no longer required or
(y) a ruling directed to the Trustee received from the Internal Revenue
Service to the same effect as the aforementioned Opinion of Counsel and
(2) an Opinion of Counsel to the effect that the defeasance trust is not
required to register as an investment company under the Investment Company Act
of 1940 and, after the passage of 123 days following the
deposit,
the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and
Creditor Law; and
(C) immediately
after giving effect to such deposit on a pro forma basis, no Event of
Default, or event that after the giving of notice or lapse of time or both would
become an Event of Default, shall have occurred and be continuing on the date of
such deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound.
Defeasance
of Certain Covenants and Certain Events of Default
The
Indentures further provide that the provisions of the Indentures will no longer
be in effect with respect to clauses (3) and (4) under
“—Consolidation, Merger and Sale of Assets” and all the covenants described
herein under “—Covenants”, clause (c) under “—Events of Default” with
respect to such clauses (3) and (4) under “—Consolidation, Merger and
Sale of Assets”, clause (d) under “—Events of Default” with respect to such
other covenants and clauses (e) and (f) under “—Events of Default”
shall be deemed not to be Events of Default upon, among other things, the
deposit with the Trustee, in trust, of money and/or U.S. Government Obligations
that through the payment of interest and principal in respect thereof in
accordance with their terms will provide money in an amount sufficient to pay
the principal of, premium, if any, and accrued interest on the Notes on the
Stated Maturity of such payments in accordance with the terms of the Indentures
and the applicable series of Notes, the satisfaction of the provisions described
in clauses (B)(2) and (C) of the preceding paragraph and the delivery by
the Company to the Trustee of an Opinion of Counsel to the effect that, among
other things, the holders will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance of certain
covenants and Events of Default and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred.
Defeasance
and Certain Other Events of Default
If the
Company exercises its option to omit compliance with certain covenants and
provisions of an Indenture with respect to a series of Notes as described in the
immediately preceding paragraph and the Notes of such series are declared due
and payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or U.S. Government Obligations on deposit
with the Trustee will be sufficient to pay amounts due on such series of Notes
at the time of their Stated Maturity but may not be sufficient to pay amounts
due on such series of Notes at the time of the acceleration resulting from such
Event of Default. However, the Company will remain liable for such
payments, and any Subsidiary Guarantor’s Note Guarantee with respect to such
payments will remain in effect.
Satisfaction
and Discharge
Each
Indenture will be discharged and will cease to be of further effect as to all
Notes issued thereunder when:
(1) either:
(a) all
Notes issued thereunder that have been authenticated and delivered (other than
destroyed, lost or stolen Notes that have been replaced, Notes that are paid and
Notes for whose payment money or securities have theretofore been deposited in
trust and thereafter repaid to the Company) have been delivered to the Trustee
for cancellation and the Company has paid all sums payable under the Indentures;
or
(b) all
Notes issued thereunder mature within one year or are to be called for
redemption within one year and the Company has irrevocably deposited with the
Trustee, as trust funds in trust solely for the benefit of the holders, money or
U.S. Government Obligations sufficient, without consideration of any
reinvestment of interest, to pay principal, premium, if any, and accrued
interest on such series of Notes to the date of maturity or redemption and all
other sums payable under the Indenture;
(2) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit and such deposit will not result in a breach or violation of, or
constitute a default under such Indenture or any other instrument
to which
the Company or any Subsidiary Guarantor is a party or by which the Company or
any Subsidiary Guarantor is bound; and
(3) the
Company has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the Notes issued thereunder at maturity or
the redemption date, as applicable.
In
addition, the Company must deliver an Officers’ Certificate and an Opinion of
Counsel to the Trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
Modification
and Waiver
Each
Indenture may be amended or supplemented, without the consent of any holder,
to:
(a) cure
any ambiguity, defect or inconsistency in the Indentures, provided that such amendments
or supplements shall not, in the good faith opinion of the Board of Directors of
the Company as evidenced by a board resolution, adversely affect the interest of
the holders in any material respect;
(b) comply
with the provisions described under “—Consolidation, Merger and Sale of Assets”
or “—Guarantees by Restricted Subsidiaries”;
(c) comply
with any requirements of the Securities and Exchange Commission in connection
with the qualification of the Indentures under the TIA;
(d) evidence
and provide for the acceptance of appointment by a successor
Trustee;
(e) make
any change that, in the good faith opinion of the Board of Directors as
evidenced by a board resolution, does not materially and adversely affect the
rights of any holder;
(f) to
provide for uncertificated Notes in addition to or in place of certificated
Notes issued thereunder;
(g) add
Guarantees with respect to the Notes issued thereunder in accordance with the
applicable provisions of the Indentures; or
(h) secure
the Notes;
In
addition, each Senior Notes Indenture may be amended or supplemented without the
consent of any holder to: (a) provide for the issuance of
Additional Notes of the series of Notes issued thereunder in accordance with the
respective Indentures; or (b) conform any provisions contained in the
Indentures to the “Description of Notes” sections contained in certain offering
documents as described in the Indentures.
Modifications
and amendments of each Indenture may be made by the Company and the Trustee with
the consent of the holders of not less than a majority in aggregate principal
amount of the outstanding Notes issued thereunder; provided, however, that no
such modification or amendment may, without the consent of each holder affected
thereby:
(1) change
the Stated Maturity of the principal of, or any installment of interest on, any
Note issued thereunder;
(2) reduce
the principal amount of, or premium, if any, or interest on, any Note issued
thereunder;
(3) change
the optional redemption dates or optional redemption prices of the Notes issued
thereunder from that stated under “—Optional Redemption”;
(4) change
the place or currency of payment of principal of, or premium, if any, or
interest on, any Note issued thereunder;
(5) impair
the right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note issued thereunder;
(6) waive
a default in the payment of principal of, premium, if any, or interest on the
Notes issued thereunder or modify any provision of such Indenture relating to
modification or amendment thereof;
(7) reduce
the above-stated percentage of outstanding Notes of such series, the consent of
whose holders is necessary to modify or amend the applicable
indenture;
(8) release
any Subsidiary Guarantor from its Notes Guarantee, except as provided in such
Indenture;
(9) reduce
the percentage or aggregate principal amount of outstanding Notes issued
thereunder the consent of whose holders is necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain
defaults.
In
addition, under the 2017 Notes Indenture, the amount of 2017 Notes issued
pursuant to the 2017 Notes Indenture cannot be increased above $1,936,000,000
(plus any capitalized interest) without the consent of each holder of the 2017
Notes.
No
Liability of Directors, Officers, Employees, Incorporators, Members and
Stockholders.
No
director, officer, employee, incorporator, member or stockholder of the Company
or any Subsidiary Guarantor, as such, will have any liability for any
obligations of the Company or such Subsidiary Guarantor under the Notes, any
Note Guarantee or the Indentures or for any claim based on, in respect of, or by
reason of, such obligations. Each holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the Notes.
The
Trustee
Except
during the continuance of a Default, the Trustee will not be liable, except for
the performance of such duties as are specifically set forth in the
Indentures. If an Event of Default has occurred and is continuing,
the Trustee will use the same degree of care and skill in its exercise of the
rights and powers vested in it under the Indentures as a prudent person would
exercise under the circumstances in the conduct of such person’s own
affairs.
The
Indentures and the provisions of the TIA incorporated by reference therein
contain limitations on the rights of the Trustee, should it become a creditor of
the Company, to obtain payment of claims in certain cases or to realize on
certain property received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions;
provided, however, that
if it acquires any conflicting interest, it must eliminate such conflict or
resign.
Book-Entry;
Delivery and Form
The Notes
are represented in the form of global notes in fully registered book-entry form
without interest coupons that are on deposit with the Trustee as custodian for
The Depository Trust Company, also referred to as DTC, in New York, New York and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant as described below.
Except as
set forth below, the global notes may be transferred, in whole but not in part,
only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be
exchanged for notes in certificated form except in the limited circumstances
described below. See “—Exchange of Book-Entry Notes for Certificated
Notes”. In addition, transfer of beneficial interests in the global
notes will be subject to the applicable rules and procedures of DTC and its
direct or indirect participants (including, if applicable, those of Euroclear
and Clearstream), which may change from time to time.
The Notes
may be presented for registration of transfer and exchange at the offices of the
registrar.
Depositary
Procedures
DTC has
advised the Company that DTC is a limited-purpose trust company created to hold
securities for its participating organizations and to facilitate the clearance
and settlement of transactions in those securities between
the
Participants through electronic book-entry changes in accounts of the
participants. The participants include securities brokers and dealers
(including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC’s system
is also available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Persons who are not
participants may beneficially own securities held by or on behalf of DTC only
through the participants or the indirect participants. The ownership
interest and transfer of ownership interest of each actual purchaser of each
security held by or on behalf of DTC are recorded on the records of the
participants and the indirect participants.
DTC has
also advised the Company that, pursuant to procedures established by
it,
(1) upon
deposit of the global notes, DTC will credit the accounts of participants
designated by the beneficiaries with portions of the principal amount of the
global notes; and
(2) ownership
of such interests in the global notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC (with
respect to the participants) or by the participants and the indirect
participants (with respect to other owners of beneficial interests in the global
notes).
All
interests in a global note, including those held through Euroclear or
Clearstream, may be subject to the procedures and requirements of
DTC. Those interests held through Euroclear or Clearstream may also
be subject to the procedures and requirements of such system.
The laws
of some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to
transfer beneficial interests in a global note to such persons may be limited to
that extent. Because DTC can act only on behalf of the participants,
which in turn act on behalf of the indirect participants and certain banks, the
ability of a person having beneficial interests in a global note to pledge such
interests to persons or entities that do not participate in the DTC system or
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests.
Except
as described below, owners of interests in the global notes will not have notes
registered in their names, will not receive physical delivery of notes in
certificated form and will not be considered the registered owners or holders
thereof under the indenture for any purpose.
Payments
in respect of the principal of (and premium, if any) and interest on a global
note registered in the name of DTC or its nominee will be payable to DTC or its
nominee in its capacity as the registered holder under the
indentures. Under the terms of the indenture, the Company and the
Trustee will treat the persons in whose names the notes, including the global
notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently,
none of the Company, the placement agents, the Trustee nor any agent of the
Company, the placement agents or the Trustee has or will have any responsibility
or liability for (1) any aspect or accuracy of DTC’s records or any
participant’s or indirect participant’s records relating to the beneficial
ownership or (2) any other matter relating to the actions and practices of
DTC or any of the participants or the indirect participants.
The
Company understands that DTC’s current practice, upon receipt of any payment in
respect of securities such as the notes (including principal and interest), is
to credit the accounts of the relevant participants with the payment on the
payment date, in amounts proportionate to their respective holdings in principal
amount of beneficial interests in the relevant security as shown on the records
of DTC. Payments by the participants and the indirect participants to
the beneficial owners of notes will be governed by standing instructions and
customary practices and will not be the responsibility of DTC, the Trustee or
the Company. None of the Company nor the Trustee will be liable for
any delay by DTC or any of the participants in identifying the beneficial owners
of the notes, and the Company and the Trustee may conclusively rely on and will
be protected in relying on instructions from DTC or its nominee as the
registered owner of the global notes for all purposes.
Except
for trades involving only Euroclear and Clearstream participants, interests in
the global notes will trade in DTC’s same-day funds settlement system and
secondary market trading activity in such interests will therefore settle in
immediately available funds, subject in all cases to the rules and procedures of
DTC and the participants.
Transfers
between participants in DTC will be effected in accordance with DTC’s procedures
and will be settled in same-day funds. Transfers between
accountholders in Euroclear and Clearstream will be effected in the ordinary way
in accordance with their respective rules and operating procedures.
Subject
to compliance with the transfer restrictions applicable to the Notes described
herein, cross-market transfers between the accountholders in DTC on the one hand
and directly or indirectly through Euroclear or Clearstream accountholders, on
the other hand, will be effected through DTC in accordance with DTC’s rules on
behalf of Euroclear or Clearstream, as the case may be, by its respective
depository; however, such cross-market transactions will require delivery of
instructions to Euroclear or Clearstream, as the case may be, by the
counterparty in such system in accordance with the rules and procedures and
within the established deadlines (Brussels time) of such
system. Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant global note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear or Clearstream accountholders
may not deliver instructions directly to the depositories for Euroclear or
Clearstream.
Because
of time zone differences, the securities account of a Euroclear or Clearstream
accountholder purchasing an interest in a global note from an accountholder in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Clearstream participant, during the securities settlement
processing day (which must be a business day for Euroclear or Clearstream)
immediately following the settlement date of DTC. Cash received in
Euroclear or Clearstream as a result of sales of interests in a global note by
or through a Euroclear or Clearstream accountholder to a participant in DTC will
be received with value on the settlement date of DTC but will be available in
the relevant Euroclear or Clearstream cash account only as of the business day
for Euroclear or Clearstream following DTC’s settlement date.
The
Company understands that DTC will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants in whose
account with DTC interests in the global notes are credited and only in respect
of such portion of the aggregate principal amount at maturity of the notes as to
which such participant or participants has or have given such
direction. However, if any of the events described under “—Exchange
of Book-Entry Notes for Certificated Notes” occurs, DTC reserves the right to
exchange the global notes for notes in certificated form and to distribute such
notes to its participants.
The
information in this section concerning DTC, Euroclear and Clearstream and their
book-entry systems has been obtained from sources that the Company believes to
be reliable, but the Company takes no responsibility for the accuracy
thereof.
Although
DTC, Euroclear and Clearstream have agreed to the foregoing procedures to
facilitate transfers of interests in the global notes among accountholders in
DTC and accountholders of Euroclear and Clearstream, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the
initial purchasers or the Trustee nor any agent of the Company, the initial
purchasers or the Trustee will have any responsibility for the performance by
DTC, Euroclear or Clearstream or their respective participants, indirect
participants or accountholders of their respective obligations under the rules
and procedures governing their operations.
Exchange
of Book-Entry Notes for Certificated Notes
A global
note is exchangeable for definitive notes in registered certificated form
if:
(1) DTC
(A) notifies the Company that it is unwilling or unable to continue as
depository for the global note and the Company thereupon fails to appoint a
successor depository or (B) has ceased to be a clearing agency registered
under the Exchange Act; or
(2) there
shall have occurred and be continuing a Default or an Event of Default with
respect to the notes.
In all
the above cases, certificated notes delivered in exchange for any global note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of DTC (in accordance with its
customary procedures).
Definitions
Set forth
below are defined terms used in the covenants and other provisions of the
Indentures. Reference is made to the Indentures for other capitalized
terms used in this “Description of Notes” for which no definition is
provided. Please note that there are differences in the definitions
among the various series of Notes. Although some of these differences
have been described below, we urge holders of the Notes to read the Indentures
because they (and not this description) define their rights as holders of the
Notes.
“2011 Notes” means 8.0% Senior
Notes due 2011 issued by the Company pursuant to the 2011 Notes Indenture,
together with any exchange notes issued therefor.
“2011 Notes Indenture” means
the indenture dated as of June 8, 2004, between the Company and The Bank of
New York, as trustee, as amended or supplemented from time to time, including
the supplemental indentures dated September 19, 2005 and November 1,
2006.
“2013 Notes” means 7.375%
Senior Notes due 2013 issued by the Company pursuant to the 2013 Notes
Indenture, together with any exchange notes issued therefor.
“2013 Notes Indenture” means
the indenture dated as of September 19, 2005 between the Company and The
Bank of New York, as trustee, as amended or supplemented from time to time,
including the supplemental indentures dated November 10, 2005 and
November 1, 2006.
“2015 Notes” means 7.875%
Senior Notes due 2015 issued by the Company pursuant to the 2015 Notes
Indenture, together with any exchange notes issued therefor.
“2015 Notes Indenture” means
the indenture dated as of November 22, 2005 between the Company and The
Bank of New York, as trustee, as amended or supplemented from time to time,
including the supplemental indenture dated November 1, 2006.
“2017 Notes” means 12.5%
Springing Notes due 2017 (plus any Capitalized Interest) issued by the Company
pursuant to the 2017 Notes Indenture.
“2017 Notes Indenture” means
the indenture dated as of November 29, 2007 between the Company and The
Bank of New York, as trustee, as amended or supplemented from time to time,
including the supplemental indentures dated December 27, 2007 and
January 18, 2008.
“Acquired Indebtedness” means
Indebtedness of a Person existing at the time such Person becomes a Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary assumed in connection with
an Asset Acquisition by such Restricted Subsidiary; provided such Indebtedness
was not Incurred in connection with or in contemplation of such Person becoming
a Restricted Subsidiary or such Asset Acquisition.
“Adjusted Consolidated Net
Income” means, for any period, the aggregate net income (or loss) of the
Company and its Restricted Subsidiaries and Regulated Subsidiaries for such
period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication):
(1) the
net income (or loss) of any Person that is not a Restricted Subsidiary or
Regulated Subsidiary, except that the Company’s equity in the net income of any
such Person for such period (to the extent not otherwise excluded pursuant to
clauses (2) through (6) below) will be included up to the aggregate
amount of cash actually distributed by such Person during such period to the
Company or to its Restricted Subsidiaries or Regulated Subsidiaries (less
minority interest therein) as a dividend or other distribution;
(2) the
net income (or loss) of any Person accrued prior to the date it becomes a
Restricted Subsidiary or Regulated Subsidiary or is merged into or consolidated
with the Company or any of its Restricted Subsidiaries or Regulated Subsidiaries
or all or substantially all of the property and assets of such Person are
acquired by the Company or any of its Restricted Subsidiaries or Regulated
Subsidiaries;
(3) the
net income of any Restricted Subsidiary to the extent that the declaration or
payment of dividends or similar distributions by such Restricted Subsidiary of
such net income is not at the time permitted by the operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to such Restricted
Subsidiary;
(4) the
net income of any Regulated Subsidiary (x) to the extent that the
declaration or payment of dividends or similar distributions by such Regulated
Subsidiary of such net income is not at the time permitted by the operation of
the terms of its charter or any agreement or instrument with a Person, other
than such Regulated Subsidiaries applicable regulatory authorities, or any
judgment or decree applicable to such Regulated Subsidiary (y) other than
to the extent that such Regulated Subsidiary reasonably believes, in good faith,
that such net income could be distributed, declared or paid as a dividend or
similar distribution without causing such Regulated Subsidiary to fail to be at
least “adequately capitalized” as defined in the regulations of applicable
regulatory authorities, or to meet minimum capital requirements imposed by
applicable regulatory authorities;
(5) any
gains or losses (on an after-tax basis) attributable to Asset Sales or Regulated
Sales;
(6) solely
for purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the “—Limitation on
Restricted Payments” covenant, any amount paid or accrued as dividends on
Preferred Stock of the Company owned by Persons other than the Company and any
of its Restricted Subsidiaries and Regulated Subsidiaries;
(7) all
extraordinary gains and, solely for purposes of calculating the Consolidated
Fixed Charge Coverage Ratio, extraordinary losses;
(8) the
cumulative effect of changes in accounting principles; and
(9)
the net after-tax effect of impairment charges related to goodwill and other
intangible assets.
“Affiliate” means, as applied
to any Person, any other Person directly or indirectly controlling, controlled
by, or under direct or indirect common control with, such Person. For
purposes of this definition, “control” (including, with correlative meanings,
the terms “controlling”, “controlled by” and “under common control with”), as
applied to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise. Notwithstanding the foregoing, in no event will Citadel be
deemed to be an Affiliate of the Company under the 2017 Notes
Indenture.
“Asset Acquisition” means
(1) an investment by the Company or any of its Restricted Subsidiaries or
Regulated Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or a Regulated Subsidiary or shall be merged into
or consolidated with the Company or any of its Restricted Subsidiaries or
Regulated Subsidiaries; provided that such Person’s
primary business is a Related Business or (2) an acquisition by the Company
or any of its Restricted Subsidiaries or Regulated Subsidiaries of the property
and assets of any Person other than the Company or any of its Restricted
Subsidiaries or Regulated Subsidiaries that constitute substantially all of a
division or line of business of such Person that is a Related
Business.
“Asset Sale” means any sale,
transfer or other disposition (including by way of merger, consolidation or
Sale-Leaseback Transaction) in one transaction or a series of related
transactions by the Company or any of its Restricted Subsidiaries to any Person
other than the Company or any of its Restricted Subsidiaries or Regulated
Subsidiaries of:
(1) all
or any of the Capital Stock of any Restricted Subsidiary;
(2) all
or substantially all of the property and assets of an operating unit or business
of the Company or any of its Restricted Subsidiaries; or
(3) any
other property and assets (other than the Capital Stock or other Investment in
an Unrestricted Subsidiary) of the Company or any of its Restricted Subsidiaries
outside the ordinary course of business of the Company or such Restricted
Subsidiary, and, in each case, that is not governed by the provisions of the
Indentures applicable to mergers, consolidations and sales of assets of the
Company; provided that
“Asset Sale” shall not include:
(a) sales
or other dispositions of Investment Securities, inventory, receivables and other
current assets;
(b) sales,
transfers or other dispositions of assets constituting a Permitted Investment or
Restricted Payment permitted to be made under the “Limitation on Restricted
Payments” covenant;
(c) sales,
transfers or other dispositions of assets with a Fair Market Value not in excess
of $2.5 million in any transaction or series of related
transactions;
(d) any
sale, transfer, assignment or other disposition of any property equipment that
has become damaged, worn out, obsolete or otherwise unsuitable for use in
connection with the business of the Company or its Restricted
Subsidiaries;
(e) an
issuance of Capital Stock by a Restricted Subsidiary or the sale, transfer or
other disposition by the Company or a Restricted Subsidiary of the Capital Stock
of a Restricted Subsidiary or Regulated Subsidiary, in each case to the Company,
a Wholly Owned Restricted Subsidiary or a Wholly Owned Regulated Subsidiary;
or
(f) Permitted
Liens, or foreclosure on assets as a result of Liens permitted under the
“—Limitation on Liens” covenant.
“Average Life” means, at any
date of determination with respect to any debt security, the quotient obtained
by dividing (1) the sum of the products of (a) the number of years
from such date of determination to the dates of each successive scheduled
principal payment of such debt security and (b) the amount of such
principal payment by (2) the sum of all such principal
payments.
“Bank Regulated Subsidiary”
means (i) ETB Holdings, Inc. (provided that such entity is a savings and
loan holding company, as defined under the Home Owners’ Loan Act, as amended, or
a bank holding company, as defined under the Bank Holding Company Act, as
amended, but in no event shall such entity mean, or include, the Company),
(ii) any direct or indirect insured depository institution subsidiary of
the Company that is regulated by foreign, federal or state banking regulators,
including, without limitation, the OTS and the FDIC or (iii) any Subsidiary
of a Bank Regulated Subsidiary all of the Common Stock of which is owned by such
Bank Regulated Subsidiary and the sole purpose of which is to issue trust
preferred or similar securities where the proceeds of the sale of such
securities are invested in such Bank Regulated Subsidiary and where such
proceeds would be treated as Tier I capital were such Bank Regulated Subsidiary
a bank holding company regulated by the Board of Governors of the Federal
Reserve System.
“Board of Directors” means,
with respect to any Person, the Board of Directors of such Person or any duly
authorized committee of such Board of Directors, or any other group performing
comparable functions.
“Broker Dealer Regulated
Subsidiary” means any direct or indirect subsidiary of the Company that
is registered as a broker dealer pursuant to Section 15 of the Exchange Act
or that is regulated as a broker dealer or underwriter under any foreign
securities law.
“Business Day” means any day
except a Saturday, Sunday or other day on which commercial banks in New York
City or in the city where the Corporate Trust Office of the Trustee is located
are authorized by law to close.
“Capital Stock” means, with
respect to any Person, any and all shares, interests, participations or other
equivalents (however designated, whether voting or non-voting) in equity of such
Person, whether outstanding on
the
applicable Closing Date or issued thereafter, including, without limitation, all
Common Stock and Preferred Stock.
“Capitalized Interest” has the
meaning set forth under “—Interest” under the 2017 Notes Indenture.
“Capitalized Lease” means, as
applied to any Person, any lease of any property (whether real, personal or
mixed) of which the discounted present value of the rental obligations of such
Person as lessee, in conformity with GAAP, is required to be capitalized on the
balance sheet of such Person.
“Capitalized Lease
Obligations” means the discounted present value of the rental obligations
under a Capitalized Lease.
“Change of Control” means such
time as:
(1) a
“person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), becomes the ultimate “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act) of more than 50% of the total voting power of the
Voting Stock of the Company on a fully diluted basis; or
(2) individuals
who on the applicable Closing Date constitute the Board of Directors (together
with any new directors whose election by the Board of Directors or whose
nomination by the Board of Directors for election by the Company’s stockholders
was approved by a vote of at least a majority of the members of the Board of
Directors then in office who either were members of the Board of Directors on
such Closing Date or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of the
Board of Directors then in office; or
Under the
2017 Notes Indenture, “Change of Control” also includes:
(3) a
“person” or “group” (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), becomes the ultimate “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act) of more than 50% of the economic value of the equity of
the Company; or
(4) the
adoption of a plan of liquidation of the Company; or
(5) a
voluntary sale, conveyance, exchange or transfer of all or substantially all of
the property and assets of the Company and its Subsidiaries on a consolidated
basis in one transaction or a series of related transactions; or
(6) the
consummation of any merger or business combination if, after such transaction,
holders of the Company’s Voting Stock before the transaction do not hold a
majority of the voting power of the Company’s Voting Stock immediately after the
transaction.
In
connection with the Debt Exchange and the successful consent solicitation, this
definition will be amended upon the execution of a supplemental indenture
amending the 2017 Notes Indenture by deleting paragraph (3) above.
“Change of Control Agreement”
means a definitive agreement the consummation of which will result in a Change
of Control.
“Citadel” means Citadel
Limited Partnership and/or any of its Affiliates.
“Closing Date” for any series
of Notes means the date on which such Notes were originally issued under their
respective Indentures. For the 2011 Notes, the Closing Date is
June 8, 2004, for the 2013 Notes, the Closing Date is September 19,
2005, for the 2015 Notes, the Closing Date is November 22, 2005, and for
the 2017 Notes, the Closing Date is November 29, 2007.
“Collateral” means all
property (whether tangible or intangible, real or personal), assets and Capital
Stock of the Company and its Subsidiaries in which a security interest is
granted as provided in “—Covenants—Springing Lien”, excluding, however, the
Excluded Collateral.
“Collateral Agent” means the
Person appointed as such in accordance with the terms of “—Collateral Documents
and Security”.
“Collateral Documents” means
each and every agreement, document and instrument executed by the Company or any
of its Subsidiaries for purposes of giving effect to the provisions described in
“—Covenants—Springing Lien”, including the Intercreditor Agreement.
“Common Stock” means, with
respect to any Person, any and all shares, interests, participations or other
equivalents (however designated, whether voting or non-voting) of such Person’s
equity, other than Preferred Stock of such Person, whether outstanding on the
applicable Closing Date or issued thereafter, including, without limitation, all
series and classes of such common stock.
“Consolidated EBITDA” means,
for any period, Adjusted Consolidated Net Income for such period plus, to the
extent such amount was deducted in calculating such Adjusted Consolidated Net
Income:
(1) Consolidated
Interest Expense;
(2) income
taxes;
(3) depreciation
expense;
(4) amortization
expense; and
(5) all
other non-cash items reducing Adjusted Consolidated Net Income (other than items
that will require cash payments and for which an accrual or reserve is, or is
required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company, its Restricted Subsidiaries and its Regulated Subsidiaries in
conformity with GAAP; provided that, if any
Restricted Subsidiary or Regulated Subsidiary is not a Wholly Owned Restricted
Subsidiary, or Wholly Owned Regulated Subsidiary, as the case may be,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary or Regulated
Subsidiary multiplied by (B) the percentage of Common Stock of such
Restricted Subsidiary or Regulated Subsidiary not owned on the last day of such
period by the Company or any of its Restricted Subsidiaries or any of its Wholly
Owned Regulated Subsidiaries.
“Consolidated Fixed Charge Coverage
Ratio” means, with respect to any Person, the ratio of Consolidated
EBITDA of such Person during the most recent four full fiscal quarters (the
“Four Quarter Period”), for which financial statements are available, ending on
or prior to the date of the transaction giving rise to the need to calculate the
Consolidated Fixed Charge Coverage Ratio (the “Transaction Date”), to
Consolidated Fixed Charges of such Person for the Four Quarter
Period. In addition to and without limitation of the foregoing, for
purposes of this definition, Consolidated EBITDA and Consolidated Fixed Charges
shall be calculated after giving effect on a pro forma basis for the period of
such calculation to:
(1) the
incurrence or repayment of any Indebtedness of such Person or any of its
Restricted Subsidiaries or Regulated Subsidiaries (and the application of the
proceeds thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the Four
Quarter Period; and
(2) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Restricted Subsidiaries or Regulated Subsidiaries
(including any Person who becomes a Restricted Subsidiary or Regulated
Subsidiaries as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA attributable to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during
the Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or
Asset Acquisition (including
the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period.
If such
Person or any of its Restricted Subsidiaries or Regulated Subsidiaries directly
or indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. Furthermore, in
calculating “Consolidated Fixed Charges”:
(3) interest
on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date;
(4) if
interest on any Indebtedness actually incurred on the Transaction Date may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rates, then the
interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Four Quarter Period; and
(5) notwithstanding
clause (1) above, interest on Indebtedness determined on a fluctuating
basis, to the extent such interest is covered by agreements relating to Interest
Swap Obligations, shall be deemed to accrue at the rate per annum resulting
after giving effect to the operation of such agreements.
“Consolidated Fixed Charges”
means, with respect to any Person for any period, the sum, without duplication,
of (1) Consolidated Interest Expense, plus (2) the product of
(A) the amount of all dividend payments on any series of Preferred Stock of
such Person (other than (x) dividends paid in Qualified Capital Stock and
(y) dividends on the Preferred Stock, the net proceeds of which will be
used for the Distribution, to the extent they are paid in kind or accrete,
except to the extent they constitute Disqualified Capital Stock) paid, accrued
or scheduled to be paid or accrued during such period times (B) a fraction,
the numerator of which is one and the denominator of which is one minus the then
current effective consolidated federal, state and local tax rate of such Person,
expressed as a decimal.
“Consolidated Interest
Expense” means, for any period, the aggregate amount of interest in
respect of Indebtedness (including, without limitation, amortization of original
issue discount on any Indebtedness and the interest portion of any deferred
payment obligation of the type described under clause (4) of the definition
of “Indebtedness”, calculated in accordance with the effective interest method
of accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers’ acceptance financing; Indebtedness
that is Guaranteed or secured by the Company, any of its Restricted
Subsidiaries, or any of its Regulated Subsidiaries), and all but the principal
component of rentals in respect of Capitalized Lease Obligations paid, accrued
or scheduled to be paid or to be accrued by the Company, its Restricted
Subsidiaries and its Regulated Subsidiaries during such period; excluding,
however:
(1) any
amount of such interest of any Restricted Subsidiary or Regulated Subsidiary if
the net income of such Restricted Subsidiary or Regulated Subsidiary is excluded
in the calculation of Adjusted Consolidated Net Income pursuant to clause
(3) or (4) of the definition thereof (but only in the same proportion
as the net income of such Restricted Subsidiary or Regulated Subsidiary is
excluded from the calculation of Adjusted Consolidated Net Income pursuant to
clause (3) or (4) of the definition thereof) and
(2) (a)
For the 2011 Notes, any premiums, fees and expenses (and any amortization
thereof) payable in connection with the offering of the 2011 Notes, all as
determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP, and (3) interest payments on trust
preferred or similar securities issued by a Regulated Subsidiary to the extent
the proceeds of the sale of such securities are invested in a Regulated
Subsidiary.
(b) For
the 2013 Notes, any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the 2013 Notes and the 2011 Notes,
all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP, and (3) interest
payments on trust preferred or similar securities issued by a Regulated
Subsidiary to the extent the proceeds of the sale of such securities are
invested in a Regulated Subsidiary.
(c) For
the 2015 Notes, any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the 2015 Notes, the 2013 Notes and
the 2011 Notes, all as determined on a consolidated basis (without taking into
account Unrestricted Subsidiaries) in conformity with GAAP, and
(3) interest payments on trust preferred or similar securities issued by a
Regulated Subsidiary to the extent the proceeds of the sale of such securities
are invested in a Regulated Subsidiary.
(d) For
the 2017 Notes, any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP, and (3) interest payments on trust preferred or
similar securities issued by a Regulated Subsidiary to the extent the proceeds
of the sale of such securities are invested in a Regulated
Subsidiary.
“Consolidated Net Worth”
means, at any date of determination, stockholders’ equity as set forth on the
most recently available quarterly or annual consolidated balance sheet of the
Company and its Restricted Subsidiaries and Regulated Subsidiaries (which shall
be as of a date not more than 90 days prior to the date of such computation, and
which shall not take into account Unrestricted Subsidiaries), plus, to the
extent not included, any Preferred Stock of the Company, less any amounts
attributable to Disqualified Stock or any equity security convertible into or
exchangeable for Indebtedness, the cost of treasury stock and the principal
amount of any promissory notes receivable from the sale of the Capital Stock of
the Company or any of its Restricted Subsidiaries or Regulated Subsidiaries,
each item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
“Credit Facility” means a
credit facility of, or Guaranteed by, the Company and used by the Company, its
Restricted Subsidiaries or its Regulated Subsidiaries for working capital and
other general corporate purposes together with the related documents (including,
without limitation, any guarantee agreements and security documents), as such
agreements may be amended (including any amendment and restatement),
supplemented, replaced or otherwise modified from time to time.
“Default” means any event that
is, or after notice or passage of time or both would be, an Event of
Default.
“Disqualified Stock” means any
class or series of Capital Stock of any Person that by its terms or otherwise is
(1) required to be redeemed prior to a date that is 123 days following the
Stated Maturity of the Notes, (2) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (3) convertible into or exchangeable for Capital Stock
referred to in clause (1) or (2) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an “asset sale” or “change of control”
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the “asset sale” or “change of control” provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in the “—Limitation on Asset Sales”
and “—Repurchase of Notes upon a Change of Control” covenants and such Capital
Stock specifically provides that such Person will not repurchase or redeem any
such stock pursuant to such provision prior to the Company’s repurchase of such
Notes as are required to be repurchased pursuant to the “—Limitation on Asset
Sales” and “—Repurchase of Notes upon a Change of Control”
covenants.
“Domestic Subsidiary” means
any Restricted Subsidiary of the Company with total assets as determined under
GAAP of at least $100,000, as set forth on the most recently available quarterly
or annual consolidated balance sheet of such Restricted Subsidiary other than a
Restricted Subsidiary that is (1) a Foreign Subsidiary or (2) a
Subsidiary of any such Foreign Subsidiary.
“Exchange Act” means the
Securities Exchange Act of 1934, as amended.
“Excluded Collateral” means
those assets of the Company and its Subsidiaries as to which
(a) (i) Citadel, if Citadel holds a majority in principal amount of
outstanding 2017 Notes or (ii) the Company’s Board of Directors if Citadel
does not hold a majority in principal amount of outstanding 2017 Notes, as
applicable, shall have determined
in good
faith that the costs of obtaining a security interest are unreasonably excessive
in relation to the benefits to the holders of the security afforded thereby
(which determination shall be delivered to the Trustee or a collateral agent
appointed by the trustee to maintain possession of any stock certificates,
promissory notes or other instruments delivered to it under the Collateral
Documents) or (b) the grant of security interest (x) is prohibited by
or requires approval under the applicable law, regulation or rule including
those of self-regulatory organizations, or (y) is prohibited by a
contractual arrangement existing on the Closing Date for the 2017 Notes or any
contractual arrangement entered into after the Closing Date for the 2017 Notes
and approved by the holders of a majority in principal amount of outstanding
2017 Notes.
“Fair Market Value” means the
price that would be paid in an arm’s-length transaction between an informed and
willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy which, if determined by the Board of Directors as
evidenced by a Board Resolution, shall be conclusively determined.
“FDIC” means the Federal
Deposit Insurance Corporation.
“Final Closing” is defined in
the Investment Agreement.
“Foreign Subsidiary” means any
Subsidiary of the Company that is an entity which is a controlled foreign
corporation under Section 957 of the Internal Revenue Code or any
subsidiary that is otherwise organized under the laws of a jurisdiction other
than the United States, any state thereof, or the District of
Columbia.
“GAAP” means generally
accepted accounting principles in the United States of America as in effect as
of the applicable Closing Date for each series of Notes, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained
or referred to in the Indentures shall be computed in conformity with GAAP
applied on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other provisions
of the Indenture shall be made without giving effect to (1) (a) for
the 2011 Notes, the amortization of any expenses incurred in connection with the
offering of the 2011 Notes; (b) for the 2013 Notes, the amortization of any
expenses incurred in connection with the offering of the 2011 Notes and 2013
Notes; (c) for the 2015 Notes, the amortization of any expenses incurred in
connection with the offering of the 2011 Notes, 2013 Notes and 2015 Notes; or
(d) for the 2017 Notes, the amortization of any expenses incurred in
connection with the offering of the Notes; and (2) except as otherwise
provided, the amortization or writedown of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17 and Statement of Financial
Accounting Standards No. 142.
“Guarantee” means any
obligation, contingent or otherwise, of any Person directly or indirectly
guaranteeing any Indebtedness of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect, contingent or
otherwise, of such Person (1) to purchase or pay (or advance or supply
funds for the purchase or payment of) such Indebtedness of such other Person
(whether arising by virtue of partnership arrangements, or by agreements to
keep-well, to purchase assets, goods, securities or services (unless such
purchase arrangements are on arm’s-length terms and are entered into in the
ordinary course of business), to take-or-pay, or to maintain financial statement
conditions or otherwise) or (2) entered into for purposes of assuring in
any other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided that the term
“Guarantee” shall not include endorsements for collection or deposit in the
ordinary course of business, letters of credit issued by a Bank Regulated
Subsidiary in the ordinary course of its business or STAMP or other signature
guarantees made by a Regulated Subsidiary in the ordinary course of its
business. The term “Guarantee” used as a verb has a corresponding
meaning.
“Hedging Obligations” means,
with respect to any Person, the obligations of such person under
(i) currency exchange, interest rate, commodity, credit or equity swap,
forward or futures agreements, currency exchange, interest rate, commodity,
credit or equity cap agreements, currency exchange, interest rate, commodity,
credit or equity collar agreements, or currency exchange, interest rate,
commodity, credit or equity puts or calls, and (ii) other agreements or
arrangements designed to protect such Person, directly or indirectly, against
fluctuations in currency exchange, interest rate, commodity or equity
prices.
“Incur” means, with respect to
any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become
liable for or with respect to, or become responsible for, the payment of,
contingently or otherwise, such Indebtedness; provided that (1) any
Indebtedness of a Person existing at the time such Person becomes a Restricted
Subsidiary will be deemed to be incurred by such Restricted Subsidiary at the
time it becomes a Restricted Subsidiary and (2) neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
“Indebtedness” means, with
respect to any Person at any date of determination (without
duplication):
(1) all
indebtedness of such Person for borrowed money;
(2) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments;
(3) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto, but
excluding letters of credit issued by such Person and excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (1) or (2) above or
(5), (6) or (7) below) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn upon or, if
drawn upon, to the extent such drawing is reimbursed no later than the third
Business Day following receipt by such Person of a demand for
reimbursement);
(4) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is recorded as a liability under GAAP
and due more than six months after the date of placing such property in service
or taking delivery and title thereto or the completion of such services, except
Trade Payables;
(5) all
Capitalized Lease Obligations;
(6) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person; provided that the amount of
such Indebtedness shall be the lesser of (A) the Fair Market Value of such
asset at such date of determination and (B) the amount of such
Indebtedness;
(7) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person;
(8) Acquired
Indebtedness;
(9) to
the extent not otherwise included in this definition, net obligations under
Hedging Obligations (other than Hedging Obligations not entered into for
speculative investment purposes and designed to protect the Company or its
Restricted Subsidiaries or Regulated Subsidiaries against fluctuations in
commodity prices, equity prices, foreign currency exchange rates or interest
rates and that do not increase the Indebtedness of the obligor outstanding at
any time other than as a result of fluctuations in commodity prices, foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder); and
(10) all
obligations to redeem or repurchase Preferred Stock issued by such Person, other
than PIK Preferred Stock, provided that Indebtedness
shall not include:
(a) obligations
arising from products and services offered by Bank Regulated Subsidiaries or
Broker Dealer Regulated Subsidiaries in the ordinary course including, but not
limited to, deposits, CDs, prepaid forward contracts, swaps, exchangeable debt
securities, foreign currency purchases or sales and letters of
credit;
(b) indebtedness
or other obligations incurred in the ordinary course arising from margin
lending, Stock Loan activities or foreign currency settlement obligations of a
Broker Dealer Regulated Subsidiary;
(c) indebtedness
of the Company or any Restricted Subsidiary represented by letters of credit for
the account of the Company or such Restricted Subsidiary, as the case may be, in
order to provide security for workers’ compensation claims, payment obligations
in connection with self-insurance or similar requirements in the ordinary course
of business;
(d) Purchase Money
Indebtedness of the Company or any Restricted Subsidiary not to exceed at any
one time outstanding 5% of Consolidated Net Worth;
(e) indebtedness
arising from agreements of the Company or a Restricted Subsidiary providing for
indemnification, adjustment of purchase price or similar obligations, in each
case, incurred or assumed in connection with the disposition of any business,
assets or a Subsidiary, other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or a Subsidiary for
the purpose of financing such acquisition;
(f) indebtedness
Incurred by Professional Path, Inc. in the ordinary course of its proprietary
trading activities in an amount not to exceed at any one time outstanding of $5
million;
(g) advances from
the Federal Home Loan Bank, Federal Reserve Bank (or similar institution),
repurchase and reverse repurchase agreements relating to Investment Securities,
medium term notes, treasury tax and loan balances, special direct investment
balances, bank notes, commercial paper, term investment option balances,
brokered certificates of deposit, dollar rolls, and fed funds purchased, in each
case incurred in the ordinary course of a Regulated Subsidiary’s
business;
(h) Indebtedness
Incurred by a Regulated Subsidiary and Guaranteed by the Company (i)(A) the
proceeds of which are used to satisfy applicable minimum capital requirements
imposed by applicable regulatory authorities of such Regulated Subsidiary and
(B) where the provision of such Guarantee by the Company is required by the
applicable regulatory authority or (ii) where the provision of such
Guarantee by the Company is required by a bank, clearing house or other market
participant in connection with the ordinary course of a Broker Dealer Regulated
Subsidiary’s business.
The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided
(A) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP,
(B) that
money borrowed and set aside at the time of the Incurrence of any Indebtedness
in order to prefund the payment of the interest on such Indebtedness shall not
be deemed to be “Indebtedness” so long as such money is held to secure the
payment of such interest and
(C) that
Indebtedness shall not include:
(1) any
liability for federal, state, local or other taxes,
(2) performance,
surety or appeal bonds provided in the ordinary course of business
or
(3) agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or Guarantees or letters of credit, surety bonds or performance
bonds securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in connection
with the disposition of any business, assets or Restricted Subsidiary (other
than Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), so long as the principal amount does not to exceed
the gross proceeds actually received by the Company or any Restricted Subsidiary
in connection with such disposition.
“Indentures” means the 2017
Notes Indenture, the 2015 Notes Indenture, the 2013 Notes Indenture and the 2011
Notes Indenture.
“Insurance Regulated
Subsidiary” means any Subsidiary which conducts an insurance business
such that it is regulated by any supervisory agency, state insurance department
other state, federal or foreign insurance regulatory body or the National
Association of Insurance Commissioners.
“Intercreditor Agreement”
means an intercreditor agreement among the Company, the Collateral Agent and the
representative under the Credit Facility, in form and substance reasonably
satisfactory to Citadel, if Citadel holds a majority in principal amount of
outstanding 2017 Notes and, otherwise, in all instances in the form agreed upon
by the Company and the representative under the Credit Facility, which
Intercreditor Agreement, among other things may contain (a) provisions
permitting the holders of the first priority liens, without the consent of the
holders of the 2017 Notes, to change, waive, modify or vary the Collateral
Documents or release Collateral and (b) waivers of certain rights of the
holders of the 2017 Notes in bankruptcy or insolvency procedures.
“Interest Swap Obligations”
means the obligations of any Person pursuant to any arrangement with any other
Person, whereby, directly or indirectly, such Person is entitled to receive from
time to time periodic payments calculated by applying either a floating or a
fixed rate of interest on a stated notional amount in exchange for periodic
payments made by such other Person calculated by applying a fixed or a floating
rate of interest on the same notional amount and shall include, without
limitation, interest rate swaps, caps, floors, collars and similar
agreements.
“Investment” in any Person
means any direct or indirect advance, loan or other extension of credit
(including, without limitation, by way of Guarantee or similar arrangement; but
excluding Investment Securities, advances to customers or suppliers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable, prepaid expenses or deposits on the balance sheet of the
Company or its Restricted Subsidiaries and endorsements for collection or
deposit arising in the ordinary course of business) or capital contribution to
(by means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, bonds, notes, debentures or other similar
instruments issued by, such Person and shall include (1) the designation of
a Restricted Subsidiary as an Unrestricted Subsidiary or as a Regulated
Subsidiary and (2) the retention of the Capital Stock (or any other
Investment) by the Company or any of its Restricted Subsidiaries, of (or in) any
Person that has ceased to be a Restricted Subsidiary, including without
limitation, by reason of any transaction permitted by clause (3) or
(4) of the “—Limitation on the Issuance and Sale of Capital Stock of
Restricted Subsidiaries or Regulated Subsidiaries” covenant. For
purposes of the definition of “Unrestricted Subsidiary” and the “—Limitation on
Restricted Payments” covenant, (a) the amount of or a reduction in an
Investment shall be equal to the Fair Market Value thereof at the time such
Investment is made or reduced and (b) in the event the Company or a
Restricted Subsidiary makes an Investment by transferring assets to any Person
and as part of such transaction receives Net Cash Proceeds, the amount of such
Investment shall be the Fair Market Value of the assets less the amount of Net
Cash Proceeds so received, provided the Net Cash
Proceeds are applied in accordance with clause (A) or (B) of the
“—Limitation on Asset Sales” covenant.
“Investment Agreement” means
the Master Investment and Securities Purchase Agreement, dated as of the date of
the 2017 Notes Indenture, between the Company and Citadel.
“Investment Grade Status”
shall occur when the Notes receive a rating of “BBB-” or higher from S&P or
a rating of “Baa3” or higher from Moody’s.
“Investment Securities” means
marketable securities of a Person (other than an Affiliate or joint venture of
the Company or any Restricted Subsidiary or any Regulated Subsidiary),
mortgages, credit card and other loan receivables, futures contracts on
marketable securities, interest rates and foreign currencies used for the
hedging of marketable securities, mortgages or credit card and other loan
receivables purchased, borrowed, sold, loaned or pledged by such Person in the
ordinary course of its business.
“Lien” means any mortgage,
pledge, security interest, encumbrance, lien or charge of any kind (including,
without limitation, any conditional sale or other title retention agreement or
lease in the nature thereof or any agreement to give any security
interest).
“Moody’s” means Moody’s
Investors Service, Inc. and its successors.
“Net Cash Proceeds”
means:
(a) with
respect to any Asset Sale or Regulated Sale, the proceeds of such Asset Sale or
Regulated Sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent
corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of
(1) brokerage
commissions and other fees and expenses (including attorney’s fees, accountants’
fees, underwriters’, placement agents’ and other investment bankers’ fees,
commissions and consultant fees) related to such Asset Sale or Regulated
Sale;
(2) provisions for
all taxes (whether or not such taxes will actually be paid or are payable) as a
result of such Asset Sale or Regulated Sale without regard to the consolidated
results of operations of the Company and its Restricted Subsidiaries, taken as a
whole, together with any actual distributions to stockholders of the type
contemplated under clause (b)(9) under the covenant entitled “—Limitation on
Restricted Payments” with respect to the taxable income relating to such Asset
Sale or Regulated Sale;
(3) payments made
to repay Indebtedness or any other obligation outstanding at the time of such
Asset Sale or Regulated Sale that either (x) is secured by a Lien on the
property or assets sold or (y) is required to be paid as a result of such
sale; and
(4) appropriate
amounts to be provided by the Company, any Restricted Subsidiary or any
Regulated Subsidiary as a reserve against any liabilities associated with such
Asset Sale or Regulated Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale or Regulated Sale, all as determined in conformity with GAAP;
and
(b) with
respect to any issuance or sale of Capital Stock, the proceeds of such issuance
or sale in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or cash
equivalents and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney’s fees, accountants’
fees, underwriters’ or placement agents’ fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes paid or payable as a result thereof.
“Note Guarantee” means any
Guarantee of the obligations of the Company under the Indentures and the Notes
by any Subsidiary Guarantor.
“Note Lien” means all Liens
that secure the obligations under the 2017 Notes and the Subsidiary
Guarantees.
“Obligations” means any
principal, interest, penalties, fees, indemnifications, reimbursements, damages
and other liabilities payable under the documentation governing any
Indebtedness.
“Offer to Purchase” means an
offer to purchase Notes by the Company from the holders commenced by mailing a
notice to the Trustee and each holder stating:
(1) the
covenant pursuant to which the offer is being made and that all Notes validly
tendered will be accepted for payment on a pro rata basis;
(2) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the “Payment Date”);
(3) that
any Note not tendered will continue to accrue interest pursuant to its
terms;
(4) that,
unless the Company defaults in the payment of the purchase price, any Note
accepted for payment pursuant to the Offer to Purchase shall cease to accrue
interest on and after the Payment Date;
(5) that
holders electing to have a Note purchased pursuant to the Offer to Purchase will
be required to surrender the Note, together with the form entitled “Option of
the Holder to Elect Purchase” on the reverse side
of the
Note completed, to the Paying Agent at the address specified in the notice prior
to the close of business on the Business Day immediately preceding the Payment
Date;
(6) that
holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Payment Date, a telegram, facsimile transmission or
letter setting forth the name of such holder, the principal amount of Notes
delivered for purchase and a statement that such holder is withdrawing his
election to have such Notes purchased; and
(7) that
holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered;
provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
multiples of $1,000.
On the
Payment Date, the Company shall (a) accept for payment on a pro rata basis Notes or
portions thereof tendered pursuant to an Offer to Purchase; (b) deposit
with the Paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so accepted; and (c) deliver, or cause to be delivered, to
the Trustee all Notes or portions thereof so accepted together with an Officers’
Certificate specifying the Notes or portions thereof accepted for payment by the
Company. The Paying Agent shall promptly mail to the holders of Notes
so accepted payment in an amount equal to the purchase price, and the Trustee
shall promptly authenticate and mail to such holders a new Note equal in
principal amount to any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
multiples of $1,000. The Company will publicly announce the results
of an Offer to Purchase as soon as practicable after the Payment
Date. The Trustee shall act as the Paying Agent for an Offer to
Purchase. The Company will comply with Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable, if the Company is required to repurchase
Notes pursuant to an Offer to Purchase.
“Officer” means the chairman
of the Board of Directors, the president or chief executive officer, any vice
president, the chief financial officer, the treasurer or any assistant
treasurer, or the secretary or any assistant secretary, of the
Company.
“Officers’ Certificate” means
a certificate signed in the name of the Company (i) by the chairman of the
Board of Directors, the president or chief executive officer or a vice president
and (ii) by the chief financial officer, the treasurer or any assistant
treasurer or the secretary or any assistant secretary.
“Opinion of Counsel” means an
opinion from legal counsel, that meets the requirements of the
Indentures.
“Outstanding Convertible
Notes” means 6.00% convertible subordinated notes due February 2007,
issued by the Company pursuant to the indenture dated February 1, 2000,
outstanding on the applicable Closing Date for each series of Notes, and, for
the 2011 Notes and 2013 Notes, “Outstanding Convertible Notes” also includes the
6.75% convertible subordinated notes due May 2008, issued by the Company
pursuant to an indenture dated May 29, 2001, outstanding on the Closing
Date for such Notes.
“OTS” means the Office of
Thrift Supervision.
“Permitted Investment”
means:
(1) an
Investment in the Company or a Restricted Subsidiary or a Regulated Subsidiary
or a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or Regulated Subsidiary or be merged or consolidated with or into or
transfer or convey all or substantially all its assets to, the Company or a
Restricted Subsidiary or Regulated Subsidiary; provided that such person’s
primary business is a Related Business on the date of such
Investment;
(2) Temporary
Cash Investments and Investment Securities;
(3) payroll,
travel and similar advances to cover matters that are expected at the time of
such advances ultimately to be treated as expenses in accordance with
GAAP;
(4) stock,
obligations or securities received in satisfaction of judgments;
(5) an
Investment in an Unrestricted Subsidiary consisting solely of an Investment in
another Unrestricted Subsidiary;
(6) Hedging
Obligations not entered into for speculative investment purposes and designed to
protect the Company or its Restricted Subsidiaries or Regulated Subsidiaries
against fluctuations in commodity prices, securities prices, foreign currency
exchange rates or interest rates; and
(7) any
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the “—Limitation on
Asset Sales” covenant.
“Permitted Liens”
means:
(1) Liens
for taxes, assessments, governmental charges or claims that are being contested
in good faith by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been
made;
(2) statutory
and common law Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other similar Liens (including a lender’s
unexercised rights of set-off) arising in the ordinary course of business and
with respect to amounts not yet delinquent or being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made;
(3) Liens
incurred or deposits made in the ordinary course of business in connection with
workers’ compensation, unemployment insurance and other types of social
security;
(4) Liens
incurred or deposits made to secure the performance of tenders, bids, leases,
statutory or regulatory obligations, bankers’ acceptances, surety and appeal
bonds, government contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money);
(5) easements,
rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries;
(6) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of the Company and its Restricted Subsidiaries,
taken as a whole;
(7) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or its Restricted Subsidiaries
relating to such property or assets;
(8) any
interest or title of a lessor in the property subject to any Capitalized Lease
or operating lease;
(9) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases;
(10) Liens
on property of, or on shares of Capital Stock or Indebtedness of, any Person
existing at the time such Person becomes, or becomes a part of, any Restricted
Subsidiary; provided
that such Liens do not extend to or cover any property or assets of the Company
or any Restricted Subsidiary other than the property or assets
acquired;
(11) Liens
in favor of the Company or any Restricted Subsidiary;
(12) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of
Default;
(13) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof;
(14) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of
goods;
(15) Liens
encumbering customary initial deposits and margin deposits, and other Liens that
are within the general parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness under Hedging
Obligations not entered into for speculative investment purposes and designed to
protect the Company or any of its Restricted Subsidiaries from fluctuations in
interest rates, currencies or the price of commodities or
securities;
(16) Liens
arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of the Company and its Restricted Subsidiaries prior to the
applicable Closing Date;
(17) Liens
on shares of Capital Stock of any Unrestricted Subsidiary to secure Indebtedness
of such Unrestricted Subsidiary; and
(18) (a)
For the Senior Notes, Liens on or sales of receivables or
mortgages.
(b) For
the 2017 Notes, Liens on or sales of receivables or mortgages in the ordinary
course of business of the Company or its Subsidiaries.
“Person” means an individual,
a corporation, a partnership, a limited liability company, an association, a
trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
“PIK Preferred Stock” means
Preferred Stock the terms of which do not permit the declaration or payment of
any dividend or other distribution thereon or with respect thereto, or the
redemption or conversion thereof, in each such case prior to the payment in full
of the Company’s obligations under the Notes.
“Preferred Stock” of any
Person means any Capital Stock of such Person that has preferential rights to
any other Capital Stock of such Person with respect to dividends or redemptions
or upon liquidation.
“Purchase Money Indebtedness”
means indebtedness (1) incurred to finance the cost (including the cost of
improvement or construction and fees and expenses related to the acquisition) of
real or personal property acquired after the applicable Closing Date, provided
that (a) the amount of such indebtedness does not exceed 100% of such cost,
and (b) such indebtedness is incurred prior to, at the time of, or within
twelve months after the later of the acquisition, the completion of construction
or the commencement of full operation of such property; or (2) issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Purchase Money Indebtedness and any refinancings or refundings
thereof. The term “Indebtedness” for purposes of clause (a)(3) under
“—Covenants—Limitation on Indebtedness and Issuances of Preferred Stock” and
clauses (4) and (6) of “—Covenants—Limitation on Liens” shall be
deemed to include “Purchase Money Indebtedness”.
“Rating Agency” means any
“nationally recognized statistical rating organization”, as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act.
“Rating Decline” means for a
particular series of Notes, (i) a decrease of one or more gradations
(including gradations within Rating Categories as well as between Rating
Categories) in the rating of the notes by both Moody’s and S&P or
(ii) a withdrawal of the rating of the Notes by Moody’s and S&P, in
each case, directly as a result of a Change of Control; provided, however, that such
decrease or withdrawal occurs on, or within 30 days following, the date of
public notice of the occurrence of a Change of Control or of the intention by
the Company, or a stockholder of the Company, as applicable, to effect a Change
of Control, which period shall be extended so long as the rating of the Notes
relating to the Change of Control as noted by the Rating Agency is under
publicly announced consideration for downgrade by the applicable Rating
Agency.
“Regulated Sale” means any
sale, transfer or other disposition (including by way of merger, consolidation
or Sale-Leaseback Transaction) in one transaction or a series of related
transactions by the Company or any of its Restricted Subsidiaries or Regulated
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries or Regulated Subsidiaries of:
(1) all
or any of the Common Stock of any Regulated Subsidiary that constitutes a
Significant Subsidiary, or
(2) all
or substantially all of the property and assets of an operating unit or business
of any Regulated Subsidiary that constitutes a Significant Subsidiary, in each
case, that is not governed by the provisions of the Indentures applicable to
mergers, consolidations and sales of assets of the Company; provided that “Regulated
Sale” shall not include an issuance, sale, transfer or other disposition of
Capital Stock by a Regulated Subsidiary to the Company, a Wholly Owned
Restricted Subsidiary or a Wholly Owned Regulated Subsidiary.
“Regulated Subsidiary” means a
Broker Dealer Regulated Subsidiary, a Bank Regulated Subsidiary or an Insurance
Regulated Subsidiary or any other Subsidiary subject to minimum capital
requirements or other similar material regulatory requirements imposed by
applicable regulatory authorities.
“Related Business” means any
financial services business which is the same as or ancillary or complementary
to any business of the Company and its Restricted Subsidiaries and Regulated
Subsidiaries that is being conducted on the applicable Closing Date, including,
but not limited to, activities under Section 4(k) of the Bank Holding
Company Act, as amended, or Section 10 of the Home Owners’ Loan Act, as
amended, broker-dealer services, insurance, investment advisory services,
specialist and other market making activities, trust services, underwriting and
the creation of and offers and sales of interests in mutual funds.
“Replacement Assets” means, on
any date, property or assets (other than current assets) of a nature or type or
that are used in a business (or an Investment in a company having property or
assets of a nature or type, or engaged in a business) similar or related to the
nature or type of the property and assets of, or the business of, the Company
and its Restricted Subsidiaries and its Regulated Subsidiaries existing on such
date.
“Restricted Subsidiary” means
any Subsidiary of the Company other than an Unrestricted Subsidiary, or a
Regulated Subsidiary.
“Sale-Leaseback Transaction”
means, with respect to any Person, an arrangement whereby such Person sells or
transfers property and then or thereafter leases such property or any
substantial part thereof which such Person intends to use for substantially the
same purpose or purposes as the property sold or transferred, provided that for purposes of
this definition, “property” shall not include Investment
Securities.
“S&P” means
Standard & Poor’s Ratings Group, a division of The McGraw-Hill
Companies, and its successors.
“Secured Indebtedness Cap”
means, on any date, an amount equal to 1.0 times the Consolidated EBITDA of the
Company for the most recently ended Four Quarter Period for which financial
statements are available immediately preceding such date. For
purposes of making the computation referred to above, Consolidated EBITDA shall
be calculated after giving effect on a pro forma basis for the period of such
calculation to any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted Subsidiaries or
Regulated Subsidiaries (including any Person who becomes a Restricted Subsidiary
or Regulated Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for acquired indebtedness and also including
any Consolidated EBITDA attributable to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during
the Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the date of such calculation, as if such Asset
Sale or Asset Acquisition (including the incurrence, assumption or liability for
any such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period.
“Securities Act” means the
Securities Act of 1933, as amended.
“Significant Subsidiary”
means, at any date of determination, any Restricted Subsidiary that, together
with its Subsidiaries, (1) for the most recent fiscal year of the Company,
accounted for more than 10% of the consolidated revenues of the Company and its
Restricted Subsidiaries or (2) as of the end of such fiscal year, was the
owner of more than 10% of the consolidated assets of the Company and its
Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal
year.