Filed
pursuant to Rule 424(b)(5)
Registration
No. 333-158636
A filing
fee of $3,632, calculated in accordance with Rule 457(r), has been
transmitted to the Securities and Exchange Commission in connection with the
shares of common stock offered by means of this prospectus supplement and the
accompanying prospectus from the registration statement filed April 17, 2009. A
filing fee of $8,307 was previously paid in connection with the filing of a
prospectus supplement dated May 8, 2009, Registration Number 333-158636, filed
on May 8, 2009. $4,675 of unused fees from that prospectus supplement
has been applied to this filing to offset the registration fee. The proposed
maximum aggregate offering price has been calculated pursuant to Rule 457(o) and
is based on the maximum aggregate offering price of the shares of common stock
offered hereunder without regard to the number of shares offered and
sold. This paragraph shall be deemed to update the “Calculation of
Registration Fee” table in the registration statement referred to
above.
PROSPECTUS
SUPPLEMENT
(To
prospectus dated April 17, 2009)
$150,000,000
E*TRADE
Financial Corporation
Common
Stock
______________
We may
offer and sell up to $150,000,000 aggregate amount of shares of our common stock
from time to time through Sandler O’Neill & Partners, L.P. (“Sandler
O’Neill”), as our distribution agent under a distribution
agreement. Sales of the shares, if any, will be made by means of
ordinary brokers’ transactions on the NASDAQ Global Select Market (“NASDAQ”) at
market prices or as otherwise agreed by Sandler O’Neill.
These
shares will be offered at market prices prevailing at the time of sale. We will
pay Sandler O’Neill a commission equal to 2.00% of the sales price of all shares
sold through it as our distribution agent. Subject to the terms of
the distribution agreement, Sandler O’Neill will use its commercially reasonable
efforts to sell on our behalf any shares to be offered under the distribution
agreement.
Under the
terms of the distribution agreement, we also may sell shares of our common stock
to Sandler O’Neill, as principal for its own account, at a price agreed upon at
the time of sale. If we sell shares to Sandler O’Neill, as principal, we will
enter into a separate terms agreement with Sandler O’Neill, and we will describe
such agreement in a separate prospectus supplement or pricing
supplement.
Shares of
common stock to be offered and sold pursuant to this prospectus supplement will
not be savings accounts, deposits or other obligations of any bank or non-bank
subsidiary of ours and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
Our
common stock is listed on NASDAQ under the ticker symbol “ETFC”. On September
11, 2009, the closing price of our common stock on NASDAQ was
$1.66.
Investing
in these securities involves a high degree of risk. See “Risk Factors” beginning
on page S-7 of this prospectus supplement and in the documents incorporated by
reference in the accompanying prospectus.
Neither
the Securities and Exchange Commission nor any state securities regulators or
other regulatory bodies have approved or disapproved of these securities, or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
September
14, 2009
Prospectus
Supplement
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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, and Sandler O’Neill has 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 common stock 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.
These
offering materials consist of two documents: (1) this prospectus
supplement, which describes the terms of this offering of the common stock and
(2) the accompanying prospectus, which provides general information about us and
our securities, some of which may not apply to the common stock that we are
currently offering. The information in this prospectus supplement
replaces any inconsistent information included in the accompanying
prospectus.
At
varying places in this prospectus supplement and the accompanying prospectus, we
refer you to other sections of the documents for additional information by
indicating the caption heading of the other sections. The page on
which each principal caption included in this prospectus supplement and the
prospectus can be found is listed in the Table of Contents on the preceding
page. All cross references in this prospectus supplement are to
captions contained in this prospectus supplement and not in the prospectus,
unless otherwise stated.
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 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 and in our Quarterly Reports on Form 10-Q for the three months ended March
31, 2009 and June 30, 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 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
Reports on Form 10-Q for the three months ended March 31, 2009 and June 30, 2009
and our Current Report on Form 8-K dated May 14, 2009, including the
following:
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·
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potential
actions that government regulators may take with respect to us or our
subsidiaries;
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our
potential inability to service our substantial indebtedness and to, if
necessary, raise sufficient additional capital or further reduce
indebtedness, and the potential negative regulatory consequences that may
result therefrom;
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·
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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;
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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;
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our
potential inability to retain our current customer assets and
accounts;
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our
potential inability to reduce the credit risk in our loan
portfolio;
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liabilities
and costs associated with investigations and lawsuits, including those
relating to our losses from mortgage loans and asset-backed
securities;
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our
potential inability to compete
effectively;
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our
potential inability to control our operating
expenses;
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adverse
changes in general economic conditions, including fluctuations in interest
rates;
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adverse
changes in governmental regulations or enforcement practices;
and
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other
factors described elsewhere in this prospectus supplement or the
accompanying prospectus or in our current and future filings with the
Securities and Exchange Commission
(“SEC”).
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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 is a wholly-owned operating
subsidiary of E*TRADE Bank. It is the primary provider of brokerage
services to our customers.
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
Management
Transition
On
September 9, 2009, we announced that Donald H. Layton will step down as Chairman
and CEO, and as a member of the Board of Directors, at the end of 2009 on
schedule when his contract expires. Mr. Layton will work in partnership with a
special committee of the Board of Directors to oversee a search for his
successor. For additional information regarding this matter, we refer
you to our Current Report on Form 8-K filed with the SEC on September 9,
2009.
Termination
of Stockholder Rights Plan
On
September 11, 2009, in accordance with the stockholder advisory vote at the
special stockholder meeting held on August 19, 2009, we entered into an
amendment with respect to the Rights Agreement, dated as of July 9, 2001, as
amended, between the Company and American Stock Transfer and Trust Company, to
accelerate the final expiration date of the rights issued thereunder to the
close of business on September 11, 2009, effectively terminating our stockholder
rights plan as of that date.
Contribution
of $100 Million to E*TRADE Bank
In
response to a request by the Office of Thrift Supervision, we have agreed to
contribute an additional $100 million in cash to E*TRADE Bank in exchange for
equity before the end of the current fiscal quarter.
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”). The Debt Exchange expired on August 19, 2009 and
closed on August 25, 2009. Holders who tendered their 2011 Notes and
2017 Notes received, at the closing of the Debt Exchange, cash in the amount of
the accrued and unpaid interest on the 2011 Notes and 2017 Notes
exchanged. The Debentures issued in the Debt Exchange are designated
as either Class A Debentures or Class B Debentures and are identical except for
the conversion price for each class of Debentures. The initial
conversion price of the Class A Debentures is $1.0340. The initial
conversion price for the Class B Debentures is $1.5510, or 150% of the initial
conversion price applicable to the Class A Debentures. On the closing
of the Debt Exchange, $1,739,616,000 aggregate principal amount of Class A
Debentures and $2,255,000 aggregate principal amount of Class B Debentures were
issued in exchange for $431,871,000 aggregate principal amount of 2011 Notes and
$1,310,000,000 of 2017 Notes. Of the Class A Debentures issued, $1,230,245,000
aggregate principal amount were issued to Citadel.
In
connection with the Debt Exchange, 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
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 7.375% Senior Notes due 2013
(the “2013 Notes”) and 7.875% Senior Notes due 2015 (the “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 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. On July 9, 2009, we executed supplemental indentures relating
to the 2011 and 2017 Notes to make the amendments described above.
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 were approximately $522.6 million, after deducting underwriting
discounts and commissions and estimated offering expenses. Citadel
purchased
approximately
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.
Special
Stockholder Meeting
On August
19, 2009, we held a Special Meeting of Stockholders (the “Special Meeting”) to
(1) increase the number of authorized shares of our common stock to 4 billion,
(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 common stock or securities convertible or exchangeable
into or exercisable for, common stock in connection with future debt exchange
transactions, up to an aggregate of 365 million shares. In addition,
we also asked our stockholders for an advisory vote on whether to maintain our
Stockholder Rights Plan. At the Special Meeting, each of the
proposals were approved and the advisory vote was in favor of advising the Board
to terminate our Stockholder Rights Plan. Our Board of Directors has
since elected to terminate the Stockholder Rights Plan.
Conversion
of Debentures
As
described elsewhere herein, in August 2009, we issued approximately $1.7 billion
of our Debentures upon completion of the Debt Exchange. The
Debentures are convertible into shares of our common stock at any time at the
option of the holders thereof. As of September 11, 2009,
approximately $425 million aggregate principal amount of our Debentures had been
converted into an aggregate of approximately 410 million shares of our common
stock. The information included or incorporated by reference in this
prospectus supplement does not reflect conversions of the
Debentures. Except as required in connection with our periodic and
other reports to be filed with the SEC, we undertake no duty to update
information with respect to the conversions of the Debentures in the
future.
The
Offering
Issuer
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E*TRADE
Financial Corporation, a Delaware
corporation.
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Common stock
offered
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Shares
of our common stock, par value $0.01 per share, having aggregate offering
price of up to $150,000,000.
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Use of
proceeds
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We
intend to use the net proceeds from the sale of our common stock pursuant
to the distribution agreement for working capital and general corporate
purposes.
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Risk
factors
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An
investment in our common stock involves a high degree of
risk. Please refer to “Risk Factors” and other information
included or incorporated by reference in this prospectus supplement or the
accompanying prospectus for a discussion of factors you should carefully
consider before investing in shares of our common
stock.
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Market
and trading symbol
for the common
stock
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Our
common stock is listed and traded on the NASDAQ Global Select Market under
the symbol “ETFC.”
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Registrar and Transfer
Agent
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American
Stock Transfer & Trust Company,
N.A.
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In the
subsection below entitled “—Risks Relating to this Offering and Owning Our
Stock,” unless expressly indicated or the context otherwise requires, the terms
“we,” “us,” “our” and “the Company” refer solely to E*TRADE Financial
Corporation and not to
any of its subsidiaries. In all other subsections, unless expressly
indicated or the context otherwise requires, the terms “we,” “us,” “our” and
“the Company” refer to E*TRADE Financial Corporation and its consolidated
subsidiaries.
Risks
Relating to this Offering and Owning Our Stock
If
we are requested by the Office of Thrift Supervision, or OTS, to raise
additional equity to support E*TRADE Bank or to reduce debt at the Company and
we are unable to do so, we could face negative regulatory actions, including a
public form of supervisory action by the OTS. Any such actions could
have a material negative effect on our business and the value of our common
stock.
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. Prior to completing the Debt
Exchange and the Public Equity Offering, the OTS advised us, and we agreed, that
we needed 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. While we have completed the Debt Exchange and the Public
Equity Offering, pursuant to memoranda of understanding we and E*TRADE Bank
entered into with the OTS, we and E*TRADE Bank are required to submit to the OTS
and implement both capital and de-leverage plans to address these
matters.
Notwithstanding
the successful completion of the Public Equity Offering and the Debt Exchange,
if we are unable to comply with the terms of our capital and de-leverage plan in
the ordinary course of business or are unable to raise any additional cash
equity to be contributed as capital to E*TRADE Bank or to further reduce our
debt as may be required by the OTS, we could 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 debt securities would constitute a default under our debt
securities and likely result in the debt securities becoming immediately due and
payable at their full face value. We refer to our 2017 Notes, 2011
Notes, 2013 Notes and 2015 Notes as our interest-bearing debt
securities. The Debentures and our interest-bearing debt securities
are referred collectively as our debt securities.
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, and you would likely lose the entire value of your
investment.
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 debt securities and our other creditors
have been paid in full.
We
do not know whether this offering, the Debt Exchange and the Public Equity
Offering will be fully sufficient to avoid any future 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.
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 “Prospectus Supplement Summary—Recent
Developments”. Although we have improved our and E*TRADE Bank’s
capital position following the Public Equity Offering and the Debt Exchange, we
may still consider it advantageous to raise cash equity capital in addition to
this offering. The common stock issued in this offering will dilute
our existing stockholders. Additional cash equity required could be
issued at a discount to market, which would also dilute holders of our common
stock.
Even
though we completed the Debt Exchange, the OTS, which we believed was
considering public supervisory actions against us in the absence of a
satisfactory increase in capital and reduction in debt, has not confirmed
whether our capital raising and debt reduction activities to date are sufficient
to avoid regulatory actions against us and may still take such actions in the
future. 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
we undertake additional debt exchanges to reduce our debt burden in the future,
our stockholders may be substantially diluted. Any substantial
reduction of our debt burden by means of such a debt exchange will likely
require the participation of Citadel, which, we believe, owns more than 49% of
our outstanding interest-bearing debt securities and 59% of the Debentures, in
each case as of August 19, 2009.
Although
we have no present intention to do so, to reduce the amount of debt we have
outstanding, we may engage in future debt exchange transactions, in addition to
the recently completed 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 interest-bearing debt
securities. Any such exchange transactions would be designed to
reduce the amount of interest we are required to pay in the future, reduce the
principal amount due at maturity and/or extend the maturity profile of our
outstanding debt and may 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 in any case result in our receiving cash proceeds. In any future
debt exchange transactions, 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 June 30, 2009, we had approximately $3.3
billion aggregate principal amount of debt securities
outstanding. From time to time, available trading data has indicated
that the aggregate fair market value of these interest-bearing debt securities
has been significantly less than the aggregate principal amount of such debt
securities. Any meaningful reduction in our leverage through debt
exchange transactions for our interest-bearing debt securities could result in
significant dilution to holders of our common stock. In addition, any
substantial reduction of our debt will likely require some participation in
these debt exchanges by Citadel, which, we believe, owns more than 49% of our
outstanding interest-bearing debt securities and 59% of the Debentures, in each
case as of August 19, 2009.
Our
existing 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 debt securities contain restrictive financial
covenants. Although these covenants provide substantial flexibility,
for example the ability 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 debt securities at their full principal amount if we were to breach
these covenants and did not cure the breach within the cure periods (if any)
specified in the respective indentures. Further, if we experience a
“change of control”, we could be required to offer to purchase our debt
securities at 101% of their principal amount. Under our debt
securities a “change of control” would occur if, among other things, a person
became the beneficial owner of more than 50% of the total voting power of our
voting stock which, 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.
As part
of the Debt Exchange we amended the indenture relating to the 2017 Notes to
eliminate the “economic value of equity” test for a change of control and
amended other covenants in our 2017 Notes and 2011 Notes related to possible
TARP financing. We could seek to amend the terms of one or more of
our other 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 interest-bearing 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 interest-bearing 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.
We
are substantially restricted by the terms of our debt securities.
The
indentures governing our debt securities contain various covenants and
restrictions that limit our ability and certain of our subsidiaries’ ability to,
among other things:
• incur
additional indebtedness;
• create
liens;
• pay
dividends or make other distributions;
• repurchase
or redeem capital stock;
• make
investments or other restricted payments;
• enter
into transactions with our stockholders or affiliates;
• sell
assets or shares of capital stock of our subsidiaries;
• receive
dividend or other payments from our subsidiaries; and
• merge,
consolidate or transfer substantially all of our assets.
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 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 (1.2)
to 1.0 as of June 30, 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.
As
a result of the Public Equity Offering, the Debt Exchange and related
transactions, we believe that we have recently experienced 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.
As a
result of the Public Equity Offering, the Debt Exchange and related
transactions, we believe that we have recently experienced an “ownership change”
as defined under Section 382 of the Internal Revenue Code of 1986, as amended
(which is generally a greater than 50 percentage point increase by certain “5%
shareholders” over a rolling three year period). Section 382 imposes an
annual limitation on the utilization of deferred tax assets, such as net
operating loss carryforwards and other tax attributes, once an ownership
change has occurred. Depending on the size of the annual limitation (which
is in part a function of our market capitalization at the time of the ownership
change) and the remaining carryforward period of the tax assets (U.S. federal
net operating losses generally may be carried forward for a period of 20 years),
we could realize a permanent loss of a portion of our U.S. federal and state
deferred tax assets and certain built-in losses that have not been recognized
for tax purposes. We have not yet determined the impact of the recent
ownership change. However, based on our preliminary analysis of the
impact of the “ownership change” on our deferred tax assets,
we believe that the impact on our deferred tax assets is unlikely
to be material. This is a preliminary and complex analysis and
requires the Company to make certain judgments in determining the annual
limitation. As a result, it is possible that we
could ultimately lose a significant portion of our deferred tax
assets, which could have a material adverse effect on our results of operations
and financial condition.
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. Following the approval of the proposals by the stockholders at
the Special Meeting, we have the ability to issue a significant number of shares
of stock in future transactions, which would substantially dilute existing
stockholders, without seeking further stockholder approval.
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 may 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 consent from
holders of our 2013 Notes and 2015 Notes 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 15% of our common
stock as of August 31, 2009, and, we believe, owns more than 49% of our
outstanding interest-bearing debt securities and 59% of the Debentures, in each
case as of August 19, 2009. Accordingly, Citadel’s interests may
conflict with the interests of other stockholders.
Citadel
is the largest holder of our common stock, and as of August 31, 2009, owned
approximately 166 million shares (15%) of our common stock. In
addition, although Citadel is not required to disclose to us the amount of our
outstanding interest-bearing debt securities it owns, we believe it owns in the
aggregate more than 49% our interest-bearing debt securities, including, we
believe, more than 85% of our 2017 Notes, and 59% of the Debentures, in each
case as of August 19, 2009. 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 debt securities contain restrictive
covenants and as a current holder of 25% or more of any series of our
interest-bearing debt securities, Citadel has a right to declare defaults and
enforce remedies just like any other noteholder for so long as Citadel retains
25% or more of the applicable series of 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 debt securities.
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 15% of our outstanding common shares. We
believe that the common stock owned by Citadel, together with the common stock
issuable on conversion of the Debentures held by Citadel, 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 101% of 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 in the Company 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. At the Special Meeting, the stockholders voted to advise the
Board to terminate the Stockholder Rights Plan in a non-binding
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 September 11, 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 13—Commitments, Contingencies and
Other Regulatory Matters” in “Item 1. Consolidated Financial
Statements” in our Quarterly Report on Form 10-Q filed August 6, 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:
• authorization
for the issuance of “blank check” preferred stock;
• provision
for a classified Board of Directors with staggered, three-year
terms;
• the
prohibition of cumulative voting in the election of directors;
• a
super-majority voting requirement to effect business combinations or certain
amendments to our certificate of incorporation and bylaws;
• limits
on the persons who may call special meetings of stockholders;
• the
prohibition of stockholder action by written consent; 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.
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 agreed to put the question of whether to retain or terminate
our Stockholder Rights Plan to an advisory vote of our
stockholders. At the Special Meeting,
the
stockholders voted to advise the Board to terminate the Stockholder Rights Plan
in a non-binding vote. Our Board of Directors has since elected to
terminate the Stockholder Rights Plan. 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.
Resales
of our common stock in the public market following the offering may cause its
market price to fall.
If our
stockholders, or if participants in debt-for-equity exchanges, sell substantial
amounts of our common stock in the public market following this offering, the
market price of our common stock could fall.
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 $375.9 million, or $0.61 loss per share, for the
six months ended June 30, 2009, due primarily to losses in our home equity
portfolio, and we expect to incur a net loss for the three months ending
September 30, 2009. 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 June
30, 2009, the principal balance of our home equity loan portfolio was $9.0
billion. During 2008 and the first half of 2009, the allowance for
loan losses in this portfolio increased by $374.7 million to $833.8 million and
decreased by $115.0 million to $718.9 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 $242.9 million to $428.0 million during 2008 and the first
half 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 June
30, 2009, we held $794.2 million in amortized cost of non-agency collateralized
mortgage obligations on the consolidated balance sheet. While the
majority of this portfolio remains AAA-rated, we incurred net impairment charges
of $95.0 million during 2008 and $48.5 million in the first half 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.
We
recently announced that our chief executive officer will step down at the end of
2009. Our inability to find a suitable replacement in a timely
manner, the inability of a replacement to quickly and successfully perform in
his or her new role or the further loss of key personnel could adversely affect
our business.
On
September 9, 2009, we announced that Donald H. Layton will step down as Chairman
and CEO, and as a member of the Board of Directors, at the end of 2009 when his
contract expires. We have begun the search process to find a
replacement for Mr. Layton. Mr. Layton has committed to work in
partnership with a special committee of the Board of Directors to oversee a
search for his successor. If we are unable to hire a qualified
replacement in a timely manner, our ability to execute our business plan could
be harmed. Even if we can timely hire a qualified replacement, we may experience
operational disruptions and inefficiencies during any transition. Additionally,
any further changes in senior management could result in disruptions to our
operations. If we lose or terminate the services of one or more of our current
executives, or if we are unable to attract or retain qualified personnel, it
could adversely affect our business.
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 unable to sustain or, if necessary, rebuild our
franchise, 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 debt securities, with restrictive financial and
other covenants. As of June 30, 2009, our total long-term debt is
$3.3 billion and the expected annual interest cash outlay prior to the
completion of the Debt Exchange was approximately $358 million, $273 million of
which we had the option to pay in the form of additional 2017 Notes through May
2010. Following the completion of the Debt Exchange, in which $1.7
billion of interest-bearing debt securities was exchanged for Debentures, the
expected annual interest cash outlay is approximately $160 million, $110 million
of which we have the option to pay in the form of additional 2017 Notes through
May 2010. Our ratio of debt to equity (expressed as a percentage) was
106% at December 31, 2008 and 97% at June 30, 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 June 30, 2009. We did
not establish a valuation allowance against our federal net deferred tax assets
as of June 30, 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 as a result 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 Quarterly
Report of Form 10-Q for the three months ended June 30, 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, Inc., 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 “We could 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 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.”
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.
Our
common stock is traded on NASDAQ 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 NASDAQ.
|
|
|
|
|
|
|
Fiscal
Year Ending December 31, 2009
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
1.40 |
|
|
$ |
0.59 |
|
Second
Quarter
|
|
|
2.58 |
|
|
|
1.19 |
|
Third
Quarter (through September 11, 2009)
|
|
|
1.18
|
|
|
|
1.76 |
|
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
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 |
|
We intend
to use the net proceeds from the sale of our common stock pursuant to the
distribution agreement for working capital and general corporate
purposes.
The
following is a general discussion of the material U.S. federal income and estate
tax consequences of the ownership and disposition of our common stock by a
beneficial owner that is a “Non-U.S. Holder,” other than a Non-U.S. Holder that
owns, or has owned, actually or constructively, more than 5% of our common
stock. Except as otherwise modified for U.S. federal estate tax
purposes, a “Non-U.S. Holder” is a person or entity that, for U.S. federal
income tax purposes, is a:
|
·
|
nonresident
alien individual, other than a former citizen or resident of the United
States subject to tax as an
expatriate;
|
|
·
|
foreign
corporation; or
|
|
·
|
foreign
estate or trust.
|
A
“Non-U.S. Holder” does not include a nonresident alien individual who is present
in the United States for 183 days or more in the taxable year of disposition of
our common stock. Such an individual is urged to consult his or her
own tax adviser regarding the U.S. federal income tax consequences of the sale,
exchange or other disposition of our common stock.
If an
entity that is classified as a partnership for U.S. federal income tax purposes
holds our common stock, the U.S. federal income tax treatment of a partner will
generally depend on the status of the partner and the activities of the
partnership. Partnerships holding our common stock and partners in
such partnerships are urged to consult their tax advisers as to the particular
U.S. federal income tax consequences of holding and disposing of our common
stock.
This
discussion is based on the Internal Revenue Code of 1986, as amended (the
“Code”), and administrative pronouncements, judicial decisions and final,
temporary and proposed Treasury Regulations, changes to any of which subsequent
to the date of this prospectus supplement may affect the tax consequences
described herein (possibly with retroactive effect). This discussion
does not address all aspects of U.S. federal income and estate taxation that may
be relevant to Non-U.S. Holders in light of their particular circumstances and
does not address any tax consequences arising under U.S. federal gift tax laws
or under the laws of any state, local or foreign
jurisdiction. Prospective holders are urged to consult their tax
advisers with respect to the particular tax consequences to them of owning and
disposing of our common stock, including the consequences under the laws of any
state, local or foreign jurisdiction.
Dividends
As
discussed under “Dividend Policy” in the accompanying prospectus, we do not
currently expect to pay dividends. In the event that we do pay
dividends, any such dividends treated as dividends for U.S. federal income tax
purposes (i.e., any distributions of cash or other property paid out of our
current or accumulated earnings and profits) paid to a Non-U.S. Holder of our
common stock generally will be subject to withholding tax at a 30% rate or a
reduced rate specified by an applicable income tax treaty. In order
to obtain a reduced rate of withholding, a Non-U.S. Holder will be required to
provide an Internal Revenue Service Form W-8BEN certifying its entitlement to
benefits under a treaty.
If a Non-U.S. Holder is engaged in a
trade or business in the United States, and if dividends paid to the Non-U.S.
Holder are effectively connected with the conduct of this trade or business, the
Non-U.S. Holder, although exempt from the withholding tax discussed in the
preceding paragraph, will generally be taxed in the same manner as a U.S.
person, subject to an applicable income tax treaty providing otherwise, except
that the Non-U.S. Holder will be required to provide us with a properly executed
Internal Revenue Service Form W-8ECI or W-8BEN in order to claim an exemption
from withholding. A corporate non-U.S. Holder receiving effectively
connected dividends may also be subject to an additional “branch profits tax”
imposed at a rate of 30% (or a lower treaty rate).
Gain
on Disposition of Common Stock
A
non-U.S. holder generally will not be subject to U.S. federal income tax on gain
realized on a sale or other disposition of our common stock unless:
|
·
|
the
gain is effectively connected with a trade or business of the non-U.S.
holder in the United States, or
|
|
·
|
the
Company is or has been a U.S. real property holding corporation, as
defined in the Code, at any time within the five-year period preceding the
disposition or the Non-U.S. Holder’s holding period, whichever period is
shorter, and our common stock has ceased to be traded on an established
securities market prior to the beginning of the calendar year in which the
sale or disposition occurs.
|
The
Company believes that it is not, and does not anticipate becoming, a U.S. real
property holding corporation.
If a
Non-U.S. Holder is engaged in a trade or business in the United States and gain
recognized by the Non-U.S. Holder on a sale or other disposition of our common
stock is effectively connected with a conduct of such trade or business, the
Non-U.S. Holder will generally be taxed in the same manner as a U.S. person,
subject to an applicable income tax treaty providing
otherwise. Non-U.S. Holders whose gain from dispositions of our
common stock may be effectively connected with a conduct of a trade or business
in the United States are urged to consult their own tax advisers with respect to
the U.S. tax consequences of the ownership and disposition of our common stock,
including the possible imposition of a branch profits tax in the case of a
corporate Non-U.S. Holder.
Information
Reporting Requirements and Backup Withholding
Information
returns will be filed with the Internal Revenue Service in connection with
payments of dividends on our common stock. Unless the Non-U.S. Holder
complies with certification procedures to establish that it is not a U.S.
person, information returns may be filed with the Internal Revenue Service in
connection with the proceeds from a sale or other disposition of our common
stock and the Non-U.S. Holder may be subject to U.S. backup withholding on
dividend payments on our common stock or on the proceeds from a sale or other
disposition of our common stock. The certification procedures
required to claim a reduced rate of withholding under a treaty described above
will satisfy the certification requirements necessary to avoid backup
withholding as well. The amount of any backup withholding from a
payment to a Non-U.S. Holder will be allowed as a credit against such holder’s
U.S. federal income tax liability and may entitle such holder to a refund,
provided that the required information is timely furnished to the Internal
Revenue Service.
Federal
Estate Tax
Individual
Non-U.S. Holders (as specifically defined for U.S. federal estate tax purposes)
and entities the property of which is potentially includible in such an
individual’s gross estate for U.S. federal estate tax purposes (for example, a
trust funded by such an individual and with respect to which the individual has
retained certain interests or powers), should note that, absent an applicable
treaty, our common stock will be treated as U.S. situs property subject to U.S.
federal estate tax.
We have
entered into a distribution agreement with Sandler O’Neill & Partners, L.P.
(“Sandler O’Neill”) under which we may issue and sell from time to time shares
of our common stock having an aggregate offering price of up to $150,000,000
through Sandler O’Neill as our distribution agent. Sales of our shares of common
stock, if any, will be made by means of ordinary brokers’ transactions on NASDAQ
at market prices. As agent, Sandler O’Neill will not engage in any transactions
that stabilize our common stock.
Sandler
O’Neill will offer our common stock subject to the terms and conditions of the
distribution agreement on a daily basis or as otherwise agreed upon by us and
Sandler O’Neill. We will designate the maximum amount of our common stock to be
sold through Sandler O’Neill on a daily basis or otherwise determine such
maximum amount together with Sandler O’Neill. Subject to the terms and
conditions of the distribution agreement, Sandler O’Neill will use its
commercially reasonable efforts as the distribution agent to sell on our behalf
all of the designated shares of our common stock. We may instruct Sandler
O’Neill not to sell our common stock if the sales cannot be effected at or above
the price designated by us in any such instruction. We may suspend the offering
of our common stock under the distribution agreement by notifying Sandler
O’Neill. Sandler O’Neill may suspend the offering of our common stock under the
agreement by notifying us of such suspension.
Sandler
O’Neill will receive from us a commission equal to 2.00% of the gross sales
price per share for any shares sold through it as our distribution agent under
the distribution agreement. The remaining sales proceeds, after deducting any
expenses payable by us and any transaction fees imposed by any governmental,
regulatory or self-regulatory organization in connection with the sales, will
equal our net proceeds for the sale of such shares. We have agreed to reimburse
Sandler O’Neill for their legal expenses in certain circumstances.
Sandler
O’Neill will provide written confirmation to us following the close of trading
on NASDAQ each day on which shares of our common stock are sold by it for us
under the distribution agreement. Each confirmation will include the number of
shares sold on that day, the gross sales price per share and the net proceeds to
us.
Settlement
for sales of our common stock will occur, unless the parties agree otherwise, on
the third business day following the date on which any sales were made in return
for payment of the net proceeds to us. There is no arrangement for funds to be
received in an escrow, trust or similar arrangement. Under the terms
of the distribution agreement, we also may sell shares of common stock to
Sandler O’Neill, as principal for its own account, at a price agreed upon at the
time of sale. If we sell shares to Sandler O’Neill as principal, we
will enter into a separate terms agreement with Sandler O’Neill, and we will
describe such agreement in a separate prospectus supplement or pricing
supplement.
We will
report in a prospectus supplement and/or our Exchange Act filings at least
quarterly the number of shares of our common stock sold through Sandler O’Neill
under the distribution agreement, the net proceeds to us and the compensation
paid by us to Sandler O’Neill in connection with the sales of our common
stock.
In
connection with the sale of our common stock on our behalf, Sandler O’Neill may
be deemed to be an “underwriter” within the meaning of the Securities Act, and
the compensation paid to Sandler O’Neill may be deemed to be underwriting
commissions or discounts. We have agreed in the distribution agreement to
provide indemnification and contribution to Sandler O’Neill against certain
civil liabilities, including liabilities under the Securities Act.
Sandler
O’Neill and its affiliates have provided, and may in the future provide,
investment banking and other financial services for us in the ordinary course of
business, for which they have received and will receive
compensation. Specifically, as described elsewhere in this prospectus
supplement, Sandler O’Neill acted as a joint book-running manager for the Public
Equity Offering.
If
Sandler O’Neill or we have reason to believe that the exemptive provisions set
forth in Rule 101(c)(1) of Regulation M under the Exchange Act are not
satisfied, that party will promptly notify the other and sales of our common
stock under the distribution agreement will be suspended until that or other
exemptive provisions have been satisfied in the judgment of Sandler O’Neill and
us.
The
offering of our common stock pursuant to the distribution agreement will
terminate upon the earlier of (i) the sale of shares having an aggregate
offering price of $150,000,000 pursuant to the distribution agreement or
(ii) the termination of the distribution agreement by us or by Sandler
O’Neill.
We
estimate that the total expenses of the offering payable by us, excluding
discounts and commissions payable to Sandler O’Neill under the distribution
agreement, will be approximately $125,000.
Various
legal matters related to the offering will be passed upon for us by Davis Polk
& Wardwell llp, Menlo Park,
California. Certain legal matters will be passed upon for Sandler O’Neill by
Cahill Gordon & Reindel llp, New York, New
York.
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any document that we file at the
Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C.
20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains a website at www.sec.gov, from which interested persons can
electronically access our SEC filings, including the registration statement of
which this prospectus forms a part and the exhibits and schedules
thereto.
The SEC
allows us to “incorporate by reference” the information we file with them, which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is an important part
of this prospectus supplement, and information that we file later with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and all documents subsequently filed with
the SEC pursuant to Section 13(a), 13(c), 14, or 15(d) of the Exchange Act,
prior to the termination of the offering under this prospectus
supplement:
|
(a)
|
our
Annual Report on Form 10-K for the year ended December 31, 2008, filed
with the SEC on February 26, 2009, except for Items 6, 7 and 8, which were
updated on the Current Report on Form 8-K filed with the SEC on May 14,
2009;
|
|
(b)
|
our
Quarterly Reports on Form 10-Q for the three months ended March 31, 2009,
filed with the SEC on May 5, 2009 and the three months ended June 30,
2009, filed with the SEC on August 6,
2009;
|
|
(c)
|
our
Current Reports on Form 8-K filed with the SEC on May 8, 2009, May 14,
2009, June 10, 2009, June 10, 2009, June 17, 2009, June 19, 2009, June 23,
2009, June 30, 2009, July 2, 2009, July 9, 2009, August 19, 2009, August
20, 2009, August 25, 2009, September 9, 2009 and September 14, 2009
and our Current Report on Form 8-K/A filed on August 26,
2009; and
|
|
(d)
|
The
description of our capital stock and the rights associated therewith
included in our Registration Statement on Form 8-A12B filed with the SEC
on December 26, 2006, including any amendments or reports filed for the
purpose of updating such
descriptions.
|
Any
statements contained in a previously filed document incorporated by reference
into this prospectus supplement is deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement contained in this
prospectus supplement, or in a subsequently filed document also incorporated by
reference herein, modifies or supersedes that statement.
You may
request a copy of these filings at no cost by writing or telephoning the office
of Investor Relations, E*TRADE Financial Corporation, 135 East 57th Street, New
York, New York 10022, (888) 772-3477. Information about us,
including our SEC filings, is also available at our website at www.etrade.com. However,
the information on our website is not a part of, or incorporated by reference
in, this prospectus supplement or the accompanying prospectus and should not be
relied upon in determining whether to make an investment in our
securities.
PROSPECTUS
E*TRADE
Financial Corporation
Common
Stock, Preferred Stock, Debt Securities,
Depositary Shares, Rights, Warrants,
Purchase
Contracts, and Units
We may
issue shares of our common stock and preferred stock, debt securities,
depositary shares, rights, warrants, purchase contracts and units, and we or any
selling security holders may offer and sell these securities from time to time
in one or more offerings. This prospectus describes the general terms
of these securities and the general manner in which these securities will be
offered. We will provide the specific terms of these securities in
supplements to this prospectus. The prospectus supplements will also
describe the specific manner in which these securities will be offered and may
also supplement, update or amend information contained in this
document. You should read this prospectus and the applicable
prospectus supplement before you invest.
We and
any selling security holders may offer these securities in amounts, at prices
and on terms determined at the time of offering. The securities may
be sold directly to you, through agents, or through underwriters and
dealers. If agents, underwriters or dealers are used to sell the
securities, we will name them and describe their compensation in a prospectus
supplement.
Our
common stock is listed on the NASDAQ Global Select Market under the symbol
“ETFC.” On April 15, 2009, the last reported sale price on the Nasdaq
Global Select Market for our common stock was $2.08.
Investing
in these securities involves certain risks. See “Item 1A – Risk
Factors” beginning on page 6 of our Annual Report on Form 10-K for the year
ended December 31, 2008, incorporated by reference herein. We may include
specific risk factors in an applicable prospectus supplement under the heading
"Risk Factors."
Neither
the Securities and Exchange Commission (the “SEC”) nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The
date of this prospectus is April 17, 2009
You
should rely only on the information contained in or incorporated by reference in
this prospectus in any supplement hereto or in any related free-writing
prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities
in any state where the offer is not permitted. You should not assume
that the information contained in or incorporated by reference in this
prospectus is accurate as of any date other than the date on the front of this
prospectus. The terms “E*TRADE,” the “Company,” “we,” “us,” and “our”
refer to E*TRADE Financial Corporation and, except where expressly indicated or
the context otherwise requires, its subsidiaries.
TABLE
OF CONTENTS
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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.
Our
corporate offices are located at 135 East 57th Street, New York, New York 10022.
We were incorporated in California in 1982 and reincorporated in Delaware in
July 1996. We operate directly and through numerous subsidiaries many of which
are overseen by governmental and self-regulatory organizations. Our most
significant 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.
|
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 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.
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.
About
this Prospectus
This
prospectus is part of a registration statement that we filed with the SEC
utilizing a “shelf” registration process. Under this shelf process, we or
selling security holders may sell any combination of the securities described in
this prospectus in one or more offerings. This prospectus provides you with a
general description of the securities we or selling security holders may offer.
Each time we sell securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering. The prospectus
supplement may also add, update or change information contained in this
prospectus. You should read both this prospectus and any prospectus supplement
together with additional information described under the heading “Where You Can
Find More Information.”
We file
annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document that we
file at the Public Reference Room of the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains a website at www.sec.gov, from which interested persons can
electronically access our SEC filings, including the registration statement of
which this prospectus forms a part and the exhibits and schedules
thereto.
The SEC
allows us to “incorporate by reference” the information we file with them, which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is an important part
of this prospectus, and information that we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and all documents subsequently filed with the SEC
pursuant to Section 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), prior to the termination of the offering
under this prospectus:
|
(a)
|
Annual
Report on Form 10-K for the year ended December 31, 2008 filed with
the SEC on February 26, 2009;
and
|
|
(b)
|
The
description of our capital stock and the rights associated therewith
included in our Registration Statement on Form 8-A12B filed with the SEC
on December 26, 2006, including any amendments or reports filed for the
purpose of updating such
descriptions.
|
Any
statements contained in a previously filed document incorporated by reference
into this prospectus is deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus, or in a
subsequently filed document also incorporated by reference herein, modifies or
supersedes that statement.
You
may request a copy of these filings at no cost by writing or telephoning the
office of Investor Relations, E*TRADE Financial Corporation, 135 East 57th
Street, New York, New York 10022, (888) 772-3477. Information
about us, including our SEC filings, is also available at our website at www.etrade.com. However,
the information on our website is not a part of, or incorporated by reference
in, this prospectus or any prospectus supplement that we file and should not be
relied upon in determining whether to make an investment in our
securities.
Certain
information included in this prospectus and in 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. Statements in this
prospectus that are not statements of historical facts are hereby identified as
forward-looking statements for these purposes. In particular, statements 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 relating to our overall volume trends, and industry
forces, margin trends, anticipated capital expenditures and our strategies are
forward-looking statements. When used 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 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. 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, including the
following:
·
|
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 institutional business segment in
2007;
|
·
|
potential
increases in our provision for loan losses if the residential real estate
and credit markets continue to deteriorate and potential 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 service our substantial indebtedness and obtain
additional financing, as well as the challenges we face due to our
substantial leverage;
|
·
|
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;
|
·
|
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 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 not to occur.
We intend
to use the net proceeds from the sale of the securities for working capital and
general corporate purposes, including, but not limited to, funding our
operations and financing capital expenditures. We may also invest the
proceeds in certificates of deposit, U.S. government securities or certain other
interest-bearing securities. If we decide to use the net proceeds
from a particular offering of securities for a specific purpose, we will
describe that in the related prospectus supplement.
We have
never declared or paid cash dividends on our common stock. Although we do not
currently have any plans to pay cash dividends on our common stock, we may do so
in the future (subject to any applicable contractual or other
restrictions).
The
following table sets forth our consolidated ratio of earnings to fixed charges
and preferred stock dividends:
|
For
the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earnings to fixed charges
|
(a)
|
|
(b)
|
|
1.61
|
|
1.75
|
|
1.95
|
Ratio
of earnings to fixed charges and preferred stock dividends
|
(a)
|
|
(b)
|
|
1.61
|
|
1.75
|
|
1.95
|
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.
(a)
Earnings for the year ended December 31, 2008 were inadequate to cover
fixed charges. The coverage deficiency was $1.3 billion.
(b)
Earnings for the year ended December 31, 2007 were inadequate to cover
fixed charges. The coverage deficiency was $2.2 billion.
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 forms a part and are exhibits to our Annual
Report on Form 10-K for the year ended December 31, 2008. 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. As of April 14, 2009, we had
outstanding 572,104,465 shares of our common stock. As of April 14,
2009, we had 1,858 stockholders of record.
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.
Stockholder
Rights Plan
Our board
of directors adopted a 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 $.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.
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, 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. 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 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:
·
|
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
|
·
|
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.
|
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,
|
·
|
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
|
·
|
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.
|
As
described below under “Description of Preferred 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.
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:
·
|
the
transaction is approved by the board before the date the interested
stockholder attained that status;
|
·
|
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:
·
|
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.
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.”
This
prospectus describes certain general terms and provisions of our preferred
stock. When we offer to sell a particular series of preferred stock,
we will describe the specific terms of the securities in a supplement to this
prospectus. The prospectus supplement will also indicate whether the
general terms and provisions described in this prospectus apply to the
particular series of preferred stock. The preferred stock will be
issued under a certificate of designation relating to each series of preferred
stock and is also subject to our Certificate of Incorporation.
We have
summarized certain terms of the certificate of designation below. The
summary is not complete. The certificate of designation will be filed
with the SEC in connection with an offering of preferred stock.
Under our
Certificate of Incorporation, our board of directors has the authority
to:
·
|
create
one or more series of preferred
stock,
|
·
|
issue
shares of preferred stock in any series up to the maximum number of shares
of preferred stock authorized, and
|
·
|
determine
the preferences, rights, privileges and restrictions of any
series.
|
Our board
may issue authorized shares of preferred stock, as well as authorized but
unissued shares of common stock, without further stockholder action, unless
stockholder action is required by applicable law or by the rules of a stock
exchange or quotation system on which any series of our stock may be listed or
quoted.
The
prospectus supplement will describe the terms of any preferred stock being
offered, including:
·
|
the
number of shares and designation or title of the
shares;
|
·
|
any
liquidation preference per share;
|
·
|
any
redemption, repayment or sinking fund
provisions;
|
·
|
any
dividend rate or rates and the dates of payment (or the method for
determining the dividend rates or dates of
payment);
|
·
|
if
other than the currency of the United States, the currency or currencies
including composite currencies in which the preferred stock is denominated
and/or in which payments will or may be
payable;
|
·
|
the
method by which amounts in respect of the preferred stock may be
calculated and any commodities, currencies or indices, or value, rate or
price, relevant to such
calculation;
|
·
|
whether
the preferred stock is convertible or exchangeable and, if so, the
securities or rights into which the preferred stock is convertible or
exchangeable, and the terms and conditions of conversion or
exchange;
|
·
|
the
place or places where dividends and other payments on the preferred stock
will be payable; and
|
·
|
any
additional voting, dividend, liquidation, redemption and other rights,
preferences, privileges, limitations and
restrictions.
|
All
shares of preferred stock offered will be fully paid and
non-assessable. Any shares of preferred stock that are issued will
have priority over the common stock with respect to dividend or liquidation
rights or both.
Our board
of directors could create and issue a series of preferred stock with rights,
privileges or restrictions which effectively discriminates against an existing
or prospective holder of preferred stock as a result of the holder beneficially
owning or commencing a tender offer for a substantial amount of common stock.
One of the effects of authorized but unissued and unreserved shares of capital
stock may be to make it more difficult or discourage an attempt by a potential
acquirer to obtain control of our company by means of a merger, tender offer,
proxy contest or otherwise. The issuance of these shares of capital stock may
defer or prevent a change in control of our company without any further
stockholder action.
In
connection with our Stockholder Rights Plan, our board of directors has
designated and reserved for issuance a series of 500,000 shares of Series B
Participating Cumulative Preferred Stock, par value $0.01 per share. We may
issue these shares of preferred stock under certain circumstances if the rights
distributed to our stockholders pursuant to our Stockholder Rights Plan become
exercisable. See “Description of Common Stock—Stockholder Rights
Plan.”
The
transfer agent for each series of preferred stock will be described in the
relevant prospectus supplement.
Our debt
securities, consisting of notes, debentures or other evidences of indebtedness,
may be issued from time to time in one or more series pursuant to, in the case
of senior debt securities, a senior indenture to be entered into between us and
a trustee to be named therein, and in the case of subordinated debt securities,
a subordinated indenture to be entered into between us and a trustee to be named
therein. The terms of our debt securities will include those set forth in the
indentures and those made a part of the indentures by the Trust Indenture Act of
1939.
Because
the following is only a summary of selected provisions of the indentures and the
debt securities, it does not contain all information that may be important to
you. This summary is not complete and is qualified in its entirety by reference
to the base indentures and any supplemental indentures thereto or officer’s
certificate or board resolution related thereto. We urge you to read the
indentures because the indentures, not this description, define the rights of
the holders of the debt securities. The senior indenture and the subordinated
indenture will be substantially in the forms included as exhibits to the
registration statement of which this prospectus is a part.
As used
in this section of the prospectus and under the captions “Description of Capital
Stock,” “Description of Warrants” and “Description of Units,” the terms “we,”
“us” and “our” refer only to E*TRADE and not to any existing or future
subsidiaries of E*TRADE.
General
The
senior debt securities will constitute unsecured and unsubordinated obligations
of ours and will rank pari passu with our other unsecured and unsubordinated
obligations. The subordinated debt securities will constitute our
unsecured
and subordinated obligations and will be junior in right of payment to our
Senior Indebtedness (including senior debt securities), as described under the
heading “Certain Terms of the Subordinated Debt
Securities—Subordination.”
We
conduct most of our operations through subsidiaries. Consequently, our ability
to pay our obligations, including our obligation to pay principal or interest on
the debt securities, to pay the debt securities at maturity or upon redemption
or to buy the debt securities may depend on our subsidiaries repaying
investments and advances we have made to them, and on our subsidiaries’ earnings
and their distributing those earnings to us. The debt securities will be
effectively subordinated to all obligations (including trade payables and
preferred stock obligations) of our subsidiaries. Our subsidiaries are separate
and distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts due on the debt securities or to make funds available to us to
do so. Our subsidiaries’ ability to pay dividends or make other payments or
advances to us will depend on their operating results and will be subject to
applicable laws and contractual restrictions. The indentures will not limit our
subsidiaries’ ability to enter into other agreements that prohibit or restrict
dividends or other payments or advances to us.
The debt
securities will be our unsecured obligations. Our secured debt and other secured
obligations will be effectively senior to the debt securities to the extent of
the value of the assets securing such debt or other obligations.
You
should look in the prospectus supplement for any additional or different terms
of the debt securities being offered, including the following
terms:
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the
debt securities’ designation;
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the
aggregate principal amount of the debt
securities;
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the
percentage of their principal amount (i.e. price) at which the debt
securities will be issued;
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the
date or dates on which the debt securities will mature and the right, if
any, to extend such date or dates;
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the
rate or rates, if any, per year, at which the debt securities will bear
interest, or the method of determining such rate or
rates;
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the
date or dates from which such interest will accrue, the interest payment
dates on which such interest will be payable or the manner of
determination of such interest payment dates and the record dates for the
determination of holders to whom interest is payable on any interest
payment date;
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the
right, if any, to extend the interest payment periods and the duration of
that extension;
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the
manner of paying principal and interest and the place or places where
principal and interest will be
payable;
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provisions
for a sinking fund purchase or other analogous fund, if
any;
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the
period or periods, if any, within which, the price or prices at which, and
the terms and conditions upon which the debt securities may be redeemed,
in whole or in part, at our option or at your
option;
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the
form of the debt securities;
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any
provisions for payment of additional amounts for taxes and any provision
for redemption, if we must pay such additional amounts in respect of any
debt security;
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the
terms and conditions, if any, upon which we may have to repay the debt
securities early at your option;
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the
currency, currencies or currency units for which you may purchase the debt
securities and the currency, currencies or currency units in which
principal and interest, if any, on the debt securities may be
payable;
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the
terms and conditions upon which conversion or exchange of the debt
securities may be effected, if any, including the initial conversion or
exchange price or rate and any adjustments thereto and the period or
periods when a conversion or exchange may be
effected;
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whether
and upon what terms the debt securities may be
defeased;
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any
events of default or covenants in addition to or in lieu of those set
forth in the indenture;
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provisions
for electronic issuance of debt securities or for debt securities in
uncertificated form; and
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any
other terms of the debt securities, including any terms which may be
required by or advisable under applicable laws or regulations or advisable
in connection with the marketing of the debt
securities.
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We may
from time to time, without notice to or the consent of the holders of any series
of debt securities, create and issue further debt securities of any such series
ranking equally with the debt securities of such series in all respects (or in
all respects other than the payment of interest accruing prior to the issue date
of such further debt securities or except for the first payment of interest
following the issue date of such further debt securities). Such further debt
securities may be consolidated and form a single series with the debt securities
of such series and have the same terms as to status, redemption or otherwise as
the debt securities of such series.
You may
present debt securities for exchange and you may present debt securities for
transfer in the manner, at the places and subject to the restrictions set forth
in the debt securities and the applicable prospectus supplement. We will provide
you those services without charge, although you may have to pay any tax or other
governmental charge payable in connection with any exchange or transfer, as set
forth in the indenture.
Debt
securities will bear interest at a fixed rate or a floating rate. Debt
securities bearing no interest or interest at a rate that at the time of
issuance is below the prevailing market rate (original issue discount
securities) may be sold at a discount below their stated principal amount.
Special U.S. federal income tax considerations applicable to any such discounted
debt securities or to certain debt securities issued at par which are treated as
having been issued at a discount for U.S. federal income tax purposes will be
described in the applicable prospectus supplement.
We may
issue debt securities with the principal amount payable on any principal payment
date, or the amount of interest payable on any interest payment date, to be
determined by reference to one or more currency exchange rates, securities or
baskets of securities, commodity prices or indices. You may receive a payment of
principal on any principal payment date, or a payment of interest on any
interest payment date, that is greater than or less than the amount of principal
or interest otherwise payable on such dates, depending on the value on such
dates of the applicable currency, security or basket of securities, commodity or
index. Information as to the methods for determining the amount of principal or
interest payable on any date, the currencies, securities or baskets of
securities, commodities or indices to which the amount payable on such date is
linked and certain additional tax considerations will be set forth in the
applicable prospectus supplement.
Certain
Terms of the Senior Debt Securities
Covenants
Unless
otherwise indicated in a prospectus supplement, the senior debt securities will
not contain any financial or restrictive covenants, including covenants
restricting either us or any of our subsidiaries from incurring, issuing,
assuming or guarantying any indebtedness secured by a lien on any of our or our
subsidiaries’ property or capital stock, or restricting either us or any of our
subsidiaries from entering into sale and leaseback transactions.
Consolidation,
Merger and Sale of Assets
Unless we
indicate otherwise in a prospectus supplement, we may not consolidate with or
merge into any other person, in a transaction in which we are not the surviving
corporation, or convey, transfer or lease our properties and assets
substantially as an entirety to any person, unless:
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the
successor entity, if any, is a U.S. corporation, limited liability
company, partnership or trust (subject to certain exceptions provided for
in the senior indenture);
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the successor entity assumes our
obligations on the senior debt securities and under the senior
indenture;
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immediately
after giving effect to the transaction, no default or event of default
shall have occurred and be continuing;
and
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certain
other conditions are met.
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No
Protection in the Event of a Change of Control
Unless
otherwise indicated in a prospectus supplement with respect to a particular
series of senior debt securities, the senior debt securities will not contain
any provisions which may afford holders of the senior debt securities protection
in the event we have a change in control or in the event of a highly leveraged
transaction (whether or not such transaction results in a change in
control).
Events
of Default
An event
of default for any series of senior debt securities is defined under the senior
indenture as being:
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our
default in the payment of principal or premium on the senior debt
securities of such series when due and payable whether at maturity, upon
acceleration, redemption, or otherwise, if that default continues for a
period of five days (or such other period as may be specified for such
series);
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our
default in the payment of interest on any senior debt securities of such
series when due and payable, if that default continues for a period of 60
days (or such other period as may be specified for such
series);
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our
default in the performance of or breach of any of our other covenants or
agreements in the senior indenture applicable to senior debt securities of
such series, other than a covenant breach which is specifically dealt with
elsewhere in the senior indenture, and that default or breach continues
for a period of 90 consecutive days after we receive written notice from
the trustee or from the holders of 25% or more in aggregate principal
amount of the senior debt securities of such
series;
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there
occurs any other event of default provided for in such series of senior
debt securities;
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a
court having jurisdiction enters a decree or order
for:
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relief
in respect of us in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in
effect;
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appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of us or for all or substantially all of our property and
assets; or
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the
winding up or liquidation of our affairs and such decree or order shall
remain unstayed and in effect for a period of 60 consecutive
days.
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commence
a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consent to the entry of an
order for relief in an involuntary case under any such
law;
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consent
to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of ours for
all or substantially all of our property and assets;
or
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effect
any general assignment for the benefit of
creditors.
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The
default by us under any other debt, including any other series of debt
securities, is not a default under the senior indenture.
If an
event of default other than an event of default specified in the last two bullet
points above occurs with respect to a series of senior debt securities and is
continuing under the senior indenture, then, and in each and every such case,
either the trustee or the holders of not less than 25% in aggregate principal
amount of such series then outstanding under the senior indenture (each such
series voting as a separate class) by written notice to us 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 amount of and accrued interest, if
any, on such senior debt securities to be immediately due and
payable.
If an
event of default specified in the last two bullet points above occurs with
respect to us and is continuing, either the trustee or the holders of not less
than 25% in aggregate principal amount of the senior debt securities of all
series then outstanding under the senior indenture (treated as one class) may,
by written notice to us and to the trustee, if such notice is given by the
holders, declare the entire principal amount of, and accrued interest, if any,
on each series of senior debt securities then outstanding to be immediately due
and payable.
Upon a
declaration of acceleration, the principal amount of and accrued interest, if
any, on such senior debt securities shall be immediately due and payable. Unless
otherwise specified in the prospectus supplement relating to a series of senior
debt securities originally issued at a discount, the amount due upon
acceleration shall include only the original issue price of the senior debt
securities, the amount of original issue discount accrued to the date of
acceleration and accrued interest, if any.
Upon
certain conditions, declarations of acceleration may be rescinded and annulled
and past defaults may be waived by the holders of a majority in aggregate
principal amount of all the senior debt securities of such series affected by
the default, each series voting as a separate class (or, of all the senior debt
securities, as the case may be, voting as a single class). Furthermore, subject
to various provisions in the senior indenture, the holders of at least a
majority in aggregate principal amount of a series of senior debt securities, by
notice to the trustee, may waive an existing default or event of default with
respect to such senior debt securities and its consequences, except a default in
the payment of principal of or interest on such senior debt securities or in
respect of a covenant or provision of the senior indenture which cannot be
modified or amended without the consent of the holders of each such senior debt
security. Upon any such waiver, such default shall cease to exist, and any event
of default with respect to such senior debt securities shall be deemed to have
been cured, for every purpose of the senior indenture; but no such waiver shall
extend to any subsequent or other default or event of default or impair any
right consequent thereto. For information as to the waiver of defaults, see
“—Modification and Waiver.”
The
holders of at least a majority in aggregate principal amount of a series of
senior debt securities 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 with respect to such senior debt securities.
However, the trustee may refuse to follow any direction that conflicts with law
or the senior 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 such series of senior debt securities 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 such series of
senior debt securities. A holder may not pursue any remedy with respect to the
senior indenture or any series of senior debt securities unless:
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the
holder gives the trustee written notice of a continuing event of
default;
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the
holders of at least 25% in aggregate principal amount of such series of
senior debt securities make a written request to the trustee to pursue the
remedy in respect of such event of
default;
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the
requesting holder or holders offer the trustee indemnity satisfactory to
the trustee against any costs, liability, or
expense;
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the
trustee does not comply with the request within 60 days after receipt of
the request and the offer of indemnity;
and
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during
such 60-day period, the holders of a majority in aggregate principal
amount of such series of senior debt securities do not give the trustee a
direction that is inconsistent with the
request.
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These
limitations, however, do not apply to the right of any holder of a senior debt
security to receive payment of the principal of or interest, if any, on such
senior debt security, or to bring suit for the enforcement of any such payment,
on or after the due date for the senior debt securities, which right shall not
be impaired or affected without the consent of the holder.
The
senior indenture requires certain of our officers to certify, on or before a
fixed date in each year in which any senior debt security is outstanding, as to
their knowledge of our compliance with all conditions and covenants under the
senior indenture.
Discharge
and Defeasance
The
senior indenture provides that, unless the terms of any series of senior debt
securities provides otherwise, we may discharge our obligations with respect to
a series of senior debt securities and the senior indenture with respect to such
series of senior debt securities if:
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we
pay or cause to be paid, as and when due and payable, the principal of and
any interest on all senior debt securities of such series outstanding
under the senior indenture;
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all
senior debt securities of such series previously authenticated and
delivered with certain exceptions, have been delivered to the trustee for
cancellation and we have paid all sums payable by us under the senior
indenture; or
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the
senior debt securities of such series mature within one year or all of
them are to be called for redemption within one year under arrangements
satisfactory to the trustee for giving the notice of redemption, and we
irrevocably deposit in trust with the trustee, as trust funds solely for
the benefit of the holders of the senior debt securities of such series,
for that purpose, the entire amount in cash or, in the case of any series
of senior debt securities payments on which may only be made in U.S.
dollars, U.S. government obligations (maturing as to principal and
interest in such amounts and at such times as will insure the availability
of cash sufficient), after payment of all federal, state and local taxes
or other charges and assessments in respect thereof payable by the
trustee, to pay principal of and interest on the senior debt securities of
such series to maturity or redemption, as the case may be, and to pay all
other sums payable by us under the senior
indenture.
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With
respect to the first and second bullet points, only our obligations to
compensate and indemnify the trustee and our right to recover unclaimed money
held by the trustee under the senior indenture shall survive. With respect to
the third bullet point, certain rights and obligations under the senior
indenture (such as our obligation to maintain an office or agency in respect of
such senior debt securities, to have moneys held for payment in trust, to
register the transfer or exchange of such senior debt securities, to deliver
such senior debt securities for replacement or to be canceled, to compensate and
indemnify the trustee and to appoint a successor trustee, and our right to
recover unclaimed money held by the trustee) shall survive until such senior
debt securities are no longer outstanding. Thereafter, only our obligations to
compensate and indemnify the trustee and our right to recover unclaimed money
held by the trustee shall survive.
Unless
the terms of any series of senior debt securities provide otherwise, on the
121st day after the date of deposit of the trust funds with the trustee, we will
be deemed to have paid and will be discharged from any and all obligations in
respect of the series of senior debt securities provided for in the funds, and
the provisions of the senior indenture will no longer be in effect with respect
to such senior debt securities (“legal defeasance”); provided that the following
conditions shall have been satisfied:
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we
have irrevocably deposited in trust with the trustee as trust funds solely
for the benefit of the holders of the senior debt securities of such
series, for payment of the principal of and interest on the senior debt
securities of such series, cash in an amount or, in the case of any series
of senior debt securities payments on which can only be made in U.S.
dollars, U.S. government obligations (maturing as to principal and
interest
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at such
times and in such amounts as will insure the availability of cash) or a
combination thereof sufficient (in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification thereof
delivered to the trustee), after payment of all federal, state and local taxes
or other charges and assessments in respect thereof payable by the trustee, to
pay and discharge the principal of and accrued interest on the senior debt
securities of such series to maturity or earlier redemption, as the case may be,
and any mandatory sinking fund payments on the day on which such payments are
due and payable in accordance with the terms of the senior indenture and the
senior debt securities of such series;
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such
deposit will not result in a breach or violation of, or constitute a
default under, the senior indenture or any other material agreement or
instrument to which we are a party or by which we are
bound;
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no
default or event of default with respect to the senior debt securities of
such series shall have occurred and be continuing on the date of such
deposit;
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we
shall have delivered to the trustee either an officer’s certificate and an
opinion of counsel that the holders of the senior debt securities of such
series will not recognize income, gain or loss for federal income tax
purposes as a result of our exercising our option under this provision of
the senior indenture 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 or a ruling by the
Internal Revenue Service to the same effect;
and
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we
have delivered to the trustee an officer’s certificate and an opinion of
counsel, in each case stating that all conditions precedent provided for
in the senior indenture relating to the contemplated defeasance of the
senior debt securities of such series have been complied
with.
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Subsequent
to the legal defeasance above, certain rights and obligations under the senior
indenture (such as our obligation to maintain an office or agency in respect of
such senior debt securities, to have moneys held for payment in trust, to
register the exchange of such senior debt securities, to deliver such senior
debt securities for replacement or to be canceled, to compensate and indemnify
the trustee and to appoint a successor trustee, and our right to recover
unclaimed money held by the trustee) shall survive until such senior debt
securities are no longer outstanding. After such senior debt securities are no
longer outstanding, only our obligations to compensate and indemnify the trustee
and our right to recover unclaimed money held by the trustee shall
survive.
Modification
and Waiver
We and
the trustee may amend or supplement the senior indenture or the senior debt
securities without the consent of any holder:
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to
convey, mortgage or pledge any assets as security for the senior debt
securities of one or more series;
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to
evidence the succession of another corporation to us, and the assumption
by such successor corporation of our covenants, agreements and obligations
under the senior indenture;
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to
cure any ambiguity, defect, or inconsistency in the senior indenture or in
any supplemental indenture; provided that such amendments or supplements
shall not adversely affect the interests of the holders of the senior debt
securities of any series in any material respect, or to conform the senior
indenture or the senior debt securities to the description of senior debt
securities of such series set forth in this prospectus or a prospectus
supplement;
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to
comply with the provisions described under “—Certain
Covenants—Consolidation, Merger and Sale of
Assets”;
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to
evidence and provide for the acceptance of appointment hereunder by a
successor trustee, or to make such changes as shall be necessary to
provide for or facilitate the administration of the trusts in the senior
indenture by more than one trustee;
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to
provide for or add guarantors with respect to the senior debt securities
of any series;
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to
establish the form or forms or terms of the senior debt securities as
permitted by the senior indenture;
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to
make any change that is necessary or desirable provided that such change
shall not adversely affect the interests of the holders of the senior debt
securities of any series in any material
respect;
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to
add to our covenants such new covenants, restrictions, conditions or
provisions for the protection of the holders, and to make the occurrence,
or the occurrence and continuance, of a default in any such additional
covenants, restrictions, conditions or provisions an event of
default;
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to
make any change to the senior debt securities of any series so long as no
senior debt securities of such series are outstanding;
or
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to
make any change that does not adversely affect the rights of any
holder.
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Other
amendments and modifications of the senior indenture or the senior debt
securities issued may be made, and our compliance with any provision of the
senior indenture with respect to any series of senior debt securities may be
waived, with the consent of the holders of not less than a majority of the
aggregate principal amount of the outstanding senior debt securities of all
series affected by the amendment or modification (voting as one class);
provided, however, that each affected holder must consent to any modification,
amendment or waiver that:
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changes
the stated maturity of the principal of, or any installment of interest
on, any senior debt securities of such
series;
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reduces
the principal amount of, or premium, if any, or interest on, any senior
debt securities of such series;
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changes
the place or currency of payment of principal of, or premium, if any, or
interest on, any senior debt securities of such
series;
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changes
the provisions for calculating the optional redemption price, including
the definitions relating thereto;
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changes
the provisions relating to the waiver of past defaults or changes or
impairs the right of holders to receive payment or to institute suit for
the enforcement of any payment of any senior debt securities of such
series on or after the due date
therefor;
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reduces
the above-stated percentage of outstanding senior debt securities of such
series the consent of whose holders is necessary to modify or amend or to
waive certain provisions of or defaults under the senior
indenture;
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waives
a default in the payment of principal of or interest on the senior debt
securities;
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adversely
affects the rights of such holder under any mandatory redemption or
repurchase provision or any right of redemption or repurchase at the
option of such holder; or
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modifies
any of the provisions of this paragraph, except to increase any required
percentage or to provide that certain other provisions cannot be modified
or waived without the consent of the holder of each senior debt security
of such series affected by the
modification.
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It shall
not be necessary for the consent of the holders under this section of the senior
indenture to approve the particular form of any proposed amendment, supplement
or waiver, but it shall be sufficient if such consent approves the substance
thereof. After an amendment, supplement or waiver under this section of the
senior indenture becomes effective, the trustee must give to the holders
affected thereby certain notice briefly describing the amendment, supplement or
waiver. We will mail supplemental indentures to holders upon request. Any
failure by the trustee to give such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such supplemental
indenture or waiver.
No
Personal Liability of Incorporators, Stockholders, Officers,
Directors
The
senior indenture provides that no recourse shall be had under or upon any
obligation, covenant, or agreement of ours in the senior indenture or any
supplemental indenture, or in any of the senior debt securities or because of
the creation of any indebtedness represented thereby, against any incorporator,
stockholder, officer or director of ours or of any successor person thereof
under any law, statute or constitutional provision or by the enforcement of any
assessment or by any legal or equitable proceeding or otherwise. Each holder, by
accepting the senior debt securities, waives and releases all such
liability.
Concerning
the Trustee
The
senior indenture provides that, 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 senior indenture. If an event of default has
occurred and is continuing, the trustee will exercise such rights and powers
vested in it under the senior indenture and will use the same degree of care and
skill in its exercise as a prudent person would exercise under the circumstances
in the conduct of such person’s own affairs.
We may
have normal banking relationships with the trustee under the senior indenture in
the ordinary course of business.
Unclaimed
Funds
All funds
deposited with the trustee or any paying agent for the payment of principal,
interest, premium or additional amounts in respect of the senior debt securities
that remain unclaimed for two years after the maturity date of such senior debt
securities will be repaid to us upon our request. Thereafter, any right of any
noteholder to such funds shall be enforceable only against us, and the trustee
and paying agents will have no liability therefor.
Governing
Law
The
senior indenture and the debt securities will be governed by, and construed in
accordance with, the internal laws of the State of New York.
Certain
Terms of the Subordinated Debt Securities
Other
than the terms of the subordinated indenture and subordinated debt securities
relating to subordination, or otherwise as described in the prospectus
supplement relating to a particular series of subordinated debt securities, the
terms of the subordinated indenture and subordinated debt securities are
identical in all material respects to the terms of the senior indenture and
senior debt securities. Additional or different subordination terms may be
specified in the prospectus supplement applicable to a particular
series.
Subordination
The
indebtedness evidenced by the subordinated debt securities is subordinate to the
prior payment in full of all our Senior Indebtedness, as defined in the
subordinated indenture. During the continuance beyond any applicable grace
period of any default in the payment of principal, premium, interest or any
other payment due on any of our Senior Indebtedness, we may not make any payment
of principal of, or premium, if any, or interest on the subordinated debt
securities. In addition, upon any payment or distribution of our assets upon any
dissolution, winding up, liquidation or reorganization, the payment of the
principal of, or premium, if any, and interest on the subordinated debt
securities will be subordinated to the extent provided in the subordinated
indenture in right of payment to the prior payment in full of all our Senior
Indebtedness. Because of this subordination, if we dissolve or otherwise
liquidate, holders of our subordinated debt securities may receive less,
ratably, than holders of our Senior Indebtedness. The subordination provisions
do not prevent the occurrence of an event of default under the subordinated
indenture.
The term
“Senior Indebtedness” of a person means with respect to such person the
principal of, premium, if any, interest on, and any other payment due pursuant
to any of the following, whether outstanding on the date of the subordinated
indenture or incurred by that person in the future:
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all
of the indebtedness of that person for money borrowed, including any
indebtedness secured by a mortgage or other lien which is (1) given
to secure all or part of the purchase price of property subject to the
mortgage or lien, whether given to the vendor of that property or to
another lender, or (2) existing on property at the time that person
acquires it;
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all
of the indebtedness of that person evidenced by notes, debentures, bonds
or other securities sold by that person for
money;
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all
of the lease obligations which are capitalized on the books of that person
in accordance with generally accepted accounting
principles;
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all
indebtedness of others of the kinds described in the first two bullet
points above and all lease obligations of others of the kind described in
the third bullet point above that the person, in any manner, assumes or
guarantees or that the person in effect guarantees through an agreement to
purchase, whether that agreement is contingent or otherwise;
and
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all
renewals, extensions or refundings of indebtedness of the kinds described
in the first, second or fourth bullet point above and all renewals or
extensions of leases of the kinds described in the third or fourth bullet
point above;
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unless, in the case of any
particular indebtedness, lease, renewal, extension or refunding, the instrument
or lease creating or evidencing it or the assumption or guarantee relating to it
expressly provides that such indebtedness, lease, renewal, extension or
refunding is not superior in right of payment to the subordinated debt
securities. Our senior debt securities constitute Senior Indebtedness for
purposes of the subordinated debt indenture.
At our
option, we may elect to offer fractional shares of preferred stock, rather than
full shares of preferred stock. If we do elect to offer fractional shares of
preferred stock, we will issue to the public receipts for depositary shares and
each of these depositary shares will represent a fraction of a share of a
particular series of preferred stock, as specified in the applicable prospectus
supplement. Each owner of a depositary share will be entitled, in proportion to
the applicable fractional interest in shares of preferred stock underlying that
depositary share, to all rights and preferences of the preferred stock
underlying that depositary share. These rights may include dividend, voting,
redemption and liquidation rights.
The
shares of preferred stock underlying the depositary shares will be deposited
with a bank or trust company selected by us to act as depositary, under a
deposit agreement between us, the depositary and the holders of the depositary
receipts. The depositary will be the transfer agent, registrar and dividend
disbursing agent for the depositary shares.
The
depositary shares will be evidenced by depositary receipts issued pursuant to
the depositary agreement. Holders of depositary receipts agree to be bound by
the deposit agreement, which requires holders to take certain actions such as
filing proof of residence and paying certain charges.
The
summary of terms of the depositary shares contained in this prospectus is not
complete. You should refer to the forms of the deposit agreement, our
certificate of incorporation and the certificate of designation for the
applicable series of preferred stock that are, or will be, filed with the
SEC.
Dividends
The
depositary will distribute cash dividends or other cash distributions, if any,
received in respect of the series of preferred stock underlying the depositary
shares to the record holders of depositary receipts in proportion to the number
of depositary shares owned by those holders on the relevant record date. The
relevant record date for depositary shares will be the same date as the record
date for the preferred stock.
In the
event of a distribution other than in cash, the depositary will distribute
property received by it to the record holders of depositary receipts that are
entitled to receive the distribution, unless the depositary determines that it
is not feasible to make the distribution. If this occurs, the depositary, with
our approval, may adopt another method for the distribution, including selling
the property and distributing the net proceeds to the holders.
Liquidation
Preference
If a
series of preferred stock underlying the depositary shares has a liquidation
preference, in the event of the voluntary or involuntary liquidation,
dissolution or winding up of E*TRADE, holders of depositary shares will be
entitled to receive the fraction of the liquidation preference accorded each
share of the applicable series of preferred stock, as set forth in the
applicable prospectus supplement.
Redemption
If a
series of preferred stock underlying the depositary shares is subject to
redemption, the depositary shares will be redeemed from the proceeds received by
the depositary resulting from the redemption, in whole or in part, of the
preferred stock held by the depositary. Whenever we redeem any preferred stock
held by the depositary, the depositary will redeem, as of the same redemption
date, the number of depositary shares representing the preferred stock so
redeemed. The depositary will mail the notice of redemption to the record
holders of the depositary receipts promptly upon receiving the notice from us
and no fewer than 20 or more than 60 days, unless otherwise provided in the
applicable prospectus supplement, prior to the date fixed for redemption of the
preferred stock.
Voting
Upon
receipt of notice of any meeting at which the holders of preferred stock are
entitled to vote, the depositary will mail the information contained in the
notice of meeting to the record holders of the depositary receipts underlying
the preferred stock. Each record holder of those depositary receipts on the
record date will be entitled to instruct the depositary as to the exercise of
the voting rights pertaining to the amount of preferred stock underlying that
holder’s depositary shares. The record date for the depositary will be the same
date as the record date for the preferred stock. The depositary will try, as far
as practicable, to vote the preferred stock underlying the depositary shares in
accordance with these instructions. We will agree to take all action that may be
deemed necessary by the depositary in order to enable the depositary to vote the
preferred stock in accordance with these instructions. The depositary will not
vote the preferred stock to the extent that it does not receive specific
instructions from the holders of depositary receipts.
Withdrawal
of Preferred Stock
Owners of
depositary shares will be entitled to receive upon surrender of depositary
receipts at the principal office of the depositary and payment of any unpaid
amount due to the depositary, the number of whole shares of preferred stock
underlying their depositary shares.
Partial
shares of preferred stock will not be issued. Holders of preferred stock will
not be entitled to deposit the shares under the deposit agreement or to receive
depositary receipts evidencing depositary shares for the preferred
stock.
Amendment
and Termination of Deposit Agreement
The form
of depositary receipt evidencing the depositary shares and any provision of the
deposit agreement may be amended by agreement between us and the depositary.
However, any amendment which materially and adversely alters the rights of the
holders of depositary shares, other than fee changes, will not be effective
unless the amendment has been approved by at least a majority of the outstanding
depositary shares. The deposit agreement may be terminated by the depositary or
us only if:
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all
outstanding depositary shares have been redeemed;
or
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·
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there
has been a final distribution of the preferred stock in connection with
our dissolution and such distribution has been made to all the holders of
depositary shares.
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Charges
of Depositary
We will
pay all transfer and other taxes and governmental charges arising solely from
the existence of the depositary arrangement. We will also pay charges of the
depositary in connection with:
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the
initial deposit of the preferred
stock;
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·
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the
initial issuance of the depositary
shares;
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any
redemption of the preferred stock;
and
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·
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all
withdrawals of preferred stock by owners of depositary
shares.
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Holders
of depositary receipts will pay transfer, income and other taxes and
governmental charges and other specified charges as provided in the deposit
agreement for their accounts. If these charges have not been paid, the
depositary may:
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refuse
to transfer depositary shares;
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·
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withhold
dividends and distributions; and
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·
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sell
the depositary shares evidenced by the depositary
receipt.
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Miscellaneous
The
depositary will forward to the holders of depositary receipts all reports and
communications we deliver to the depositary that we are required to furnish to
the holders of the preferred stock. In addition, the depositary will make
available for inspection by holders of depositary receipts at the principal
office of the depositary, and at such other places as it may from time to time
deem advisable, any reports and communications we deliver to the depositary as
the holder of preferred stock.
Neither
the depositary nor E*TRADE will be liable if either the depositary or E*TRADE is
prevented or delayed by law or any circumstance beyond either the depositary or
E*TRADE’s control in performing their respective obligations under the deposit
agreement. E*TRADE’s obligations and the depositary’s obligations will be
limited to the performance in good faith of E*TRADE or the depositary’s
respective duties under the deposit agreement. Neither the depositary nor
E*TRADE will be obligated to prosecute or defend any legal proceeding in respect
of any depositary shares or preferred stock unless satisfactory indemnity is
furnished. E*TRADE and the depositary may rely on:
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written
advice of counsel or accountants;
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·
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information
provided by holders of depositary receipts or other persons believed in
good faith
to be competent to give such information;
and
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documents
believed to be genuine and to have been signed or presented by the proper
party or parties.
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Resignation
and Removal of Depositary
The
depositary may resign at any time by delivering a notice to us. We may remove
the depositary at any time. Any such resignation or removal will take effect
upon the appointment of a successor depositary and its acceptance of such
appointment. The successor depositary must be appointed within 60 days after
delivery of the notice for resignation or removal. The successor depositary must
be a bank and trust company having its principal office in the United States of
America and having a combined capital and surplus of at least
$150,000,000.
Federal
Income Tax Consequences
Owners of
the depositary shares will be treated for federal income tax purposes as if they
were owners of the preferred stock underlying the depositary shares. As a
result, owners will be entitled to take into account for federal
income
tax purposes and deductions to which they would be entitled if they were holders
of such preferred stock. No gain or loss will be recognized for federal income
tax purposes upon the withdrawal of preferred stock in exchange for depositary
shares. The tax basis of each share of preferred stock to an exchanging owner of
depositary shares will, upon such exchange, be the same as the aggregate tax
basis of the depositary shares exchanged. The holding period for preferred stock
in the hands of an exchanging owner of depositary shares will include the period
during which such person owned such depositary shares.
We may
issue rights to purchase our common stock, preferred stock or other offered
security independently or together with any other offered security. Any rights
that we may issue may or may not be transferable by the person purchasing or
receiving the rights. In connection with any rights offering to our
stockholders, we may enter into a standby underwriting or other arrangement with
one or more underwriters or other persons pursuant to which such underwriters or
other person would purchase any offered securities remaining unsubscribed for
after such rights offering. Each series of rights will be issued under a
separate rights agent agreement to be entered into between us and a bank or
trust company, as rights agent, that we will name in the applicable prospectus
supplement. The rights agent will act solely as our agent in connection with the
certificates relating to the rights of the series of certificates and will not
assume any obligation or relationship of agency or trust for or with any holders
of rights certificates or beneficial owners of rights.
We may
issue warrants to purchase our debt or equity securities or securities of third
parties or other rights, including rights to receive payment in cash or
securities based on the value, rate or price of one or more specified
commodities, currencies, securities or indices, or any combination of the
foregoing. Warrants may be issued independently or together with any other
securities and may be attached to, or separate from, such securities. Each
series of warrants will be issued under a separate warrant agreement to be
entered into between us and a warrant agent. The terms of any warrants to be
issued and a description of the material provisions of the applicable warrant
agreement will be set forth in the applicable prospectus
supplement.
We may
issue purchase contracts for the purchase or sale of:
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debt
or equity securities issued by us or securities of third parties, a basket
of such securities, an index or indices or such securities or any
combination of the above as specified in the applicable prospectus
supplement;
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Each
purchase contract will entitle the holder thereof to purchase or sell, and
obligate us to sell or purchase, on specified dates, such securities, currencies
or commodities at a specified purchase price, which may be based on a formula,
all as set forth in the applicable prospectus supplement. We may,
however, satisfy our obligations, if any, with respect to any purchase contract
by delivering the cash value of such purchase contract or the cash value of the
property otherwise deliverable or, in the case of purchase contracts on
underlying currencies, by delivering the underlying currencies, as set forth in
the applicable prospectus supplement. The applicable prospectus
supplement will also specify the methods by which the holders may purchase or
sell such securities, currencies or commodities and any acceleration,
cancellation or termination provisions or other provisions relating to the
settlement of a purchase contract.
The
purchase contracts may require us to make periodic payments to the holders
thereof of vice versa, which payments may be deferred to the extent set forth in
the applicable prospectus supplement, and those payments may
be
unsecured or prefunded on some basis. The purchase contracts may
require the holders thereof to secure their obligations in a specified manner to
be described in the applicable prospectus supplement. Alternatively,
purchase contracts may require holders to satisfy their obligations thereunder
when the purchase contracts are issued. Our obligation to settle such
pre-paid purchase contracts on the relevant settlement date may constitute
indebtedness. Accordingly, pre-paid purchase contracts will be issued
under either the senior indenture or the subordinated indenture.
As
specified in the applicable prospectus supplement, we may issue units consisting
of one or more purchase contracts, rights, warrants, debt securities, depositary
shares, shares of preferred stock, shares of common stock or any combination of
such securities.
Each debt
security, depositary share, warrant and unit will be represented either by a
certificate issued in definitive form to a particular investor or by one or more
global securities representing the entire issuance of securities. Certificated
securities in definitive form and global securities will be issued in registered
form. Definitive securities name you or your nominee as the owner of the
security, and in order to transfer or exchange these securities or to receive
payments other than interest or other interim payments, you or your nominee must
physically deliver the securities to the trustee, registrar, paying agent or
other agent, as applicable. Global securities name a depositary or its nominee
as the owner of the debt securities, warrants or units represented by these
global securities. The depositary maintains a computerized system that will
reflect each investor’s beneficial ownership of the securities through an
account maintained by the investor with its broker/dealer, bank, trust company
or other representative, as we explain more fully below.
Global
Securities
We may
issue the registered debt securities, depositary shares, warrants and units in
the form of one or more fully registered global securities that will be
deposited with a depositary or its nominee identified in the applicable
prospectus supplement and registered in the name of that depositary or nominee.
In those cases, one or more registered global securities will be issued in a
denomination or aggregate denominations equal to the portion of the aggregate
principal or face amount of the securities to be represented by registered
global securities. Unless and until it is exchanged in whole for securities in
definitive registered form, a registered global security may not be transferred
except as a whole by and among the depositary for the registered global
security, the nominees of the depositary or any successors of the depositary or
those nominees.
If not
described below, any specific terms of the depositary arrangement with respect
to any securities to be represented by a registered global security will be
described in the prospectus supplement relating to those securities. We
anticipate that the following provisions will apply to all depositary
arrangements.
Ownership
of beneficial interests in a registered global security will be limited to
persons, called participants, that have accounts with the depositary or persons
that may hold interests through participants. Upon the issuance of a registered
global security, the depositary will credit, on its book-entry registration and
transfer system, the participants’ accounts with the respective principal or
face amounts of the securities beneficially owned by the participants. Any
dealers, underwriters or agents participating in the distribution of the
securities will designate the accounts to be credited. Ownership of beneficial
interests in a registered global security will be shown on, and the transfer of
ownership interests will be effected only through, records maintained by the
depositary, with respect to interests of participants, and on the records of
participants, with respect to interests of persons holding through participants.
The laws of some states may require that some purchasers of securities take
physical delivery of these securities in definitive form. These laws may impair
your ability to own, transfer or pledge beneficial interests in registered
global securities.
So long
as the depositary, or its nominee, is the registered owner of a registered
global security, that depositary or its nominee, as the case may be, will be
considered the sole owner or holder of the securities represented by the
registered global security for all purposes under the applicable indenture,
warrant agreement or unit agreement. Except as described below, owners of
beneficial interests in a registered global security will not be entitled to
have the securities represented by the registered global security registered in
their names, will not receive or be entitled to receive physical delivery of the
securities in definitive form and will not be considered the owners or holders
of the securities under the applicable indenture, warrant agreement or unit
agreement. Accordingly, each person owning a beneficial interest in a registered
global security must rely on the procedures of the depositary for that
registered global security and, if that person is not a participant, on the
procedures of the participant through which the person owns its interest, to
exercise any rights of a holder under the applicable indenture, warrant
agreement or unit agreement. We understand that under existing industry
practices, if we request any action of holders or if an owner of a beneficial
interest in a registered global security desires to give or take any action that
a holder is entitled to give or take under the applicable indenture, warrant
agreement or unit agreement, the depositary for the registered global security
would authorize the participants holding the relevant beneficial interests to
give or take that action, and the participants would authorize beneficial owners
owning through them to give or take that action or would otherwise act upon the
instructions of beneficial owners holding through them.
Principal,
premium, if any, and interest payments on debt securities, and any payments to
holders with respect to warrants or units, represented by a registered global
security registered in the name of a depositary or its nominee will be made to
the depositary or its nominee, as the case may be, as the registered owner of
the registered global security. None of E*TRADE, the trustee, any warrant agent,
unit agent or any other agent of E*TRADE, agent of the trustee or agent of such
warrant agent or unit agent will have any responsibility or liability for any
aspect of the records relating to payments made on account of beneficial
ownership interests in the registered global security or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
We expect
that the depositary for any of the securities represented by a registered global
security, upon receipt of any payment of principal, premium, interest or other
distribution of underlying securities or other property to holders of that
registered global security, will immediately credit participants’ accounts in
amounts proportionate to their respective beneficial interests in that
registered global security as shown on the records of the depositary. We also
expect that payments by participants to owners of beneficial interests in a
registered global security held through participants will be governed by
standing customer instructions and customary practices, as is now the case with
the securities held for the accounts of customers in bearer form or registered
in “street name,” and will be the responsibility of those
participants.
If the
depositary for any of these securities represented by a registered global
security is at any time unwilling or unable to continue as depositary or ceases
to be a clearing agency registered under the Exchange Act, and a successor
depositary registered as a clearing agency under the Exchange Act is not
appointed by us within 90 days, we will issue securities in definitive form in
exchange for the registered global security that had been held by the
depositary. Any securities issued in definitive form in exchange for a
registered global security will be registered in the name or names that the
depositary gives to the relevant trustee, warrant agent, unit agent or other
relevant agent of ours or theirs. It is expected that the depositary’s
instructions will be based on directions received by the depositary from
participants with respect to ownership of beneficial interests in the registered
global security that had been held by the depositary.
We or
selling security holders may sell the securities being offered hereby in the
following manner or any manner specified in a prospectus
supplement:
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directly
to purchasers;
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through
underwriters; and
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If any
securities are sold pursuant to this prospectus by any persons other than us, we
will, in a prospectus supplement, name the selling security holders, indicate
the nature of any relationship such holders have had with us or any of our
affiliates during the three years preceding such offering, state the amount of
securities of the class owned by such security holder prior to the offering and
the amount to be offered for the security holder’s account, and state the amount
and (if one percent or more) the percentage of the class to be owned by such
security holder after completion of the offering.
We or any
selling security holder may directly solicit offers to purchase securities, or
agents may be designated to solicit such offers. We will, in the prospectus
supplement relating to such offering, name any agent that could be viewed as an
underwriter under the Securities Act and describe any commissions that we or any
selling security holder must pay. Any such agent will be acting on a best
efforts basis for the period of its appointment or, if indicated in the
applicable prospectus supplement, on a firm commitment basis. Agents, dealers
and underwriters may be customers of, engage in transactions with, or perform
services for us or any selling security holder in the ordinary course of
business.
If any
underwriters or agents are utilized in the sale of the securities in respect of
which this prospectus is delivered, we and, if applicable, any selling security
holder will enter into an underwriting agreement or other agreement with them at
the time of sale to them, and we will set forth in the prospectus supplement
relating to such offering the names of the underwriters or agents and the terms
of the related agreement with them.
If a
dealer is utilized in the sale of the securities in respect of which the
prospectus is delivered, we will sell such securities to the dealer, as
principal. The dealer may then resell such securities to the public at varying
prices to be determined by such dealer at the time of resale.
Remarketing
firms, agents, underwriters and dealers may be entitled under agreements which
they may enter into with us to indemnification by us and by any selling security
holder against certain civil liabilities, including liabilities under the
Securities Act, and may be customers of, engage in transactions with or perform
services for us or any selling security holder in the ordinary course of
business.
In order
to facilitate the offering of the securities, any underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
securities or any other securities the prices of which may be used to determine
payments on such securities. Specifically, any underwriters may overallot in
connection with the offering, creating a short position for their own accounts.
In addition, to cover overallotments or to stabilize the price of the securities
or of any such other securities, the underwriters may bid for, and purchase, the
securities or any such other securities in the open market. Finally, in any
offering of the securities through a syndicate of underwriters, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a dealer
for distributing the securities in the offering if the syndicate repurchases
previously distributed securities in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the securities above independent
market levels. Any such underwriters are not required to engage in these
activities and may end any of these activities at any time.
Any
underwriter, agent or dealer utilized in the initial offering of securities will
not confirm sales to accounts over which it exercises discretionary authority
without the prior specific written approval of its customer.
The
validity of the securities in respect of which this prospectus is being
delivered will be passed on for us by Davis Polk & Wardwell.
The
consolidated financial statements incorporated in this prospectus by reference
from the Company’s Annual Report on Form 10-K for the year ended December 31,
2008, and the effectiveness of the Company’s internal control over financial
reporting have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their reports (which reports (1)
express an unqualified opinion on the consolidated financial statements and
include an explanatory paragraph referring to the adoption of Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109, as of January 1, 2007,
and the adoption of Statement of Financial Accounting Standard (“SFAS”) No. 157,
Fair Value Measurement,
and SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities, on January
1, 2008, and (2) express an unqualified opinion on the effectiveness of internal
control over financial reporting) which are incorporated herein by
reference. Such consolidated financial statements have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.