eTrade 2012 Annual Report Download - page 22

which may deny approval or limit the scope of our planned activity. Our compliance with 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 an acquisition and could also delay or
prevent the development, introduction and marketing of new products and services. In addition, E*TRADE
Clearing LLC and E*TRADE Securities LLC, as operating subsidiaries of E*TRADE Bank, are subject to
increased regulatory oversight and the same activity restrictions that are applicable to E*TRADE Bank.
Risks Relating to Owning Our Stock
We are substantially restricted by the terms of our corporate debt.
The indentures governing our corporate debt contain various covenants and restrictions that place
limitations on 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 shareholders 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 of these series of our corporate debt 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 2.5 to 1.0 under the terms of our outstanding
convertible notes and 2.0 to 1.0 under the terms of our other outstanding series of notes. As of December 31,
2012, our Consolidated Fixed Charge Coverage Ratio was (0.1) to 1.0. The terms of any future indebtedness
could include more restrictive 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, 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, as
defined in the indentures, we could be required to offer to purchase our debt securities at 101% of their principal
amount. Under certain of 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 6
3
⁄ 4 % senior notes due May 2016, 6% senior notes due November 2017 and 6
3
⁄ 8 % senior notes due
November 2019, would need to be coupled with a ratings downgrade before we would be required to offer to
purchase those securities.
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.
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