eTrade 2006 Annual Report Download - page 125

The interest on the 6
1
⁄ 8 % Notes is payable quarterly until November 2008, at which point the interest becomes
payable semi-annually. The Company recorded the purchase contracts and subordinated notes at fair value, with
$15 million recorded in equity and $435 million in debt, respectively. Debt issuance costs allocated to the
6
1
⁄ 8 % Notes of $14.2 million are included in other assets and are being amortized over the expected life of the
6
1
⁄ 8 % Notes.
Each purchase contract obligates the holder to purchase, and the Company to sell, at a purchase price of
$25.00 in cash, a variable number of shares of the Company’s common stock. The stock conversion ratio varies
depending on the average closing price of the Company’s common stock over a 20-day trading period ending on
the third trading day immediately preceding November 18, 2008 (“Reference Price”). If the Reference Price is
equal to or greater than $21.816 per share, the settlement rate will be 1.1459 shares of common stock. If the
Reference Price is less than $21.816 per share but greater than $18.00 per share, the settlement rate is equal to
$25.00 divided by the Reference Price. If the Reference Price is less than or equal to $18.00 per share, the
settlement rate will be 1.3889 shares of common stock. The Company is obligated under the purchase contract to
sell shares of its common stock under the agreement in November 2008. In November 2008, the aggregate
principal amount of the subordinated notes will be remarketed, which may result in a change in the interest rate
and maturity date of the subordinated notes.
Before the Purchase Date, the Units will be reflected in diluted earnings per share calculations using the
treasury stock method as defined by SFAS No. 128, Earning per Share. Under this method, the number of shares
of common stock used in calculating diluted earnings per share (based on the settlement formula applied at the
end of the reporting period) is deemed to be increased by the excess, if any, of the number of shares that would
be issued upon settlement of the purchase contracts less the number of shares that could be purchased by the
Company in the market at the average market price during the period using the proceeds to be received upon
settlement. Therefore, dilution will occur for periods when the average market price of the Company’s common
stock for the reporting period is above $21.816.
Convertible Subordinated Notes
6.00% Convertible Subordinated Notes Due February 2007
In 2000, the Company issued an aggregate principal amount of $650 million of the 6.00% convertible
subordinated notes due February 2007 (“6.00% Notes”). As of December 31, 2005 the Company had retired or
called $464.8 million of the 6.00% Notes. In 2006, the Company called for redemption the entire remaining
$185.2 million principal amount of the 6.00% Notes with 7.8 million shares of common stock issued and
$1.8 million paid in cash.
Senior Secured Revolving Credit Facility
In September 2005, the Company entered into a $250 million, three-year senior secured revolving credit
facility. The facility is secured by certain assets of the Company. The facility will be used for general corporate
purposes, including regulatory capital needs arising from acquisitions. Draws under the facility currently bear
interest, at our option, at adjusted LIBOR plus 2% or prime plus 1%. Undrawn facility funds currently bear
commitment fees of 0.25% per annum payable quarterly in arrears. At December 31, 2006, no amounts were
outstanding under this credit facility. Issuance costs of $2.2 million are included in other assets and are being
amortized over the term of the facility.
Corporate Debt Covenants
Certain of the Company’s corporate senior debt described above have terms which include customary
financial covenants. As of December 31, 2006, the Company was in compliance with all such covenants.
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