| GFI Group Inc |
| ITEM 1A RISK FACTORS Economic, political and market factors beyond our control could reduce trading volumes, securities prices and demand for our brokerage services, which could harm our business and our profitability |
| In each of the three years in the period ended December 31, 2005, over 94prca of our revenues were generated by our brokerage operations |
| As a result, our revenues and profitability are likely to decline significantly during periods of low trading volume in the financial markets in which we offer our services, which are directly affected by many national and international factors |
| Any one of the following factors, among others, may cause a substantial decline in the financial markets in which we offer our services, resulting in reduced trading volume |
| These factors include: · economic and political conditions in the United States, Europe and elsewhere in the world; · concerns about terrorism and war; · concerns over inflation and wavering institutional and consumer confidence levels; · the availability of cash for investment by our dealer clients and their clients; · the level and volatility of interest rates and foreign currency exchange rates; · the level and volatility of trading in certain equity and commodity markets; · the level and volatility of the difference between the yields on corporate securities being traded and those on related benchmark securities (which difference we refer to as credit spreads); and · legislative and regulatory changes |
| Declines in the volume of trading in the markets in which we operate generally result in lower revenue from our brokerage business |
| In addition, although less common, some of our brokerage revenues are determined on the basis of the value of transactions or on credit spreads |
| Our profitability would be adversely affected by a decline in revenue because a portion of our costs are fixed |
| For these reasons, decreases in trading volume or declining prices or credit spreads could have an adverse effect on our business, financial condition or results of operations |
| 20 ______________________________________________________________________ We face substantial competition that could negatively impact our market share and our profitability |
| The financial services industry generally, and the inter-dealer brokerage businesses in which we are engaged in particular, are very competitive, and we expect competition to continue to intensify in the future |
| Some of the companies with which we compete are better capitalized than we are and have greater financial, technical, marketing and other resources than we have |
| Our current and prospective competitors include: · other inter-dealer brokerage firms; · electronic multi-dealer trading companies or consortia; · other providers of data and analytics products; and · securities, futures and derivatives exchanges and electronic communications networks |
| Some of our competitors offer a wider range of services, have broader name recognition and have larger client bases than we do |
| Some of them may be able to respond more quickly to new or evolving opportunities, technologies and client requirements than we can, and may be able to undertake more extensive marketing activities |
| Our competitors may also seek to hire our brokers, which could result in a loss of brokers by us or in increased costs to retain our brokers |
| In addition to the competitors described above, our large institutional clients may increase the amount of trading they do directly with each other rather than through us, in which case our revenues could be adversely affected |
| In particular, several large market data and information providers currently offering varying forms of electronic trading of the types of financial instruments in which we specialize have announced their intention to expand their electronic trading platforms or to develop new platforms |
| If we are not able to compete successfully in the future, our business, financial condition and results of operations would be adversely affected |
| We have experienced intense price competition in our brokerage business in recent years |
| Some competitors may offer brokerage services to clients at lower prices than we are offering, which may force us to reduce our prices or to lose market share and revenue |
| In addition, we focus on providing brokerage services in less liquid markets for complex financial instruments |
| As the markets for these instruments become more liquid, we could lose market share to other inter-dealer brokers and electronic multi-dealer brokers who specialize in providing brokerage services in more liquid markets |
| If a financial instrument for which we provide brokerage services becomes listed on an exchange, the need for the services of an inter-dealer broker for that instrument may be severely diminished and, as a result, the need for our services in relation to that instrument could be significantly reduced |
| Because competition for the services of brokers is intense, we may not be able to attract and retain the highly skilled brokers we need to support our business or we may be required to incur additional expense to do so |
| We strive to provide high-quality brokerage services that allow us to establish and maintain long-term relationships with our clients |
| Our ability to continue to provide these services and maintain these relationships depends, in large part, upon our brokers |
| Competition for the services of brokers is intense, especially for brokers with extensive experience in the specialized markets in which we participate or may seek to enter |
| If we are unable to hire highly qualified brokers, we may not be able to enter new brokerage markets or develop new products |
| If we lose one or more of our brokers in a particular market in which we participate, our revenues may decrease and we may lose market share in that particular market |
| If we fail to attract new personnel or to retain and motivate our current personnel, or if we incur increased costs associated with attracting and retaining personnel (such as sign-on bonuses to attract new personnel), our business, financial condition and results of operations may suffer |
| 21 ______________________________________________________________________ In addition, recruitment and retention of qualified staff could result in substantial additional costs |
| We have been party to, or otherwise involved in, several litigations and arbitrations involving competitor claims in connection with new employee hires and claims from former employees in connection with the termination of their employment |
| We may also pursue our rights through litigation when competitors hire our employees who are under contract with us |
| We are currently involved in several litigations and arbitrations with our competitors relating to new employee hires or departures |
| We believe such proceedings are common in our industry due to its highly competitive nature |
| An adverse settlement or judgment related to these or similar types of claims could have a material adverse effect on our financial condition or results of operations |
| Regardless of the outcome of these claims, we generally incur significant expense and management time dealing with these claims |
| We are dependent on our management team, and the loss of any key member of our team may prevent us from executing our business strategy effectively |
| Our future success depends, in large part, upon our management team |
| In particular, we are highly dependent on the continued services of our chief executive officer and founder, Michael Gooch, and other executive officers who possess extensive financial markets knowledge and management skills |
| Neither Michael Gooch nor Colin Heffron, our president, are bound by employment contracts to remain with us for a specified period of time |
| We may not be able to find an appropriate replacement for Michael Gooch, Colin Heffron or any other executive officer if the need should arise |
| In addition, due to the regulated nature of some of our businesses, some of our executive officers, or other key personnel could become subject to suspensions or other limitations on the scope of their services to us from time to time |
| If we lose the services of any executive officers or other key personnel, we may not be able to manage and grow our operations effectively, enter new brokerage markets or develop new products |
| We maintain “key person” life insurance policies on Michael Gooch, but we do not have any such policies for our other officers or personnel |
| If we are unable to continue to identify and exploit new market opportunities, our ability to maintain and grow our business may be adversely affected |
| As more participants enter our markets, the resulting competition often leads to lower commissions |
| This may result in a decrease in revenue in a particular market even if the volume of trades we handle in that market has increased |
| As a result, our strategy is to broker more trades and increase market share in existing markets and to seek out new markets in which we can charge higher commissions |
| Pursuing this strategy may require significant management attention and broker expense |
| We may not be able to attract new clients or successfully enter new markets |
| If we are unable to continue to identify and exploit new market opportunities on a timely and cost-effective basis, our revenues may decline, which would adversely affect our profitability |
| If we are unable to manage the risks of international operations effectively, our business could be adversely affected |
| We provide services and products to clients in Europe, Asia and Australia through offices in London, Paris, Hong Kong, Singapore, Sydney and Tokyo and we may seek to further expand our operations throughout these regions in the future |
| On a geographic basis, approximately 42prca and 50prca of our total revenues for the years ended December 31, 2005 and 2004, respectively, were generated by our European operations, 50prca and 44prca, respectively, were generated by our North America operations and 8prca and 6prca, respectively, were generated by our operations in the Asia-Pacific region |
| There are certain additional risks inherent in doing business in international markets, particularly in the regulated brokerage industry |
| These risks include: · additional regulatory requirements; · tariffs and other trade barriers; 22 ______________________________________________________________________ · difficulties in recruiting and retaining personnel, and managing international · operations; · potentially adverse tax consequences; and · reduced protection for intellectual property rights |
| If we are unable to manage any of these risks effectively, our business could be adversely affected |
| Our international operations also expose us to the risk of fluctuations in currency exchange rates |
| For example, a substantial portion of our revenue from our European operations is received in Euros and US Dollars, whereas many of our expenses from our European operations are payable in British Pounds |
| Our risk management strategies relating to exchange rates may not prevent us from suffering losses that would adversely affect our financial condition or results of operations |
| Our clients’ financial or other problems could adversely affect our business |
| We generally provide brokerage services to our clients in the form of either agency or matched principal transactions |
| As described in further detail below, we also engage in unmatched principal transactions |
| In agency transactions, we charge a commission for connecting buyers and sellers and assisting in the negotiation of the price and other material terms of the transaction |
| After all material terms of a transaction are agreed upon, we identify the buyer and seller to each other and leave them to settle the trade directly |
| We are exposed to credit risk for commissions we bill to clients for our agency brokerage services |
| Our clients may default on their obligations to us due to disputes, bankruptcy, lack of liquidity, operational failure or other reasons |
| Any losses arising from such defaults could adversely affect our financial condition or results of operations |
| We have adopted policies and procedures to identify, monitor and manage our credit risk, in both agency and principal transactions, through reporting and control procedures and by monitoring credit standards applicable to our clients |
| These policies and procedures, however, may not be fully effective |
| Some of our risk management methods depend upon the evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible by us |
| That information may not, in all cases, be accurate, complete, up-to-date or properly evaluated |
| If our policies and procedures are not fully effective or we are not always successful in monitoring or evaluating the risks to which we are, or may, be exposed, our financial condition or results of operations could be adversely affected |
| In addition, our insurance policies may not provide adequate coverage for these risks |
| The securities settlement process exposes us to risks that may impact our liquidity and profitability |
| In addition, liability for unmatched trades could adversely affect our results of operations and balance sheet |
| Through our subsidiaries, we provide brokerage services by executing transactions for our clients |
| An increasing number of these are “matched principal” transactions in which we act as a “middleman” by serving as a counterparty to both a buyer and a seller in matching reciprocal back-to-back trades |
| These transactions are then settled through clearing institutions with whom we have a contractual relationship |
| In executing matched principal transactions, we are exposed to the risk that one of the counterparties to a transaction may fail to fulfill its obligations, either because it is not matched immediately or, even if matched, one party fails to deliver the cash or securities it is obligated to deliver |
| Our focus on less liquid markets exacerbates this risk for us because transactions in these markets tend to be more likely not to settle on a timely basis |
| Adverse movements in the prices of securities that are the subject of these transactions can increase our risk |
| In addition, widespread technological or communication failures, such as those which occurred as a result of the terrorist attacks on September 11, 2001 and the blackout in the eastern portion of the United States in August 2003, as well as actual or perceived credit difficulties or the insolvency of one or more large or visible market participants, could cause market-wide credit difficulties 23 ______________________________________________________________________ or other market disruptions |
| These failures, difficulties or disruptions could result in a large number of market participants not settling transactions or otherwise not performing their obligations |
| We are subject to financing risk in these circumstances because if a transaction does not settle on a timely basis, the resulting unmatched position may need to be financed, either directly by us or through one of our clearing organizations at our expense |
| These charges may be recoverable from the failing counterparty, but sometimes are not |
| Finally, in instances where the unmatched position or failure to deliver is prolonged or widespread due to rapid or widespread declines in liquidity for an instrument, there may also be regulatory capital charges required to be taken by us, which depending on their size and duration, could limit our business flexibility or even force the curtailment of those portions of our business requiring higher levels of capital |
| Credit or settlement losses of this nature could adversely affect our financial condition or results of operations |
| In the process of executing matched principal transactions, miscommunications and other errors by our clients or us can arise whereby a transaction is not completed with one or more counterparties to the transaction, leaving us with either a long or short unmatched position |
| These unmatched positions are referred to as “out trades,” and they create a potential liability for the involved subsidiary of ours |
| If an out trade is promptly discovered and there is a prompt disposition of the unmatched position, the risk to us is usually limited |
| If the discovery of an out trade is delayed, the risk is heightened by the increased possibility of intervening market movements prior to disposition |
| Although out trades usually become known at the time of, or later on the day of, the trade, it is possible that they may not be discovered until later in the settlement process |
| When out trades are discovered, our policy is to have the unmatched position disposed of promptly, whether or not this disposition would result in a loss to us |
| The occurrence of out trades generally rises with increases in the volatility of the market and, depending on their number and amount, such out trades have the potential to have a material adverse effect on our financial condition and results of operations |
| We have market risk exposure from unmatched principal transactions entered into by some of our equity and credit product brokerage desks |
| We allow certain of our brokerage desks to enter into unmatched principal transactions in the ordinary course of business for the purpose of facilitating clients’ execution needs and, in a limited number of instances and subject to risk management limits, for the purpose of proprietary trading to arbitrage the value between an exchange traded fund and its component securities |
| As a result, we have market risk exposure on these unmatched principal transactions |
| Our exposure varies based on the size of the overall positions, the terms and liquidity of the instruments brokered, and the amount of time the positions are held before we dispose of the position |
| We do not track our exposure to unmatched positions on an intra-day basis |
| These unmatched positions are intended to be held short term |
| Due to a number of factors, including the nature of the position and access to the market on which it trades, we may not be able to match the position or effectively hedge our exposure and often may be forced to hold a position overnight that has not been hedged |
| Adverse movements in the securities underlying these positions or a downturn or disruption in the markets for these positions could result in a substantial loss |
| In addition, any principal gains and losses resulting from these positions could on occasion have a disproportionate effect, positive or negative, on our financial condition and results of operations for any particular reporting period |
| Financial problems experienced by third parties could affect the markets in which we provide brokerage services |
| Problems experienced by third parties could also affect the markets in which we provide brokerage services |
| For example, in recent years, hedge funds have increasingly begun to make use of credit and other 24 ______________________________________________________________________ derivatives as part of their trading strategies |
| Hedge funds typically employ a significant amount of leverage to achieve their results and, in the past, certain hedge funds have had difficulty managing this leverage, which has resulted in market-wide disruptions |
| If one or more hedge funds that was a significant participant in a derivatives market experienced similar problems in the future, that derivatives market could be adversely affected and, accordingly, our brokerage revenues in that market could decrease |
| We operate in a highly regulated industry and we may face restrictions with respect to the way we conduct certain of our operations |
| Our business is subject to increasingly extensive government and other regulation and our relationships with our broker-dealer clients may subject us to increasing regulatory scrutiny |
| These regulations are designed to protect the interests of the investing public generally rather than our stockholders |
| The SEC, the NASD, and other agencies extensively regulate the US financial services industry, including certain of our operations in the United States |
| Some of our international operations are subject to similar regulations in their respective jurisdictions, including regulations overseen by the FSA in the United Kingdom, the AMF in France, the SFC in Hong Kong, the MAS in Singapore and the JSDA in Japan |
| These regulatory bodies are responsible for safeguarding the integrity of the securities and other financial markets and protecting the interests of investors in those markets |
| Some aspects of our business are subject to extensive regulation, including: · the way we deal with clients; · capital requirements; · financial and reporting practices; · required record keeping and record retention procedures; · the licensing of employees; · the conduct of directors, officers, employees and affiliates; · systems and control requirements; · restrictions on marketing; and · client identification and anti-money laundering requirements |
| If we fail to comply with any of these laws, rules or regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of business, suspensions of personnel or other sanctions, including revocation of our registrations with the NASD, FSA or other similar international agencies to whose regulation we are subject |
| In the past, we have been fined by the NASD for issues relating to late trade reporting |
| For more details, see “Item 1—Business—Regulations |
| ” Our authority to operate as a broker in a jurisdiction is dependent on continued registration in that jurisdiction or the maintenance of a proper exemption from such registration |
| Our ability to comply with all applicable laws and rules is largely dependent on our compliance, credit approval, audit and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, credit approval, audit and risk management personnel |
| Our systems and procedures may not be effective |
| Some of our subsidiaries are subject to regulations regarding changes in control of their ownership |
| These regulations generally provide that regulatory approval must be obtained in connection with any transaction resulting in a change in control of the subsidiary, which may include changes in control of GFI Group Inc |
| As a result of these regulations, our future efforts to sell shares or raise additional capital may be delayed or prohibited in circumstances in which such a transaction would give rise to a change in control as defined by the applicable regulatory body |
| 25 ______________________________________________________________________ Changes in laws or regulations or in governmental policies could cause us to change the way we conduct our business, which could adversely affect us |
| The government agencies that regulate us have broad powers to investigate and enforce compliance and punish noncompliance with their rules, regulations and industry standards of practice |
| We or our directors, officers and employees may not comply with the rules and regulations of, and may be subject to claims or actions by, these agencies |
| In addition, because our industry is heavily regulated, regulatory approval may be required prior to expansion of business activities |
| We may not be able to obtain the necessary regulatory approvals for any desired expansion |
| Even if approvals are obtained, they may impose restrictions on our business or we may not be able to continue to comply with the terms of the approvals or applicable regulations |
| The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs or cause the development or continuation of business activities in affected markets to become impractical |
| For a further description of the regulations which may limit our activities, see “Item 1—Business—Regulation |
| ” Our regulated subsidiaries are subject to risks associated with net capital requirements, and we may not be able to engage in operations that require significant capital |
| The SEC, NASD, FSA, JSDA and various other domestic and international regulatory agencies have stringent rules and regulations with respect to the maintenance of specific levels of net capital by broker-dealers |
| Generally, a broker-dealer’s net capital is defined as its net worth plus qualified subordinated debt less deductions for certain types of assets |
| If we fail to maintain the required net capital, we may be subject to suspension or revocation of registration by the NASD or FSA, which would have a material adverse effect on our business |
| If these net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited |
| Also, our ability to withdraw capital from our regulated subsidiaries is subject to restrictions, which in turn could limit our ability to pay dividends, repay debt and redeem or purchase shares of our common stock |
| A large operating loss or charge against net capital could adversely affect our ability to expand or even maintain our present levels of business, which could have a material adverse effect on our business |
| In addition, we may become subject to net capital requirements in other foreign jurisdictions in which we currently operate or which we may enter |
| We cannot predict our future capital needs or our ability to obtain additional financing |
| For a further discussion of our net capital requirements, see “Item 1—Business—Regulation |
| ” We are subject to new requirements that we evaluate our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act and other corporate governance initiatives that may expose us to certain risks |
| As of December 31, 2006, we will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act and the Securities and Exchange Commission rules and regulations require an annual management report on our internal controls over financial reporting, including, among other matters, management’s assessment of the effectiveness of our internal control over financial reporting, and an attestation report by our independent registered public accounting firm addressing these assessments |
| We cannot be certain as to the timing of the completion of our evaluation, testing and remediation actions or the impact of the same on our operations |
| If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, including the SEC or the Nasdaq National Market |
| Moreover, if we are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which may have an a material adverse effect on our Company |
| 26 ______________________________________________________________________ Our compliance with the Sarbanes-Oxley Act may require significant expenses and management resources that would need to be diverted from our other operations and could require a restructuring of our internal controls over financial reporting |
| Any such expenses, time reallocations or restructuring could have a material adverse effect on our operations |
| The applicability of the Sarbanes-Oxley Act to us could make it more difficult and more expensive for us to obtain director and officer liability insurance, and also make it more difficult for us to attract and retain qualified individuals to serve on our boards of directors, or to serve as executive officers |
| Our investments in expanding our brokerage and market data and analytics services may not produce substantial revenue |
| We have made, and expect to continue to make, significant investments in our brokerage and market data and analytics services, including investments in technology and infrastructure, in order to pursue new growth opportunities |
| With respect to our brokerage services, we may not receive significant revenue and profit from the hiring of a new broker or the development of a new brokerage desk |
| With respect to our market data and analytics services, we may incur substantial development, sales and marketing expenses and expend significant management effort to create a new product or service |
| Even after incurring these costs, we ultimately may not sell any or only small amounts of these products or services |
| Consequently, if revenue does not increase in a timely fashion as a result of these expansion initiatives, the up-front costs associated with expansion may exceed revenue and reduce our working capital and income |
| We may have difficulty managing our growth effectively |
| We have experienced significant growth in our business activities over the last several years, which has placed, and is expected to continue to place, a significant strain on our management and resources |
| Continued growth will require continued investment in personnel, facilities, information technology infrastructure and financial and management systems and controls |
| We may not be successful in implementing all of the processes that are necessary to support our growth, which could result in our expenses increasing faster than our revenues, causing our operating margins and profitability to be adversely affected |
| The expansion of our international operations, particularly our Asia-Pacific and European operations, involves additional challenges that we may not be able to meet, such as the difficulty in effectively managing and staffing these operations and complying with the increased regulatory requirements associated with operating in new jurisdictions |
| This expansion, if not properly managed, could have a material adverse effect on our business |
| If we acquire other companies or businesses, or if we hire new brokerage personnel, we may have difficulty integrating their operations |
| To achieve our strategic objectives, we have acquired or invested in, and in the future may seek to acquire or invest in, other companies and businesses |
| We also may seek to hire brokers for new or existing brokerage desks |
| These acquisitions or new hires may be necessary in order for us to enter into or develop new product areas |
| Acquisitions and new hires entail numerous risks, including: · difficulties in the assimilation of acquired personnel, operations, services or products; · diversion of management’s attention from other business concerns; · assumption of unknown material liabilities of acquired companies or businesses; · commercial litigation; 27 ______________________________________________________________________ · the up-front costs associated with recruiting brokerage personnel, including when establishing a new brokerage desk; · failure to achieve financial or operating objectives; and · potential loss of clients or key employees of acquired companies, businesses or newly hired brokerage personnel |
| If we fail to manage these risks as we make acquisitions or make new hires, our profitability may be adversely affected, and we may never realize the anticipated benefits of the acquisitions or hires |
| In addition, entering into new businesses may require prior approval from our regulators |
| Our ability to obtain timely approval from our regulators may hinder our ability to successfully enter new businesses |
| In the event of employee misconduct or error, our business may be harmed |
| Employee misconduct could subject us to financial losses and regulatory sanctions and could seriously harm our reputation and negatively affect our business |
| It is not always possible to deter employee misconduct and the precautions taken to prevent and detect employee misconduct may not always be effective |
| Misconduct by employees could include engaging in unauthorized transactions or activities, failure to properly supervise other employees, engaging in improper or unauthorized activities on behalf of clients or improperly using confidential information |
| Employee errors, including mistakes in executing, recording or reporting transactions for clients, could cause us to enter into transactions that clients may disavow and refuse to settle, which could expose us to the risk of material losses until the errors are detected and the transactions are unwound or reversed |
| If our clients are not able to settle their transactions on a timely basis, the time in which employee errors are detected may be increased and our risk of material loss can be increased |
| Several of our clients are currently experiencing delays in settling credit derivative transactions that we broker on an agency basis |
| As with any unsettled transaction, adverse movements in the prices of the securities involved in these transactions before they are unwound or reversed can increase this risk |
| The risk of employee error or miscommunication may be greater for products that are new or have non-standardized terms |
| Our credit agreement contains restrictive covenants which may limit our working capital and corporate activities |
| We are a party to an amended and restated credit agreement with Bank of America NA and certain other lenders dated February 24, 2006 (the “2006 Credit Agreement”) which imposes operating and financial restrictions on us, including restrictions which may, directly or indirectly, limit our ability to: · merge, acquire or dispose of assets; · incur liens, indebtedness or contingent obligations; · make investments; · engage in certain transactions with affiliates and insiders; · enter into sale and leaseback transactions; · pay dividends and other distributions; · and enter into new lines of businesses that are substantially different from our current lines of business |
| In addition, our 2006 Credit Agreement contains covenants that require us to maintain specified financial ratios and satisfy specified financial tests |
| As a result of these covenants and restrictions, we may be limited in how we conduct our business, and we may be unable to raise additional financing, to compete 28 ______________________________________________________________________ effectively or to take advantage of new business opportunities |
| We may not be able to remain in compliance with these covenants in the future |
| Our 2006 Credit Agreement also contains several events of default, including for non-payment, certain bankruptcy events, covenant or representation breaches or a change in control |
| Computer systems failures, capacity constraints and breaches of security could increase our operating costs and cause us to lose clients |
| We internally support and maintain many of our computer systems and networks |
| Our failure to monitor or maintain these systems and networks or, if necessary, to find a replacement for this technology in a timely and cost-effective manner, would have a material adverse effect on our ability to conduct our operations |
| We also rely and expect to continue to rely on third parties to supply and maintain various computer and communications systems, such as telephone companies, online service providers, data processors, clearing organizations, software and hardware vendors and back-up services |
| Our systems, or those of our third party providers, may fail or operate slowly, causing one or more of the following: · unanticipated disruptions in service to our clients; · slower response times; · delays in our clients’ trade execution; · failed settlement of trades; · decreased client satisfaction with our services; · incomplete, untimely or inaccurate accounting, recording, reporting or processing of trades; · financial losses; · litigation or other client claims; and · regulatory sanctions |
| We may experience systems failures from power or telecommunications outages, acts of God, war, terrorism, human error, natural disasters, fire, sabotage, hardware or software malfunctions or defects, computer viruses, intentional acts of vandalism or similar events |
| Any system failure that causes an interruption in service or decreases the responsiveness of our service, including failures caused by client error or misuse of our systems, could damage our reputation, business and brand name |
| In addition, if security measures contained in our systems are breached as a result of third-party action, employee error, malfeasance or otherwise, our reputation may be damaged and our business could suffer |
| If systems maintained by us or third parties malfunction, our clients or other third parties may seek recourse against us |
| We could incur significant legal expenses defending these claims, even those which we may believe to be without merit |
| An adverse resolution of any lawsuits or claims against us could result in our obligation to pay substantial damages and could have a material adverse effect on our financial condition or results of operations |
| We depend on third-party software licenses |
| The loss of any of our key licenses could adversely affect our ability to provide our brokerage services |
| We license software from third parties, some of which is integral to our business |
| These licenses are generally terminable if we breach our obligations under the licenses or if the licensor gives us notice in advance of the termination |
| If any of these relationships were terminated, or if any of these third parties 29 ______________________________________________________________________ were to cease doing business, we may be forced to spend significant time and money to replace the licensed software |
| These replacements may not be available on reasonable terms, if at all |
| A termination of any of these relationships could have a material adverse effect on our financial condition and results of operations |
| We must keep up with rapid technological changes in order to compete effectively |
| To remain competitive, we must continue to enhance and improve the responsiveness, functionality, accessibility and other features of our software, network distribution systems and technologies |
| The financial services industry is characterized by rapid technological change, changes in use and client requirements and preferences, frequent product and service introductions employing new technologies and the emergence of new industry standards and practices that could render our existing technology and systems obsolete |
| Development by our competitors of new electronic trade execution or market information products that gain acceptance in the market could give those competitors a “first mover” advantage that may make it difficult for us to overcome with our own technology |
| Our success will depend, in part, on our ability to: · develop and license technologies useful in our business; · enhance our existing services; · develop or acquire new services and technologies that address the increasingly sophisticated and varied needs of our existing and prospective clients; and · respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis |
| The development of technology to support our business entails significant technological, financial and business risks |
| Further, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services |
| We may not successfully implement new technologies or adapt our technology and transaction-processing systems to client requirements or emerging industry standards |
| We may not be able to respond in a timely manner to changing market conditions or client requirements |
| If we are unable to anticipate and respond to the demand for new services, products and technologies on a timely and cost-effective basis, and to adapt to technological advancements and changing standards, we may be unable to compete effectively, which could negatively affect our business |
| We may not be able to obtain additional financing, if needed, on terms that are acceptable |
| Our business is dependent upon the availability of adequate funding and sufficient regulatory and clearing capital |
| Clearing capital is the amount of cash, guarantees or similar collateral that we must provide or deposit with our third party clearing organizations in support of our obligations under our contractual clearing arrangements with these organizations |
| Historically, these needs have been satisfied from internally generated funds, investments from our stockholders and lines of credit made available by commercial banking institutions |
| We believe that, based on current levels of operations and anticipated growth, our cash from operations, together with cash currently available, and available financing under our 2006 Credit Agreement, will be sufficient to fund our operations for the foreseeable future |
| However, if for any reason we need to raise additional funds, including meeting increased clearing capital requirements arising from growth in our brokerage business, we may not be able to obtain additional financing when needed |
| If we cannot raise additional funds on acceptable terms, we may not be able to develop or enhance our business, take advantage of future opportunities or respond to competitive pressure or unanticipated requirements |
| 30 ______________________________________________________________________ Seasonal fluctuations in trading may cause our quarterly operating results to fluctuate |
| In the past, our business has experienced seasonal fluctuations, reflecting reduced trading activity during summer months, particularly in August |
| We also generally experience reduced activity in December due to seasonal holidays |
| As a result, our quarterly operating results may not be indicative of the results we expect for the full year |
| Our operating results may also fluctuate quarter to quarter due to a variety of factors beyond our control such as conditions in the global financial markets, terrorism, war and other economic and political events |
| Furthermore, we may experience reduced revenues in a quarter due to a decrease in the number of business days in that quarter |
| We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business |
| We rely primarily on trade secret, contract, copyright, trademark and patent law to protect our proprietary technology |
| It is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights |
| We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations |
| We may face limitations or restrictions on the distribution of some of the market data generated by our brokerage desks |
| This may limit the comprehensiveness and quality of the data we are able to distribute or sell |
| In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity |
| Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any of which could negatively affect our business |
| Consolidation among our clients may cause our revenue to be dependent on a smaller number of clients and may result in additional pricing pressure |
| Our primary clients are leading financial services institutions |
| The number of these clients may decrease as a result of large financial institution mergers |
| While no client accounted for more than approximately 8prca and 7prca of our total revenues for the year ended December 31, 2005 and 2004, respectively, if our existing clients consolidate and new clients, such as national and regional banks, insurance companies and large hedge funds, do not generate offsetting volumes of transactions, our revenues may become concentrated in a relatively small number of clients |
| In that event, our revenues may be dependent on our relationships with those clients to a material extent |
| Furthermore, continued consolidation in the financial services industry could lead to the exertion of additional pricing pressure by our primary clients impacting the commissions we generate from our brokerage services |
| Jersey Partners has significant voting power and may take actions that may not be in the best interest of our other stockholders |
| Jersey Partners Inc |
| (“JPI”), together with its subsidiaries, in which our chief executive officer and founder, Michael Gooch, is the controlling shareholder, owns approximately 50prca of our outstanding common stock |
| Our president, Colin Heffron, is also a minority shareholder of JPI As a result, through JPI, Michael Gooch has the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions |
| This concentration of control could be disadvantageous to other stockholders with interests different from those of Michael Gooch |
| This concentration of voting power may have the effect of delaying or impeding actions that could be beneficial to our other stockholders, including actions that may be supported by our board of directors |
| The trading 31 ______________________________________________________________________ price for our common stock could be adversely affected if investors perceive disadvantages to owning our stock as a result of this significant concentration of share ownership |
| Provisions of our certificate of incorporation and bylaws, agreements to which we are a party, regulations to which we are subject and provisions of our stock option plans could delay or prevent a change in control of our company and entrench current management |
| Our second amended and restated certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, deter or prevent a change of control of us, such as a tender offer or takeover proposal that might result in a premium over the market price for our common stock |
| In addition, certain of these provisions make it more difficult to bring about a change in the composition of our board of directors, which could result in entrenchment of current management |
| For example, our second amended and restated certificate of incorporation and bylaws: · provide for a classified board of directors; · do not permit our stockholders to remove members of our board of directors other than for cause; · do not permit stockholders to act by written consent or to call special meetings; · require certain advance notice for director nominations and other actions to be taken at annual meetings of stockholders; · require supermajority stockholder approval with respect to extraordinary transactions such as mergers and certain amendments to our certificate of incorporation and bylaws (including in respect of the provisions set forth above); and · authorize the issuance of “blank check” preferred stock by our board of directors without stockholder approval, which could discourage a takeover attempt |
| Under our 2006 Credit Agreement, a change in control may lead the lenders to exercise remedies such as acceleration of the loan and termination of their obligations to fund additional advances under the revolving credit portion of that facility |
| Our brokerage businesses are heavily regulated and some of our regulators require that they approve transactions which could result in a change of control, as defined by the then-applicable rules of our regulators |
| The requirement that this approval be obtained may prevent or delay transactions that would result in a change of control |
| In addition, our stock option plans contain provisions pursuant to which options that are unexercisable or unvested may automatically become exercisable or vested as of the date immediately prior to certain change of control events |
| These provisions could have the effect of dissuading potential acquirors from pursuing merger discussions with us |
| We do not expect to pay any dividends for the foreseeable future |
| We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future |
| We expect to retain all future earnings, if any, for investment in our business |
| In addition, our 2006 Credit Agreement limits our ability to pay dividends without the approval of our lenders and any instruments governing our future indebtedness may also contain various covenants that limit our ability to pay dividends |
| 32 ______________________________________________________________________ The market price of our common stock may fluctuate in the future, and future sales of our shares could adversely affect the market price of our common stock |
| The market price of our common stock may fluctuate in the future depending upon many factors, including our actual results of operations and perceived prospects and the prospects of the financial marketplaces in general, differences between our actual financial and operating results and those expected by investors and analysts, changes in analysts’ recommendations or projections, seasonality, changes in general valuations for companies in our business segment, changes in general economic or market conditions and broad market fluctuations |
| Future sales of our shares also could adversely affect the market price of our common stock |
| If our existing stockholders sell a large number of shares, or if we issue a large number of shares of our common stock in connection with future acquisitions, strategic alliances or otherwise, the market price of our common stock could decline significantly |
| Moreover, the perception in the public market that these stockholders might sell shares of common stock could depress the market price of our common stock |
| As of December 31, 2005 we had registered under the Securities Act an aggregate of 1cmam612cmam099 shares of our common stock, which are reserved for issuance upon exercise of outstanding options under our 2000 and 2002 Stock Option Plans |
| In addition, as of December 31, 2005, we had registered under the Securities Act 3cmam000cmam000 shares of our common stock issuable under the 2004 Equity Incentive Plan |
| These shares can be sold in the public market upon issuance, subject to restrictions under the securities laws applicable to resales by affiliates |
| These sales might impact the liquidity of our common stock and might have a dilutive effect on existing stockholders making it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate |