| LABRANCHE & CO INC Item 1A RISK FACTORS The following risk factors should be carefully considered in evaluating our business and us because they have a significant impact on our business, operating results, financial condition, and cash flows |
| If any of these risks actually occurs, our business, financial condition, operating results and/or cash flows could be adversely affected |
| The market structure in which we operate may change, making it difficult for us to maintain our levels of profitability |
| The market structure in which we operate is subject to changes that could adversely affect our financial condition and results of operations |
| Most notably, the NYSE’s recently-consummated 17 ______________________________________________________________________ merger with Archipelago, as well as recent proposed changes in the NYSE’s automated trade execution system and the SEC’s recent proposed structural changes in the US equity trading markets, may have an adverse effect on our business |
| In February 2004 and again on August 2, 2004, the NYSE proposed to expand its Direct+® trading system to eliminate the current limits on size, timing and types of orders that currently may be executed electronically through the Direct+® system and thereby create a so-called hybrid market intended to incorporate a number of new trade execution options while preserving the option of access to auction price discovery and deep liquidity |
| Specifically, the NYSE’s proposals would eliminate the 1cmam099-share restriction on NYSE Direct+® orders, as well as the prohibition against entering orders for the same account within 30 seconds, and would permit market orders and immediate-or-cancel orders to be eligible for Direct+® execution |
| In addition, the NYSE’s proposals contain a number of other new features designed to “create a liquidity pool accessible for electronic and auction price discovery; the opportunity for benefits associated with human judgment at the point of sale; and accountable performance with focused communication by specialists |
| ” The NYSE has begun the technological work necessary to implement its proposed changes in the NYSE Direct+® system and, in December 2004, extended the pilot phase of this Direct+® system through December 23, 2005, subject to review and approval of these proposed changes by the SEC It is possible that the NYSE may again extend this pilot phase in order to complete the technological work to finalize the Direct+® system |
| In February 2004, the SEC proposed new rules which would require, subject to certain exceptions, that every “order execution facility” (ie, every national securities exchange, national securities association that operates an order execution facility, alternative trading system, exchange specialist and market maker, OTC market maker, block positioner and any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent) establish, maintain and enforce polices and procedures reasonably designed to prevent the execution of a “trade-through” (viz, the execution of an order at a price that is inferior to a price displayed in another market) in its market |
| As originally proposed, this requirement would apply to all incoming orders in “NMS Stocks,” including all NASDAQ, NYSE and AMEX-listed stocks and any order execution facility that executes orders internally within its market, whether or not that market posts its best bid and offer, and would have (1) allowed customers (and broker dealers trading for their own accounts) to “opt-out” of the protections of the rule by providing informed consent to the execution of their orders, on an order-by-order basis, in one market without regard to the possibility of obtaining a better price in another market, and (2) taken into account the differences between the speed of execution in electronic versus manual markets by providing an automated market with the ability to trade through a non-automated market at a price up to a certain amount away from the best bid or offer displayed by the non-automated market |
| On April 6, 2005, the SEC adopted Regulation NMS (“Regulation NMS”) |
| Regulation NMS is expected to become effective in 2006 and could have a significant impact on the regulation of trading on securities exchanges and marketplaces |
| Specifically, the rule establishes inter-market protection against “trade-throughs” for all NMS stocks and protection of only those quotations that are immediately accessible through automatic execution |
| The rule generally does not contain the “opt-out” exception described above that would have allowed market participants to disregard displayed quotations, but does include a number of exceptions to the “opt-out” 18 ______________________________________________________________________ proscription to help ensure that the rule is workable with high-volume securities |
| The rule also is anticipated to protect the best bids and offers of each exchange, Nasdaq, and the NASD’s Alternative Display Facility |
| While it is too early to anticipate the impact that Regulation NMS could have on our trading, it is possible that the rule could materially affect our compliance costs and alter the competitive environment in which our Specialist and Market-Making segment functions |
| There also may be regulatory changes following the closing of the merger of the NYSE and Archipelago Holdings, Inc |
| Any failure by us to adapt to these changes could materially adversely affect our results in the new NYSE Market following the merger |
| Please see “—Risks Associated with the Recently-Consummated NYSE Merger” for a more detailed discussion |
| We are subject to extensive regulation under federal and state laws that could result in investigations, fines or other penalties |
| On March 29, 2004, we entered into a definitive agreement with the NYSE and the SEC to settle investigations by the NYSE and the SEC concerning specialist trading activity |
| Pursuant to the agreement, and without admitting or denying any wrongdoing, we paid on April 7, 2004 a total of dlra63dtta5 million with respect to certain trades that occurred during the five-year period from 1999 through 2003 |
| In December 2004, our LaBranche & Co |
| LLC subsidiary received a notice from the NASD Amex Regulation Division stating a preliminary determination by the NASD Amex Regulation Division’s staff to seek disciplinary action against LaBranche & Co |
| LLC for violations of certain federal securities laws and the AMEX’s Constitution and Rules, including Sections 10(b), 9A and 17(a) of the Securities Exchange Act of 1934, in connection with manual book freezes effected in one of LaBranche & Co |
| LLC’s Amex specialist stocks during the period March 8, 2004 through October 21, 2004 |
| This notice of possible disciplinary action has not yet been resolved |
| In addition, our broker-dealer subsidiaries are subject to increasing regulatory inquiries and informal investigations in the ordinary course of business and, as a result, are spending more resources on responding to, and defending, these inquiries and investigations |
| It is possible that these additional resources could result in increased legal and professional fees, as well as additional fines and formal regulatory actions going forward |
| It is too early to predict whether and to what extent any of these regulatory inquiries could escalate |
| However, if any of these ordinary inquiries progress into material regulatory or legal proceedings, such proceedings could result in settlements, determinations or judgments requiring substantial payments of sanctions, fines and penalties, as well as the costs of defending these actions, which could materially and adversely affect our business and operations |
| We cannot assure you that we will be able to detect or prevent all employee misconduct or rule violations |
| We are subject to extensive regulation under both federal and state laws |
| In addition, the SEC, the NYSE, the NASD, the AMEX, other SROs and state securities commissions require strict compliance with their respective rules and regulations |
| As a result of our acquisitions since 1997 and the increase in the size of our business and in the number of our employees, the risk that we will not detect or prevent employee misconduct has increased |
| Employee misconduct that 19 ______________________________________________________________________ may be difficult to detect could result in losses |
| Misconduct by employees could include, among other things, binding us to transactions that exceed authorized limits or present excessive risks, violation of securities rules or exchange rules that have not been detected by the technological systems installed by the exchanges to prevent such violations or hiding from us unauthorized or unsuccessful activities, which, in any case, may result in unknown and unmanaged risks or losses |
| Employee misconduct could also involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputation or financial harm |
| If there are any additional investigations or actions against us or any of our subsidiaries, such investigations or actions could result in settlements, determinations or judgments requiring substantial payments by us, including the costs of defending such investigations or actions, the imposition of substantial sanctions, fines or penalties and the suspension or revocation of our registration with the SEC as a broker-dealer or our suspension or expulsion as a member firm of the NYSE, the AMEX and the other exchanges on which we operate, in which case we would be unable to operate our business |
| It also may be difficult for us to comply with other new or revised legislation or regulations imposed by the SEC, other US or foreign governmental regulatory authorities and SROs, including the NYSE and the AMEX The risks of failure to comply with foreign laws and rules will increase as our LSPE and LSPH subsidiaries begin to operate as foreign broker-dealers |
| Failure to comply with any of these rules or regulations would have an adverse effect on our business, financial condition and/or operating results |
| Other changes in the interpretation or enforcement of existing laws and rules by the SEC, these governmental authorities and SROs also could have an adverse effect on our business, financial condition and/or operating results |
| Failure to comply with undertakings set forth in the settlement with the NYSE and SEC could adversely affect us |
| In connection with the settlement of the NYSE and the SEC investigations concerning our NYSE specialist trading activity, we agreed to, and we are complying with, the following undertakings: • implementation of systems and procedures to ensure appropriate follow up and review with regard to information provided to LaBranche & Co |
| LLC on a daily basis by the NYSE with regard to specialists’ override of the Principal Inhibitor function, which identifies specialist principal trades that may have been effected while an executable agency order was reflected in the order book on the same side of the market; • creation of a committee, including LaBranche & Co |
| LLC’s chief compliance officer and at least two members of senior management, specifically charged with meeting periodically (no less frequently than monthly) to evaluate specialist rule compliance; • development and/or enhancement of systems and procedures to track and maintain records identifying the individuals acting as specialist and clerk for each security at all times throughout each trading day; • annual certification, through LaBranche & Co |
| LLC’s chief executive officer, that a review has been conducted by the chief compliance officer of trading in LaBranche & 20 ______________________________________________________________________ Co |
| LLC’s principal account for the purpose of detecting interpositioning, trading ahead and unexecuted limit order violations; • bi-annual assessment of, and reports on, the adequacy of the resources devoted to LaBranche & Co |
| LLC’s compliance function, and devotion of adequate funds and staffing to the compliance department; and • retention of an independent consultant to review and evaluate LaBranche & Co |
| LLC’s compliance systems, policies and procedures reasonably designed to ensure that LaBranche & Co |
| LLC is in compliance with federal securities laws and NYSE rules with regard to specialist trading |
| If we are, in the future, unable to maintain our compliance with any of these undertakings for reasons that we cannot foresee, such failure could have a material adverse effect on our business and our regulatory compliance structure |
| We also are subject to the risks of securities laws liability and related civil litigation |
| Many aspects of our business involve substantial risks of legal liability |
| A specialist is exposed to substantial risks of liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC, the NYSE and the AMEX The above-described settlement with the NYSE and SEC has also resulted in the initiation of purported class action and derivative action proceedings against us and certain of our officers and directors in the United States District Court for the Southern District of New York and other proceedings in other courts, all of which are described under “Business—Legal Proceedings |
| ” In 2004 and early 2005, we also had received requests for information from the SEC and the United States Attorney’s Office for the Southern District of New York as part of an industry-wide investigation relating to activities of NYSE floor specialists from 1999 through 2003 |
| Two additional actions have been commenced by entities against four national securities exchanges and 35 securities brokers (including our LSP subsidiary) in the United States District Court for the Northern District of Illinois, alleging that LSP conspired with the other defendants by allegedly failing to execute orders, canceling orders and refusing to cancel orders for the purchase and sale of options |
| While we deny the allegations of wrongdoing against us in these actions, there can be no assurance as to the ultimate outcome or timing of their resolution |
| The range of possible resolutions could include determinations and judgments against us or settlements that could require substantial payments by us, including the costs of defending such investigations and suits, which could have a material adverse effect on our financial condition, results of operations and cash flows |
| We also are subject to the risk of civil litigation, employment claims and other actions in the ordinary course of our business operations |
| In particular, LFSI, as successor in interest to ROBB PECK McCOOEY Clearing Corporation, or RPMCC, has been the target, from time to time, of various claims and lawsuits incidental to the ordinary course of RPMCC’s business 21 ______________________________________________________________________ operations, and we have been the subject of a suit filed on behalf of a former employee by the Equal Employment Opportunity Commission for discrimination on the basis of disability |
| It is possible that we could incur significant legal expenses in defending ourselves against these and future lawsuits or claims |
| An adverse resolution of any future lawsuits or claims against us could have an adverse effect on our business, financial condition and/or operating results |
| We may have insufficient capital in the future and may be unable to secure additional financing when we need it |
| Our business depends on the availability of adequate capital |
| We cannot be sure that we will have sufficient capital in the future or that additional financing will be available on a timely basis, or on terms favorable to us |
| Historically, we have satisfied these needs with internally generated funds, the issuance of subordinated debt by our operating subsidiaries and the issuance of common stock and notes representing our indebtedness |
| While we currently anticipate that our available cash resources will be sufficient to meet our anticipated working capital, regulatory capital and capital expenditure requirements through at least the next twelve months, we may need to raise additional funds to: • increase the capital available to us for our inventory positions; • expand or diversify our operations; • acquire complementary businesses; or • respond to unanticipated capital requirements |
| We may be required to obtain this additional financing on short notice as a result of rapid, unanticipated developments, such as a steep market decline |
| Our revenues may decrease due to changes affecting the economy or changes affecting the securities markets, such as decreased volume, volatility or liquidity |
| Adverse changes affecting the economy and/or the securities markets could result in a further decline in market volatility or liquidity, thus negatively impacting revenues at our Specialist and Market-Making segment and our Execution and Clearing segment |
| Many elements of our cost structure do not decline if we experience reductions in our revenues and we may be unable to adjust our cost structure on a timely basis, or at all, and we could suffer losses |
| The lack of growth in share volume, rising program trading and low levels of volatility on the NYSE over the past three years have negatively affected our results of operations and may adversely affect our operations in the future |
| Although US equity prices generally recovered in 2003, 2004 and 2005, adverse changes in the economy and the securities markets could return, resulting in: • losses from declines in the market value of securities held in our accounts; • a decline in trading volume on the NYSE, the AMEX and other exchanges; 22 ______________________________________________________________________ • a decline in volatility in the securities markets in which we act as a specialist; • the failure of buyers and sellers of securities to fulfill their settlement obligations; and • further increases in claims and litigation |
| Whether market and economic conditions will continue to improve and whether we will be able to adequately protect our interests and maintain revenues in the future is uncertain |
| Risks associated with our trading transactions could result in trading losses |
| A majority of our Specialist and Market-Making segment’s revenues are derived from trading by us as principal |
| We may incur trading losses relating to these activities, since each such trade primarily involves the purchase, sale or short sale of securities for our own account |
| In any period, we may incur trading losses in a significant number of our specialist stocks, options, rights and ETFs for a variety of reasons, including price declines, lower trading volumes and the required performance of our specialist obligations |
| From time to time, we have large position concentrations in securities of a single issuer or issuers engaged in a specific industry |
| In general, because our inventory of securities is marked-to-market on a daily basis, any downward price movement in these securities results in an immediate reduction of our revenues and operating results |
| Our specialist and market-maker trading in options, ETFs, futures, other derivative instruments and foreign currencies also exposes us to certain additional risks associated with such factors as price fluctuations, foreign exchange currency movements, changes in the liquidity of markets, volatility and counterparty credit |
| Although we have adopted and carry out risk management procedures, we cannot be sure that these procedures have been formulated properly to identify or completely limit our risks and, even if formulated properly, we cannot be sure that we will successfully implement these procedures |
| As a result, we may not be able to manage our risks successfully or avoid trading losses |
| Our securities transactions are conducted as principal and agent with broker-dealer counterparties located in the United States |
| While the NYSE, the AMEX and the clearing houses monitor the credit standing of the counterparties with which we conduct business, we cannot be certain that any of these counterparties will not default on their obligations |
| If any do, our business, financial condition and/or operating results could be adversely affected |
| Specialist and market-maker rules require us to make unprofitable trades and refrain from making profitable trades |
| Our roles as a specialist and market maker, at times, require us to make trades that adversely affect our operating results |
| In addition, as a specialist and market-maker, we are at times required to refrain from trading for our own account in circumstances in which it may be to our advantage to trade |
| For example, we may be obligated to act as a principal when buyers or sellers outnumber each other and take a position counter to the market, buying or selling shares to support an orderly market in the affected stocks |
| In addition, specialists and market-makers generally may not trade for their own account when public buyers are meeting public sellers in an 23 ______________________________________________________________________ orderly fashion and may not compete with public orders at the same price |
| By having to support an orderly market, maintain inventory positions and refrain from trading under some favorable conditions, we are subject to risk |
| In addition, one consequence of the SEC and the NYSE investigations of NYSE specialist trading practices may be amendments by the NYSE and, possibly, the AMEX, of the rules, practices and procedures governing our specialist and market-making activities in a manner that could adversely affect our trading revenues |
| Failure to comply with net capital and net liquid asset requirements may result in the revocation of our registration with the SEC or our expulsion from the NYSE and/or the AMEX The SEC, the NYSE, the AMEX and various other regulatory agencies have stringent rules with respect to the maintenance of minimum levels of capital and net liquid assets by securities broker-dealers and specialist firms |
| LLC and LSPS are required to maintain minimum combined net liquid assets of approximately dlra447dtta0 million |
| Failure by any of our broker-dealer and specialist subsidiaries to maintain its required level of net capital and net liquid assets may subject it to suspension or revocation of its SEC registration or suspension or expulsion by the NYSE and/or the AMEX If this occurs, we would be unable to operate our business |
| In addition, a change in these rules, the imposition of new rules or any unusually large capital requirement or charge against the regulatory capital of any of our broker-dealer subsidiaries could limit those areas of our operations which require intensive use of capital |
| These rules also could restrict our ability to withdraw capital from our broker-dealer subsidiaries, thus limiting our ability to expand, diversify or even maintain our present levels of business, pay dividends, repay debt and repurchase shares of our outstanding common stock |
| We depend primarily on our Specialist and Market-Making activities, and if they fail to generate revenues as anticipated, it would adversely affect our financial condition and results of operations |
| We derive the vast majority of our revenues from specialist and market-making activities |
| If demand for our specialist and market-making services fails to grow, grows more slowly than we currently anticipate or declines, our financial condition and results of operations would be adversely affected |
| We expect our specialist and market-making activities to continue to account for the vast majority of our revenues for the foreseeable future |
| Our future success will depend on: • continued growth in the volume of trading and the number of listings on the NYSE, the AMEX and other exchanges; • being chosen as the specialist for additional listed companies and ETFs; • our ability to respond to regulatory and technological changes; and • our ability to respond to changing demands in the marketplace |
| Over the past few years, a number of alternative trading systems have been developed or emerged |
| These alternative trading systems may compete with specialists by increasing trading in 24 ______________________________________________________________________ NYSE-listed and AMEX-listed securities off the NYSE and the AMEX trading floors |
| In addition, as described above, the SEC and the NYSE’s market structure rule changes could result in increased trading of NYSE-listed and AMEX-listed securities in electronically-matched orders and thus reduce levels of trading of such securities through specialists |
| Historically, a relatively small number of listed companies has accounted for a significant portion of our revenues from our NYSE specialist trading activities |
| The loss of any of these listed companies could have an adverse effect on our revenues |
| For the years ended December 31, 2003, 2004 and 2005, transactions in our 10 most actively traded NYSE specialist stocks accounted for approximately 19dtta0prca, 16dtta8prca and 13dtta6prca of our total NYSE principal trading revenues, respectively |
| The composition of these ten most actively traded specialist stocks changes frequently |
| We can lose these listed companies if they cease to be traded on the NYSE as a result of being acquired or otherwise delisted |
| In addition, under NYSE procedures allowing listed companies greater latitude to request a change in their specialist or if the NYSE were to determine that we have failed to fulfill our obligations as specialist for a listed company, our registration as the specialist for that listed company could be canceled or suspended |
| Although we have further diversified our specialist and market-making operations into additional products and marketplaces, this diversification may not adequately diminish our risk of reliance on certain operations |
| We cannot assure you that we will continue to be able to effectively compete in the specialist and market-making industry |
| We cannot be sure that we will be able to compete effectively with current or future competitors in the specialist and market-making industry |
| We obtain all our new equity listings on the NYSE by going through an allocation process |
| In this process, either a committee of the NYSE or the listing company chooses the specialist |
| The competition for obtaining new listing companies is intense |
| We expect competition to continue and further intensify in the future |
| We also compete with significantly larger entities to be the specialist in ETFs traded on the NYSE and the AMEX Although we have been able to secure a market share of the ETF specialist business with many of the established ETF issuers, we cannot assure you that our growth in market share will continue as our competitors focus more resources on their ETF specialist business or as market participants enter the ETF market |
| Some of our competitors may have significantly greater financial and other resources than we have in both specialist and market-making activities and may have greater name recognition |
| These competitors may be able to respond more quickly to new or evolving opportunities and listing company requirements |
| They also may be able to undertake more extensive promotional activities to attract new listing companies, especially those which are not publicly-traded specialist firms |
| Our failure to compete effectively would have an adverse effect on our operating results |
| 25 ______________________________________________________________________ We have significant debt obligations |
| We have a significant amount of debt |
| As of December 31, 2005, our total debt outstanding was dlra493dtta8 million, excluding subordinated liabilities related to contributed exchange memberships |
| LLC also may borrow, subject to certain conditions, up to dlra200dtta0 million to finance its specialist security positions under a committed line-of-credit with a US commercial bank |
| Our significant level of debt could have important consequences, including the following: • our ability to obtain additional financing to fund growth, working capital, capital expenditures, debt service requirements or other purposes may be impaired; • our ability to use operating cash flow in other areas of our business may be limited because we dedicate a substantial portion of these funds to service our debt; and • limitation on our flexibility to adjust to changing market conditions, changes in our industry and economic downturns |
| Our ability to take certain actions may be restricted by the terms of our outstanding indebtedness |
| The covenants in the indenture governing our outstanding 9dtta5prca Senior Notes due 2009 and our outstanding 11dtta0prca Senior Notes due 2012, in the aggregate principal amount of approximately dlra460dtta0 million (collectively, the “outstanding senior notes”), LaBranche & Co |
| LLC’s dlra200dtta0 million committed line of credit agreement with a bank and subordinated note purchase agreements (under which approximately dlra9dtta0 million remains outstanding), as well as any future financing agreements, may adversely affect our ability to finance future operations or capital needs or to engage in other business activities |
| These covenants may limit or restrict our ability and the ability of our subsidiaries, under certain circumstances, to: • incur additional debt; • pay dividends and make distributions; • repurchase our common stock or subordinated indebtedness prior to maturity; • make certain investments; • create liens on our assets; • transfer or sell assets; • enter into transactions with affiliates; • issue or sell stock of subsidiaries; or • merge or consolidate |
| 26 ______________________________________________________________________ For example, our ability to take certain actions, such as incurring additional indebtedness (other than certain “permitted indebtedness”) or making certain “restricted payments” (such as paying dividends, redeeming stock or repurchasing subordinated indebtedness prior to maturity), is limited if our consolidated fixed charge coverage ratio, as defined by our debt covenants and calculated on a trailing four-quarter basis, is at or below a threshold of 2dtta00:1, as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources |
| ” Although our consolidated fixed charge coverage ratio currently is above 2:00:1, we have in the past been below this ratio, which prevented us from making “restricted payments” exceeding dlra15dtta0 million in the aggregate over the life of the indenture |
| In addition, under the indenture governing our outstanding senior notes, even if our consolidated fixed charge coverage ratio is 2dtta00:1 or greater, we cannot make any such “restricted payments” if doing so will cause our cumulative “restricted payments” since May 18, 2004 to be greater than the sum of (A) 50dtta0prca of our cumulative consolidated net income since July 1, 2004 (or, if such calculation is a loss, minus 100dtta0prca of such loss) and (B) 100dtta0prca of the net cash proceeds received from any issuance or sale of our capital stock since July 1, 2004 and certain other amounts |
| As of December 31, 2005, this covenant prevented us from making restricted payments in excess of dlra36dtta2 million |
| Although we have not made any restricted payments since May 18, 2004, we cannot be sure if, when or to what extent the covenants in the indenture will prevent us from making restricted payments in the future |
| The note purchase agreement governing this subordinated indebtedness requires LaBranche & Co |
| LLC’s ability to comply with these ratios may be affected by events beyond our or its control |
| If any of the covenants in this agreement are breached, or if LaBranche & Co |
| LLC is unable to comply with required financial ratios, we or it may be in default under such agreements |
| A significant portion of this indebtedness then may become immediately due and payable |
| We are not certain whether we would have, or be able to obtain, sufficient funds to make required accelerated payments under our indebtedness, including payments on our outstanding senior notes |
| We may not be able to generate sufficient cash flows to meet our debt service obligations, including payments on the outstanding senior notes |
| Our ability to generate sufficient cash flows from operations to make scheduled payments on our debt obligations will depend on our future financial performance, which will be, to an extent, subject to general economic, financial, competitive, regulatory and other factors that are beyond our control |
| We cannot provide assurance that our business will generate sufficient cash flows or that future borrowings will be available to us in an amount sufficient to enable us to pay our debt, including the outstanding senior notes, or to fund our other liquidity needs |
| If our future cash flows from operations are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to sell assets, obtain additional equity capital or restructure or 27 ______________________________________________________________________ refinance all or a portion of our debt, including the outstanding senior notes, on or before maturity |
| We cannot assure you that we will be able to repay or refinance our debt, including the outstanding senior notes, on a timely basis or on satisfactory terms, if at all |
| We may not be able to finance a change of control offer required by the indenture governing the outstanding senior notes |
| If we were to experience a change of control, we would be required to offer to repurchase all outstanding senior notes then-outstanding, as well as all of our then-outstanding 12dtta0prca senior subordinated notes due 2007, in the aggregate principal amount of approximately dlra13dtta6 million (the “2007 notes”), in each case at a price equal to 101dtta0prca of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase |
| This purchase requirement may delay or make it harder for others to obtain control of us |
| If a change of control were to occur, it is possible that we would not have sufficient funds to repurchase these notes or that restrictions in the credit agreement and LaBranche & Co |
| LLC’s subordinated note purchase agreements and such other notes would not allow such repurchases |
| If we do not have sufficient funds at the time of a repurchase obligation or cannot meet any obligations under the credit agreement, the subordinated note purchase agreements, the indenture governing the outstanding senior notes, or the indenture governing the 2007 notes, we would be forced to seek additional third-party financing |
| However, it is possible that we would not be able to obtain such financing on favorable terms, or at all |
| Our success depends on our ability to accurately process and record our transactions, and any failure to do so could subject us to losses |
| Our specialist, market-making and clearing and execution activities require us to accurately record and process a very large number of transactions on a daily basis |
| Any failure or delay in recording or processing transactions could cause substantial losses for brokers, their customers and/or us and could subject us to claims for losses |
| We rely on our staff to operate and maintain our information and communications systems properly, and we depend on the integrity and performance of those systems |
| Our recording and processing of trades is subject to human and processing errors |
| Moreover, extraordinary trading volume or other events could cause our information and communications systems to operate at an unacceptably low speed or even fail |
| Any significant degradation or failure of our information systems or any other systems in the trading process could cause us to fail to complete transactions or could cause brokers who place trades through us to suffer delays in trading |
| Any information or communication systems failure or decrease in information or communications systems performance that causes interruptions in our operations could have an adverse effect on our business, financial condition and/or operating results |
| Our systems may fail as a result of a hardware, software, power or telecommunications failure |
| In addition, our offices are located in close proximity to the site of the September 11, 2001 terrorist attacks on the World Trade Center |
| The aftermath of the attacks on the World Trade Center required us to close our operations and temporarily operate from our disaster recovery site |
| The NYSE also was forced to stop operating for four consecutive trading days, which caused our operations to halt |
| It is possible that additional terrorist attacks or acts of war may occur in the future and that such 28 ______________________________________________________________________ attacks could compromise or disable our systems |
| Although we have established back-up disaster recovery centers in New Jersey and New York and have an overall business continuity plan in the event of another disaster, these measures may not be effective in preventing an interruption of our business |
| We also are dependent on the proper and timely function of complex information and communications systems maintained and operated by or for the NYSE, the AMEX and clearing and depositary institutions |
| Failures or inadequate or slow performance of any of these systems could adversely affect our ability to operate and complete trades |
| The failure to complete trades on a timely basis could subject us to losses and claims for losses of brokers and their customers |
| Our future success will depend on the ability to upgrade information and communications systems, and any failure to do so could harm our business and profitability |
| The development of complex communications and new technologies, including Internet-based technologies, may render our existing information and communications systems outdated |
| In addition, our information and communications systems must be compatible with those of the NYSE and the AMEX As a result, when and if the NYSE or the AMEX upgrades its systems, we will need to make corresponding upgrades |
| Our future success will depend on our ability, on a cost-effective basis, to timely respond to changing technologies |
| Our failure to do so could have an adverse effect on our business, financial condition and/or operating results |
| The NYSE’s ability to develop information and communications systems and complex computer and other technology systems has been instrumental in its growth and success |
| We are dependent on the continuing development of technological advances by the NYSE and the AMEX, a process over which we have no control |
| If the NYSE for any reason is unable to continue its history of computer-related and other technological developments and advances, it could have an adverse effect on the success of the NYSE, including its ability to grow, to manage its trading volumes and to attract new listings |
| Any such developments can be expected to adversely affect our operations, financial condition and operating results |
| If we lose the services of our key personnel or cannot hire additional qualified personnel, our business will be harmed |
| Our future success depends on the continued service of key employees, particularly George ML LaBranche, IV, our Chairman, Chief Executive Officer and President |
| The loss of the services of any of our key personnel or the inability to identify, hire, train and retain other qualified personnel in the future could have an adverse effect on our business, financial condition and/or operating results |
| Competition for key personnel and other highly qualified management, trading, compliance and technical personnel is intense |
| We cannot assure you that we will be able to attract or retain highly qualified personnel in the future |
| Our current and prospective employees may experience uncertainty about their future roles with us and our business prospects |
| This uncertainty may adversely affect our ability to attract and retain key personnel, which would adversely affect our business and results of operations |
| 29 ______________________________________________________________________ We may have difficulty successfully managing our growth |
| Our business has grown since 1997, primarily due to acquisitions and organic growth through the continued expansion of our specialist and market-making operations |
| The growth of our business has increased the demands upon our management and operations |
| This growth has required, and will continue to require, an increase in investment in management personnel, financial and management systems and controls and facilities |
| The scope of procedures for assuring compliance with applicable rules and regulations, including the Sarbanes-Oxley Act of 2002, has changed as the size and complexity of our business has increased |
| In response, we have implemented formal compliance procedures that are regularly updated |
| Our future operating results will depend on our ability to continue: • to improve our systems for operations, financial control and communication and information management; • to refine our compliance procedures and enhance our compliance oversight; • to raise additional capital if and when needed; • to effectively deploy assets, capital or workforce; • to maintain strong relationships with, and attract new, listed companies; and • to retain and incentivize our employees |
| Three of our current or former executive officers are in a position to substantially control matters requiring a stockholder vote |
| Certain of our current and former managing directors who currently own a significant amount of our outstanding common stock have entered into a stockholders’ agreement under which they have agreed, among other things, that their shares of our common stock will be voted, for as long as they own their shares, as directed by a majority vote of George ML LaBranche, IV, our Chairman, Chief Executive Officer and President, Alfred O Hayward, Jr, our executive officer, director and Chief Executive Officer of LaBranche & Co |
| LLC, and James G Gallagher, a former executive officer and director |
| Accordingly, these individuals have the ability to substantially control most matters requiring approval by our common stockholders |
| These matters include the election and removal of directors and the approval of any merger, consolidation or sale of all or substantially all our assets |
| This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, a merger or consolidation, a takeover or another business combination |
| 30 ______________________________________________________________________ Risks Associated with the Recently Consummated NYSE Merger The value of the NYSE Group stock we received in the NYSE merger with Archipelago may significantly lose value following the merger |
| In connection with the recently-consummated merger between the NYSE and Archipelago, we received approximately 3dtta1 million shares of NYSE Group common stock in exchange for our 39 NYSE memberships |
| Under the merger agreement, there are restrictions on the sale of the NYSE Group shares following the merger |
| As provided in the agreement, one-third of these NYSE Group shares will be released from these sale restrictions on each of the first three anniversaries of the closing of the merger |
| Although the agreement allows the NYSE to release these sale restrictions early in a secondary offering, we will only be able to participate in such an offering by selling a small portion of our NYSE Group stock |
| As a consequence, there is a risk that there could be a significant drop in the value of the NYSE Group stock prior to the time we are able and choose to monetize the consideration we received in exchange for the NYSE memberships we held prior to the NYSE merger |
| We expect to mark our NYSE Group shares to market, subject to any applicable discounts due to restrictions on transfer |
| Any substantial drop in the price of NYSE Group stock following the merger could require us to consider whether such drop in value has created an impairment of our intangible assets |
| Such an impairment, if any, would adversely affect our financial results in a particular fiscal period |
| The regulatory environment following the NYSE merger could change and thereby adversely affect our compliance and strategic efforts |
| As disclosed in connection with the NYSE merger, NYSE Regulation is expected to perform the regulatory function for the NYSE and the Pacific Stock Exchange |
| In addition, the NYSE Group has proposed that technology play a greater role in trading, compliance and regulation |
| The NYSE Group also has indicated that NYSE Regulation may be self-funding |
| It is possible that these factors could cause regulatory or technological errors, especially if NYSE Regulation is unable to adequately self-fund its operations |
| This environment could produce additional regulatory scrutiny, which could cause us to expend additional resources to monitor and enhance our compliance with NYSE rules |
| We also may be required to expend substantial resources to coordinate our technological compliance systems with those of the new technological requirements of the NYSE market, which could increase our overall Specialist and Market-Making segment operating expenses and adversely affect our operating results |
| The role of the specialist on the NYSE may substantially change following the merger and we may not be able to timely adapt |
| Although senior NYSE officials have continued to publicly state that there will continue to be an auction market with a central point of sale on the NYSE following the merger, and that specialists will continue to play an integral role in making a fair and orderly market and providing liquidity, there is speculation that large issuers’ stocks will trade entirely electronically with minimal participation by specialists |
| We may not be able to anticipate or adequately and effectively deploy capital, workforce and technology to respond to such a change |
| Although we have expended considerable resources to enable us to adapt to such a situation, we may not be able to timely or successfully do so |
| Any failure by us to anticipate, respond or adapt to a 31 ______________________________________________________________________ changing NYSE Market following the merger could adversely affect our results of operations and financial condition |
| The NYSE Group may not achieve the anticipated cost savings, technology improvements, growth opportunities and other benefits anticipated from the transaction, which could adversely affect the operations of the NYSE specialist firms following the merger |
| Some of the stated purposes of the NYSE’s merger with Archipelago are the cost savings, the ability to compete with an increasingly electronic marketplace, potential market growth opportunities and other synergies |
| Prior to the merger, the NYSE and Archipelago operated as separate companies with different goals, technology, infrastructures and market structures |
| The success of the NYSE merger will depend, in part, on the ability to achieve these cost savings, efficiencies and technological and product advances |
| If the NYSE Group is not able to successfully achieve these objectives, the anticipated cost savings, technological and revenue growth and synergies may not be realized fully or at all, or may take longer to realize than expected |
| In such event, the new NYSE Market may lose listed companies, exchange-based trading market share and additional product lines and order flow |
| To the extent the NYSE Market is unable to attract new listed companies or products or loses existing listed companies and products, our financial results and operations could be materially adversely affected |