EXHIBIT 99
RISK FACTORS
The risks described below are not the only ones facing us. Additional
risks not presently known to us or that we currently believe are immaterial may
also impair our business operations. Our business, financial condition or
results of operation could be materially adversely affected by any of these
risks. The trading price of our common stock could decline because of any one of
these risks.
Market fluctuations could adversely affect our business.
As a securities broker-dealer, our business is materially affected by
conditions in the financial markets and economic conditions generally, both in
the United States and elsewhere around the world. In the event of a market
downturn, our business could be adversely affected in many ways, including those
described below. Our revenues are likely to decline in such circumstances and,
if we are unable to reduce expenses at the same pace, our profit margins would
erode.
Possible decline in revenues from commissions in a market downturn.
A market downturn could lead to a decline in the volume of transactions
that we execute for our customers and, therefore, to a decline in the revenues
we receive from commissions and spreads.
We may incur significant losses from trading and investment activities due to
market fluctuations and volatility.
We generally maintain trading and investment positions in the equity
markets. To the extent that we own assets, i.e. have long positions, in those
markets, a downturn in those markets could result in losses from a decline in
the value of those long positions. Conversely, to the extent that we have sold
assets that we do not own, i.e., have short positions, in any of those markets,
an upturn in those markets could expose us to potentially unlimited losses as we
attempt to cover our short positions by acquiring assets in a rising market. We
may from time to time have a trading strategy consisting of holding a long
position in one asset and a short position in another, from which we expect to
earn revenues based on changes in the relative value of the two assets. If,
however, the relative value of the two assets changes in a direction or manner
that we did not anticipate or against which we are not hedged, we might realize
a loss in those paired positions. In addition, we maintain trading positions
that can be adversely affected by the level of volatility in the financial
markets, i.e., the degree to which trading prices fluctuate over a particular
period, in a particular market, regardless of market levels.
Investment banking revenues may decline in adverse market or economic
conditions.
Unfavorable financial or economic conditions would likely reduce the
number and size of transactions in which we provide underwriting, mergers and
acquisitions advisory and other services. Our investment banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn.
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Our risk management policies and procedures may leave us exposed to unidentified
or unanticipated risk.
Our policies and procedures to identify, monitor and manage risks may
not be fully effective. Some methods of managing risk are based upon the use of
observed historical market behavior. As a result, these methods may not predict
future risk exposures, which could be significantly greater than the historical
measures indicate. Other risk management methods depend upon evaluation of
information regarding markets, clients or other matters that is publicly
available or otherwise accessible by us. This information may not in all cases
be accurate, complete, up-to-date or properly evaluated. Management of
operational, legal and regulatory risk requires, among other things, policies
and procedures to properly record and verify a large number of transactions and
events, and these policies and procedures may not be fully effective.
We seek to monitor and control our risk exposure through a variety of
separate but complementary financial, credit, operational and legal reporting
systems. We believe that we effectively evaluate and manage the market, credit
and other risks to which we are exposed. Nonetheless, the effectiveness of our
ability to manage risk exposure can never be completely or accurately predicted
or fully assured. For example, unexpectedly large or rapid movements or
disruptions in one or more markets or other unforeseen developments can have a
material adverse effect on our results of operations and financial condition.
The consequences of these developments can include losses due to adverse changes
in inventory values, decreases in the liquidity of trading positions, higher
volatility in earnings, increases in our credit risk to customers and
counterparties and increases in general systemic risk.
Credit risk exposes us to losses caused by financial or other problems
experienced by third parties.
We are exposed to the risk that third parties that owe us money,
securities or other assets will not perform their obligations. These parties
include trading counterparties, customers, clearing agents, exchanges, clearing
houses and other financial intermediaries as well as issuers whose securities we
hold. These parties may default on their obligations to us due to bankruptcy,
lack of liquidity, operational failure or other reasons. This risk may arise,
for example, from holding securities of third parties, executing securities
trades that fail to settle at the required time due to non-delivery by the
counterparty or systems failure by clearing agents, exchanges, clearing houses
or other financial intermediaries; and extending credit to clients through
bridge or margin loans or other arrangements. Significant failures by third
parties to perform their obligations to us could adversely affect our revenue
and perhaps our ability to borrow in the credit markets.
We may have difficulty effectively managing our growth.
Over the past several years, we have experienced significant growth in
our business activities and the number of our employees. We expect our business
to continue to grow. Such growth will require increased investments in
management personnel, financial and management systems and controls, and
facilities, which, in the absence of parallel revenue growth, of which there can
be no assurance, would cause our operating margins to decline from current
levels. In addition, as is common in the securities industry, we will continue
to be highly dependent on the effective and reliable operation of our
communications and information systems. We believe that our current and
anticipated future growth will require implementation of new and enhanced
communications and information systems and training of our personnel to operate
such systems. Any difficulty or significant delay in the implementation or
operation of existing or new systems or the training of personnel could
adversely affect our ability to manage growth.
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We depend on five key employees and the loss of any of their services could harm
our business.
Our success depends on several key employees. The loss of any key
employee could materially and adversely affect us. Although we entered into
five-year employment agreements in August 1999 with Joseph Berland, Richard
Rosenstock, Mark Zeitchick, Vincent Mangone and David Thalheim, these agreements
may be terminated by these employees upon 30 days' notice. Each of those
employees is entitled to participate in our Bonus Plan, is entitled to receive
additional compensation through our Special Performance Plan and has been
granted options to purchase 100,000 shares of our Common Stock through the 1999
Performance Equity Plan. In addition, while these employment agreements contain
various incentives, as well as nonsolicitation provisions in our favor, these
provisions may be insufficient to retain any or all of these persons in our
employ in light of the increasing competition for experienced professionals in
the securities industry, particularly if our stock price were to decline or fail
to appreciate sufficiently to be a competitive source of a portion of
professional compensation. We do not maintain and we do not intend to obtain key
man insurance on the lives of any of these employees.
We face significant competition for professional employees.
From time to time, individuals we employ may choose to leave us to
pursue other opportunities and we have experienced losses of research,
investment banking and sales and trading professionals. The level of competition
for key personnel remains intense. There can be no assurance that losses of key
personnel due to such competition or otherwise will not occur in the future. The
loss of an investment banking, research, or sales and trading professional,
particularly a senior professional with a broad range of contacts in an
industry, could materially and adversely affect our operating results.
Intense competition from existing and new entities may adversely affect our
revenues and profitability.
The securities industry is rapidly evolving, intensely competitive and
has few barriers to entry. We expect competition to continue and intensify in
the future. Many of our competitors have significantly greater financial,
technical, marketing and other resources than us. Some of our competitors also
offer a wider range of services and financial products than us and have greater
name recognition and a larger client base. These competitors may be able to
respond more quickly to new or changing opportunities, technologies and client
requirements and may be able to undertake more extensive promotional activities,
offer more attractive terms to clients, and adopt more aggressive pricing
policies. We cannot assure you that we will be able to compete effectively with
current or future competitors or that the competitive pressures faced by us will
not harm our business.
We currently do not have internet brokerage service capability.
Recently, a growing number of brokerage firms, including firms with
substantially more name recognition and financial and other resources than us,
have offered internet brokerage services to their customers in response to
increased customer demand for such services. While we may seek to offer internet
brokerage services in the future, there can be no assurance that we will be able
to offer internet brokerage services that will appeal to its current or
prospective customers or that any internet brokerage services conducted in the
future by us will be profitable. Our failure to commence internet brokerage
services in the near future or to attract customers to any internet brokerage
services that we commence could have a material adverse effect on our business.
We rely very heavily on our clearing broker, Bear Stearns Securities Corp. and
termination of our agreement with it could disrupt our business.
Bear Stearns Securities Corp. acts as our clearing broker. It processes
all securities transactions and maintains customer accounts on a fee basis for
our account and for the accounts of our clients. It also provides billing
services, extends credit and provides for control and receipt, custody and
delivery of securities. We depend upon the operational capacity and ability of
Bear Stearns Securities Corp. for the orderly processing of transactions. In
addition, by engaging the processing services of a clearing firm, we are exempt
from some capital reserve requirements and other regulatory requirements imposed
by federal and state securities laws. If our clearing agreement was terminated
for any reason, it could disrupt our business since we would find it necessary
to engage another clearing firm.
Our clearing broker extends credit to our clients and we are liable if our
clients do not pay.
We permit our clients to purchase securities on a margin basis or sell
securities short, which means that our clearing firm extends credit to the
client secured by cash and securities in the clients' account. During periods of
volatile markets the value of the collateral held by our clearing broker could
fall below the amount borrowed by the client. If margin requirements are not
sufficient to cover losses, our clearing broker sells or buys securities at
prevailing market prices, and may incur losses to satisfy client obligations. We
have agreed to indemnify our clearing broker for losses it incurs while
extending credit to our clients.
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Employee misconduct could harm us and is difficult to detect and deter.
We run the risk that employee misconduct could occur. Misconduct by
employees could include binding us to transactions that exceed authorized limits
or present unacceptable risks, or hiding from us unauthorized or unsuccessful
activities. This type of misconduct could result in unknown and unmanaged risks
or losses. Employee misconduct could also involve the improper use of
confidential information, which could result in regulatory sanctions and serious
reputational harm. The precautions we take to prevent and detect this activity
may not be effective to deter or prevent misconduct.
We are currently subject to extensive securities regulation, and the failure to
comply could subject us to penalties or sanctions.
The securities industry and our business is subject to extensive
regulation by the SEC, state securities regulators and other governmental
regulatory authorities. We are also regulated by industry self-regulatory
organizations ("SROs"), including the NASD and the MSRB.
We are registered as a broker-dealer with the SEC, are a member firm of
the NASD and are a broker-dealer in every state in the United States, the
District of Columbia and Puerto Rico. Broker-dealers are subject to regulations
which cover all aspects of the securities business, including sales methods and
supervision, trading practices among broker-dealers, use and safekeeping of
customers' funds and securities, capital structure of securities firms, record
keeping and the conduct of directors, officers and employees. Much of the
regulation of broker-dealers has been delegated to SROs, principally the NASD
Regulation, Inc., the regulatory arm of the NASD, which has been designated by
the SEC as our primary regulatory agency. NASD Regulation adopts rules, which
are subject to approval by the SEC, that govern its members and conducts
periodic examinations of member firms' operations.
Compliance with many of the regulations applicable to us involves a
number of risks, particularly in areas where applicable regulations may be
subject to varying interpretation. The requirements imposed by these regulators
are designed to ensure the integrity of the financial markets and to protect
customers and other third parties who deal with us. Consequently, these
regulations often serve to limit our activities, including through net capital,
customer protection and market conduct requirements. In the event of
noncompliance by us with an applicable regulation, governmental regulators and
self-regulatory organizations may institute administrative or judicial
proceedings that may result in censure, fine, civil penalties (including treble
damages in the case of insider trading violations), the issuance of
cease-and-desist orders, the deregistration or suspension of our broker-dealer
activities, the suspension or disqualification of our officers or employees, or
other adverse consequences. The imposition of any such penalties or other
sanctions on us could have a material adverse effect on our operating results
and financial condition.
The regulatory environment is also subject to change. We may be
adversely affected as a result of new or revised legislation or regulations
imposed by the SEC, other federal or state governmental regulatory authorities,
or self-regulatory organizations. We also may be adversely affected by changes
in the interpretation or enforcement of existing laws and rules by these
governmental authorities and self-regulatory organizations.
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Failure to comply with net capital requirements could subject us to suspension
or revocation by the SEC or suspension or expulsion by the NASD.
We are subject to the SEC's net capital rule, which requires the
maintenance of minimum net capital. We compute our net capital under the
aggregate indebtedness method permitted by the net capital rule, which requires
that we maintain minimum net capital which is the greater of 6-2/3% of aggregate
indebtedness (as defined in the net capital rule) or $100,000, or an amount
determinable based on the market price and number of securities in which we are
a market-maker, not to exceed $1,000,000. The net capital rule is designed to
measure the general financial integrity and liquidity of a broker-dealer. In
computing net capital, various adjustments are made to net worth which exclude
assets not readily convertible into cash, and the regulations require a
conservative perspective of other assets such as a broker-dealer's position in
securities. The requirements of the net capital rule provide that a
broker-dealer shall maintain a certain minimum level of net capital and a
certain ratio of net capital to aggregate indebtedness. The particular levels
vary in application depending upon the nature of the activity undertaken by a
firm. Compliance with the net capital rule limits those operations of
broker-dealers which require the intensive use of their capital, such as
underwriting commitments and principal trading activities, and limits the
ability of securities firms to pay dividends or make payments on certain
indebtedness, e.g., subordinated debt as it matures. A significant operating
loss or any charge against net capital could adversely affect the ability of a
broker-dealer to expand or, depending on the magnitude of the loss or charge,
maintain its then present level of business. The NASD may enter the offices of a
broker-dealer at any time, without notice, and calculate such firm's net
capital. In the event such calculation reveals a deficiency in net capital, the
NASD may immediately restrict or suspend certain or all of the activities of a
broker-dealer, including its ability to make markets. There can be no assurance
that we will be able to maintain adequate net capital, or that our net capital
will not fall below requirements established by the SEC, and subject us to
disciplinary action in the form of fines, censure, suspension, expulsion or the
termination of business altogether.
Risk of losses associated with securities laws violations and litigation.
Many aspects of our business will involve substantial risks of
liability. An underwriter is exposed to substantial liability under federal and
state securities laws, other federal and state laws, and court decisions,
including decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for
statements made by its securities analysts or other personnel. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seeks substantial damages. Our
underwriting activities will usually involve offerings of the securities of
smaller companies, which often involve a higher degree of risk and are more
volatile than the securities of more established companies. In comparison with
more established companies, such smaller companies are also more likely to be
the subject of securities class actions, to carry directors and officers
liability insurance policies with lower limits, or no such insurance, and to
become insolvent. Each of these factors increases the likelihood that an
underwriter of a smaller companies' securities will be required to contribute to
an adverse judgment or settlement of a securities lawsuit.
In the normal course of business, we have been, and continue to be the
subject of numerous civil actions and arbitrations arising out of customers
complaints relating to our activities as a broker-dealer in securities, as an
employer and as a result of other business activities. In general, the cases
involve various allegations that our employees had mishandled customer accounts.
At September 30, 2000, the total amount sought from us in pending and threatened
claims is approximately $11,600,000. It is our opinion, based upon historical
experience and the reserves established by us, that the resolution of the claims
presently pending will not have a material adverse effect on our financial
condition.
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On or about June 30, 1999, we entered into a consent order with the
State of Connecticut, Department of Banking, without admitting or denying any
substantive acts or violations, in which we agreed, among other things, that we
would hire a consultant to review our supervisory and employee procedures and
make written recommendations for implementation of additional procedures to
insure compliance with securities laws. For two years we must submit periodic
reports to the relevant government agency describing any securities-related
complaints involving Connecticut residents and initiated against us or against
any of our officers, directors or employees. Also, for two years we are required
to limit our brokerage activities in the State of Connecticut to securities
listed on the New York Stock Exchange, the American Stock Exchange, and/or the
Nasdaq National Market, corporate debt securities, municipal securities,
securities issued by investment companies subject to regulation under the
Investment Company Act of 1940, United States securities and insurance products
subject to regulation by the Connecticut Insurance Commissioner. Such
limitations do not apply to accounts established prior to April 15, 1999 or to
accounts of "accredited investors," as defined under the Securities Act. We paid
a $20,000 administrative penalty, $5,000 to reimburse state costs and $5,000 to
that state's Investor Education Fund. Lastly, we must also pay the costs of one
or more examinations to be conducted by the relevant government agency within
twenty-four months following entry of the consent order, which cost will not
exceed $2,500. If we fail to comply with the consent order, we will be subject
to a fine of $15,000 and to the revocation of our broker-dealer registration in
Connecticut.
A significant percentage of our common stock is held by our directors and
executive officers, who can significantly influence all actions by our company
requiring a vote of our stockholders.
Our directors and executive officers own approximately 58.4% of our
outstanding common stock. Accordingly, management is in a position to
significantly influence the election of the directors of our company and all
other matters that are put to a vote of our stockholders and otherwise generally
control our company's affairs and operations.
We may issue preferred stock with preferential rights which may adversely affect
your rights.
The rights of the holders of our common stock will be subject to and
may be adversely affected by the rights of holders of any preferred stock that
we may issue in the future. Our articles of incorporation authorize our board of
directors to issue up to 2,000,000 shares of "blank check" preferred stock, and
to fix the rights, preferences, privilege and restrictions, including voting
rights, of these shares without further stockholder approval. To date, we have
not issued any shares of preferred stock.
