| NATIONAL FINANCIAL PARTNERS CORP Item 1A Risk Factors Risks Relating to Our Company We may be unsuccessful in acquiring suitable acquisition candidates, which could adversely affect our growth |
| We compete with numerous integrated financial services organizations, insurance brokers, insurance companies, banks and other entities to acquire high quality independent financial services distribution firms |
| Many of our competitors have substantially greater financial resources than we do and may be able to outbid us for these acquisition targets |
| If we do identify suitable candidates, we may not be able to complete any such acquisition on terms that are commercially acceptable to us |
| If we are unable to complete acquisitions, it may have an adverse effect on our earnings or revenue growth and negatively impact our strategic plan because we expect a portion of our growth to come from acquisitions |
| We may be adversely affected if the firms we acquire do not perform as expected |
| Even if we are successful in acquiring firms, we may be adversely affected if the acquired firms do not perform as expected |
| The firms we acquire may perform below expectations after the acquisition for various reasons, including legislative or regulatory changes that affect the products in which a firm specializes, the loss of key clients after the acquisition closed, general economic factors that impact a firm in a direct way and the cultural incompatibility of an acquired firm’s management team with us |
| The failure of firms to perform as expected at the time of acquisition may have an adverse effect on our internal earnings and revenue growth rates, and may result in impairment charges and/or generate losses or charges to NFP’s earnings if the firms are disposed |
| As of December 31, 2005, out of a total of 192 acquisitions, we have disposed of 13 firms and restructured our relationship with the principals of another 18 firms due to these factors |
| Competition in our industry is intense and, if we are unable to compete effectively, we may lose clients and our financial results may be negatively affected |
| The business of providing financial services to high net worth individuals and growing entrepreneurial companies is highly competitive and we expect competition to intensify |
| Our firms face competition in all aspects of their business, including life insurance, wealth transfer and estate planning, corporate and executive benefits, and financial planning and investment advisory services |
| See “Business—Competition” for a listing of some of our more prominent competitors |
| Our firms compete for clients on the basis of reputation, client service, program and product offerings and their ability to tailor products and services to meet the specific needs of a client |
| We actively compete with numerous integrated financial services organizations as well as insurance companies and brokers, producer groups, individual insurance agents, investment management firms, independent financial planners and broker-dealers |
| Many of our competitors have greater financial and marketing resources than we do and may be able to offer products and services that our firms do not currently offer and may not offer in the future |
| The passage of the Gramm-Leach-Bliley Act in 1999 reduced barriers to large institutions providing a wide range of financial services products and services |
| We believe, in light of increasing industry consolidation and the regulatory overhaul of the financial services industry, that competition will continue to increase from manufacturers and other marketers of financial services products |
| Our competitors in the insurance, wealth transfer and estate planning business include individual insurance carrier sponsored producer groups, captive distribution systems of insurance companies, broker-dealers and banks |
| In addition, we also compete with independent insurance intermediaries, boutique broker-general agents and local distributors, including M Financial Group and The BISYS Group, Inc |
| In the employee benefits sector, we face competition from both national and regional groups |
| Our national competitors include Marsh & McLennan Companies, Inc, Aon Corporation, Hilb, Rogal and Hamilton Company, Arthur J Gallagher & Co, USI Holdings Corp, Clark Consulting, Inc, Brown & Brown, Inc |
| and Willis Group Holdings Limited |
| Our 20 ______________________________________________________________________ [44]Table of Contents regional competitors include local brokerage firms and regional banks, consulting firms, third-party administrators, producer groups and insurance companies |
| In the financial planning and investment advisory business, we compete with a large number of investment management and investment advisory firms |
| Our competitors include global and domestic investment management companies, commercial banks, brokerage firms, insurance companies, independent financial planners and other financial institutions |
| Our operating strategy and structure may make it difficult to respond quickly to regulatory, operational or financial problems and to grow our business, which could negatively affect our financial results |
| We operate through firms that report their results to our corporate headquarters on a monthly basis |
| We have implemented cash management and management information systems that allow us to monitor the overall performance and financial activities of our firms |
| However, if our firms delay either reporting results or informing corporate headquarters of a negative business development such as the possible loss of an important client or relationship with a financial services products manufacturer or a threatened professional liability or other claim or regulatory inquiry or other action, we may not be able to take action to remedy the situation on a timely basis |
| In addition, if one of our firms were to report inaccurate financial information, we might not learn of the inaccuracies on a timely basis and be able to take corrective measures promptly, which could negatively affect our ability to report our financial results |
| In addition, due in part to our management approach, we may have difficulty helping our firms grow their business |
| Our failure to facilitate internal growth, cross-selling and other growth initiatives among our firms may negatively impact our earnings or revenue growth |
| Our dependence on the principals of our firms may limit our ability to effectively manage our business |
| Most of our acquisitions result in the acquired business becoming our wholly owned subsidiary |
| The principals retain responsibility for day-to-day operations of the acquired business for an initial five-year term, renewable annually thereafter by the principals and/or certain entities they own, subject to termination for cause and supervisory oversight as required by applicable securities and insurance laws and regulations and the terms of our management agreements |
| The principals are responsible for ordinary course operational decisions, including personnel, culture and office location, subject to the oversight of the board of directors of the acquired business |
| Non-ordinary course transactions require the unanimous consent of the board of directors of the acquired business, which always includes a representative of our management |
| The principals also maintain the primary relationship with clients and, in some cases, vendors |
| Although we maintain internal controls that allow us to oversee our nationwide operations, this operating structure exposes us to the risk of losses resulting from day-to-day decisions of the principals |
| Unsatisfactory performance by these principals could hinder our ability to grow and could have a material adverse effect on our business and the value of our common stock |
| Elimination or modification of the federal estate tax could adversely affect revenue from our life insurance, wealth transfer and estate planning businesses |
| Legislation enacted in the spring of 2001 under EGTRRA increased the size of estates exempt from the federal estate tax and phases in additional increases between 2002 and 2009 |
| EGTRRA also phases in reductions in the federal estate tax rate between 2002 and 2009 and repeals the federal estate tax entirely in 2010 |
| Under EGTRRA, the federal estate tax will be reinstated, without the increased exemption or reduced rate, in 2011 and thereafter |
| However, President Bush and members of Congress have expressed a desire to modify the current legislation, which could result in additional increases in the size of estates exempt from the federal estate tax, further reductions in the federal estate tax rate or a permanent repeal of the federal estate tax |
| In that regard, on April 13, 2005, the House of Representatives passed a bill that would permanently extend the estate tax repeal after it expires in 2010 under EGTRRA, while maintaining the current phase-out schedule |
| The bill, or other related legislation, is expected to be considered in the Senate in due course |
| As enacted, EGTRRA has had a 21 ______________________________________________________________________ [45]Table of Contents modest negative impact on our revenue from the sale of estate planning services and products including certain life insurance products that are often used to fund estate tax obligations and could have a further negative impact in the future |
| The pending bill, if enacted in its current form, or any additional increases in the size of estates exempt from the federal estate tax, further reductions in the federal estate tax rate or other legislation to permanently repeal the federal estate tax, could have a material adverse effect on our revenue |
| There can be no assurance that the pending bill will not be enacted in its current form or, alternatively, that other legislation will not be enacted that would have a further negative impact on our revenue |
| A change in the tax treatment of life insurance products we sell or a determination that these products are not life insurance contracts for federal tax purposes could reduce the demand for these products, which may reduce our revenue |
| The market for many life insurance products we sell is based in large part on the favorable tax treatment, including the tax-free build up of cash values, that these products receive relative to other investment alternatives |
| A change in the tax treatment of the life insurance products we sell or a determination by the IRS, that certain of these products are not life insurance contracts for federal tax purposes could remove many of the tax advantages policyholders seek in these policies |
| In addition, the IRS from time to time releases guidance on the tax treatment of products we sell |
| If the provisions of the tax code change or new federal tax regulations and IRS rulings and releases are issued in a manner that would make it more difficult for holders of these insurance contracts to qualify for favorable tax treatment or subject holders to special tax reporting requirements, the demand for the life insurance contracts we sell could decrease, which may reduce our revenue and negatively affect our business |
| Under current law, both death benefits and accrual of cash value under a life insurance contract are treated favorably for federal income tax purposes |
| However, changes in federal legislation could diminish such favorable treatment |
| From time to time, legislation has been proposed that could negatively impact the use of charitable giving of life insurance benefits |
| For example, a proposal in the Administration’s Fiscal Year 2006 Budget that would apply an excise tax to amounts received under certain life insurance contracts to which a charity and a person other than the charity have had an interest has been included in a tax cut reconciliation bill passed by the United States Senate |
| With certain unidentified exceptions, this proposal would impose a nondeductible 25prca excise tax on death benefits, dividends, withdrawals, loans or surrenders under a life insurance contract entered into after February 7, 2005 if (1) a charity has ever had a direct or indirect ownership in the contract and (2) a person other than a charity has ever had a direct or indirect interest in the same contract (including an interest in an entity holding an interest in that contract) |
| This proposal or any other similarly focused legislative proposal, particularly if enacted, could adversely impact, among other things, the appetite of clients to employ and the utility of insurance strategies involving charitable giving of life insurance policy benefits when the policy is or has been owned by someone other than the charity, and our revenue from the sale of policies pursuant to such strategies could materially decline |
| On October 22, 2004, President Bush signed into law HR 4520, the “American Jobs Creation Act of 2004,” which included provisions affecting deferred compensation arrangements for taxable and tax-exempt employers |
| The legislation created new Section 409A of the Internal Revenue Code which applies to voluntary deferred compensation arrangements, supplemental executive retirement plans, stock appreciation rights and certain other arrangements which have the effect of deferring compensation |
| Section 409A generally applies to compensation deferrals made after December 31, 2004 |
| Among other things, Section 409A modifies the times at which distributions are permitted from nonqualified deferred compensation arrangements and will require that elections to defer compensation be made earlier than is current practice for many plans |
| Certain of our firms sell deferred compensation plans and many of these plans will have to be modified in accordance with these new rules prior to December 31, 2006 |
| Because of the time and effort required to come into compliance with the new rules, our revenue may be reduced during this transition period |
| We cannot predict the long-term impact that the new rules will have on us |
| 22 ______________________________________________________________________ [46]Table of Contents Changes in the pricing, design or underwriting of insurance products could adversely affect our revenues |
| Adverse developments in the insurance markets in which we operate could lead to changes in the pricing design or underwriting of insurance products that result in these products becoming less attractive to our customers |
| For example, we believe that changes in the reinsurance market that make it more difficult for insurance carriers to obtain reinsurance coverage for life insurance, including certain types of financed life insurance transactions, have caused some insurance carriers to become more conservative in their underwriting, and to change the design and pricing of universal life policies, which may have reduced their attractiveness to customers |
| Regulatory developments also could impact product design and the attractiveness of certain products |
| For example, the Office of the General Counsel of the New York Insurance Department recently issued an opinion on certain financed life insurance transactions that could lead to changes in the design and demand for financed life insurance products generally |
| Any developments that reduce the attractiveness of insurance-related products could result in fewer sales of those products and adversely affect our revenues |
| Because the commission revenue our firms earn on the sale of certain insurance products is based on premiums and commission rates set by insurers, any decreases in these premiums or commission rates could result in revenue decreases for us |
| We are engaged in insurance agency and brokerage activities and derive revenue from commissions on the sale of insurance products to clients that are paid by the insurance underwriters from whom our clients purchase insurance |
| These commission rates are set by insurance underwriters and are based on the premiums that the insurance underwriters charge |
| Commission rates and premiums can change based on the prevailing economic and competitive factors that affect insurance underwriters |
| These factors, which are not within our control, include the capacity of insurance underwriters to place new business, underwriting and non-underwriting profits of insurance underwriters, consumer demand for insurance products, the availability of comparable products from other insurance underwriters at a lower cost and the availability of alternative insurance products, such as government benefits and self-insurance plans, to consumers |
| We cannot predict the timing or extent of future changes in commission rates or premiums |
| As a result, we cannot predict the effect that any of these changes will have on our operations |
| These changes may result in revenue decreases for us |
| Revenue decreases may adversely affect our results of operations for the periods in which they occur |
| While we do not believe we have experienced any significant revenue reductions in the aggregate in our business to date due to the following occurrences, we are aware of several instances in the last three years of insurance underwriters reducing commission payments on certain life insurance and employee benefits products |
| Our business is subject to risks related to litigation and regulatory actions |
| From time to time, we are subject to lawsuits and other claims arising out of our business operations, including actions relating to the suitability of insurance and financial services products we sold to customers and complaints arising out of industry-wide scrutiny of contingent commissions practices |
| The outcome of these actions cannot be predicted, and no assurance can be given that such litigation or actions would not have a material adverse effect on our results of operations and financial condition |
| Recently, the insurance industry has been subject to a significant level of scrutiny by various regulatory bodies, including state attorneys general and insurance departments, concerning certain practices within the insurance industry |
| These practices include, without limitation, the receipt of contingent commissions by insurance brokers and agents from insurance companies and the extent to which such compensation has been disclosed, bid rigging and related matters |
| As a result of these and related matters, including actions taken by the New York Attorney General’s office beginning in April 2004, there have been a number of recent revisions to existing, or proposals to modify or enact new, laws and regulations regarding insurance agents and brokers |
| These actions have imposed or could impose additional obligations on us with respect to the insurance and other 23 ______________________________________________________________________ [47]Table of Contents financial products we market |
| Any changes or further requirements that are adopted by the federal government or the states where we market insurance could adversely affect our revenue and financial results |
| During 2004, several of our firms received subpoenas and other informational requests from governmental authorities, including the New York Attorney General’s Office, seeking information regarding compensation arrangements, any evidence of bid rigging and related matters |
| We have cooperated and will continue to cooperate fully with all governmental agencies |
| In addition, in March 2006, we received a subpoena from the New York Attorney General’s Office seeking information regarding life settlement transactions |
| One of our subsidiaries received a subpoena seeking the same information |
| We intend to cooperate fully with the Attorney General’s investigation |
| The investigation, however, is ongoing and we are unable to predict the investigation’s outcome |
| We cannot predict the effect that any current or future regulatory activity, investigations or litigation will have on our business |
| Given the current regulatory environment and the number of our subsidiaries operating in local markets throughout the country, it is possible that we will become subject to further governmental inquiries and subpoenas and have lawsuits filed against us |
| Our involvement in any investigations and lawsuits would cause us to incur additional legal and other costs and, if we were found to have violated any laws, we could be required to pay fines, damages and other costs, perhaps in material amounts |
| We could also be materially adversely affected by the negative publicity for the insurance brokerage and life settlements industries related to these proceedings, and by any new industry-wide regulations or practices that may result from these proceedings |
| For example, in 2005, management believes approximately 6 to 8prca of our total revenues were derived from fees earned on the settlement of life insurance policies into the secondary market |
| Should new regulations or practices that adversely affect the life settlement industry be instituted, our revenues could be adversely impacted |
| We, however, are unable to quantify the adverse effect any such regulations or practices could have on our revenues and business |
| In addition, a portion of our earnings is derived from commissions and other payments from manufacturers of financial services products that are based on the volume, persistency and profitability of business generated by us |
| If we were required to or chose to end these arrangements, our revenue and results of operations could be adversely affected |
| Our ultimate liability, if any, in connection with these matters and any possible future such matters is uncertain and subject to contingencies that are not yet known |
| In addition, legislative, legal, and regulatory developments concerning financial services products we provide may negatively affect our business and financial results |
| Continuing investigations and proceedings regarding late trading and market timing in connection with mutual funds and variable insurance products could result in new industry-wide legislation, rules or regulations that could significantly affect distributors of financial services products such as ourselves |
| Similar to certain mutual fund and insurance companies and other broker-dealers, NFPSI has been contacted by the National Association of Securities Dealers, or NASD, and requested to provide information relating to market timing and late trading |
| NFPSI is cooperating with the regulatory authorities |
| Although we are not aware of any systemic problems with respect to market timing and late trading that would have a material adverse effect on our consolidated financial position, we cannot predict the course that the existing inquiries and areas of focus may take or the impact that any new laws, rules or regulations may have on our business and financial results |
| Our revenue and earnings may be affected by fluctuations in interest rates, stock prices and general economic conditions |
| General economic and market factors, such as changes in interest rates or declines or significant volatility in the securities markets, can affect our commission and fee income |
| These factors can affect the volume of new sales and the extent to which clients keep their policies in force year after year or maintain funds in accounts we manage |
| Equity returns and interest rates can have a significant effect on the sale of many employee benefit programs whether they are financed by life insurance or other financial instruments |
| For example, if interest rates increase, competing products offering higher returns could become more attractive to potential purchasers than the programs and policies we market and distribute |
| A portion of our recent sales of life insurance products includes sales of financed life insurance products |
| If interest rates rise, the availability or attractiveness of such 24 ______________________________________________________________________ [48]Table of Contents financing may decrease, which may reduce our new sales of life insurance products |
| Further, a decrease in stock prices can have a significant effect on the sale of financial services products that are linked to the stock market, such as variable life insurance, variable annuities, mutual funds and managed accounts |
| In addition, a portion of our earnings is derived from fees, typically based on a percentage of assets under management, for our firms offering financial advice and related services to clients |
| Further, our firms earn recurring commission revenue on certain products over a period after the initial sale, provided the customer retains the product |
| These factors may lead customers to surrender or terminate their products, ending these recurring revenues |
| A portion of our earnings is derived from commissions and override payments from manufacturers of financial services products that are based on the volume, persistency and profitability of business generated by us |
| If investors were to seek alternatives to our firms’ financial planning advice and services or to our firms’ insurance products and services, it could have a negative impact on our revenue |
| We cannot guarantee that we will be able to compete with alternative products if these market forces make our firms’ products and services unattractive to clients |
| Finally, adverse general economic conditions may cause potential customers to defer or forgo the purchase of products that our firms sell, for example, to invest more defensively or to surrender products to increase personal cash flow |
| General economic and market factors may also slow the rate of growth, or lead to a decrease in the size, of the high net worth market and the number of small and medium-size corporations |
| For example, the size of the high net worth market decreased in 2001 and 2002, in part due to these factors, including in particular the decline in the equity markets |
| Further, assets under management in the independent distribution channel for financial services products declined in 2002 as a result of the same factors |
| If we are required to write down goodwill and other intangible assets, our financial condition and results would be negatively affected |
| When we acquire a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets |
| The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired |
| As of December 31, 2005, goodwill of dlra357dtta4 million, net of accumulated amortization of dlra12dtta7 million, represented 54dtta2prca of our total stockholders’ equity |
| As of December 31, 2005, other intangible assets, including book of business, management contracts, institutional customer relationships and trade name, of dlra341dtta0 million, net of accumulated amortization of dlra87dtta6 million, represented 51dtta7prca of our total stockholders’ equity |
| On January 1, 2002, we adopted Statement of Financial Standards, or SFAS, Nodtta 142 which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition |
| This accounting standard requires that goodwill and intangible assets deemed to have indefinite lives no longer be amortized but instead be tested for impairment at least annually (or more frequently if impairment indicators arise) |
| Other intangible assets will continue to be amortized over their useful lives |
| In accordance with SFAS Nodtta 142, we recognized an impairment loss on goodwill and identifiable intangible assets not subject to amortization of dlra0dtta8 million, dlra5dtta7 million, dlra2dtta4 million, and dlra3dtta1 for the years ended December 31, 2002, 2003, 2004 and 2005, respectively |
| In accordance with SFAS Nodtta 144, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable |
| We recognized an impairment loss on identifiable intangible assets subject to amortization of dlra1dtta0 million, dlra4dtta2 million, dlra2dtta4 million and dlra5dtta0 million for the years ended December 31, 2002, 2003, 2004 and 2005, respectively |
| Under current accounting standards, if we determine goodwill or intangible assets are impaired, we will be required to write down the value of these assets |
| Any write-down would have a negative effect on our stockholders’ equity and financial results |
| 25 ______________________________________________________________________ [49]Table of Contents Failure to comply with or changes in state and federal laws and regulations applicable to us could restrict our ability to conduct our business |
| The financial services industry is subject to extensive regulation |
| Our firms are currently licensed to conduct business in the 50 states, the District of Columbia and Puerto Rico, and are subject to regulation and supervision both federally and in each of these jurisdictions |
| In general, this regulation is designed to protect clients and other third parties that deal with our firms and to ensure the integrity of the financial markets, and is not designed to protect our stockholders |
| Our firms’ ability to conduct business in the jurisdictions in which they currently operate depends on our compliance with the rules and regulations promulgated by federal regulatory bodies and the regulatory authorities in each of these jurisdictions |
| Failure to comply with all necessary regulatory requirements, including the failure to be properly licensed or registered, can subject our firms to sanctions or penalties |
| In addition, there can be no assurance that regulators or third parties will not raise material issues with respect to our firms past or future compliance with applicable regulations or that future regulatory, judicial or legislative changes will not have a material adverse effect on our company |
| State insurance laws grant supervisory agencies, including state insurance departments, broad regulatory authority |
| State insurance regulators and the National Association of Insurance Commissioners continually reexamine existing laws and regulations, some of which affect us |
| These supervisory agencies regulate, among other things, the licensing of insurance brokers and agents and other insurance intermediaries, regulation of the handling and investment of third-party funds held in a fiduciary capacity and the marketing and compensation practices of insurance brokers and agents |
| This continual reexamination may result in the enactment of laws and regulations, or the issuance of interpretations of existing laws and regulations, that adversely affect our business |
| More restrictive laws, rules or regulations may be adopted in the future that could make compliance more difficult and expensive |
| Several of our subsidiaries, including NFPSI, are registered broker-dealers |
| The regulation of broker-dealers is performed, to a large extent, by the SEC and self-regulatory organizations, principally the NASD and the national securities exchanges, such as the NYSE Broker-dealers are subject to regulations which cover all aspects of the securities business, including sales practices, trading practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure, recordkeeping and the conduct of directors, officers and employees |
| Violations of applicable laws or regulations can result in the imposition of fines or censures, disciplinary actions, including the revocation of licenses or registrations, and reputational damage |
| Recently, federal, state and other regulatory authorities have focused on, and continue to devote substantial attention to, the mutual fund and variable annuity industries |
| It is difficult at this time to predict whether changes resulting from new laws and regulations will affect the industry or our business and, if so, to what degree |
| Providing investment advice to clients is also regulated on both the federal and state level |
| NFPSI and certain of our firms are investment advisers registered with the SEC under the Investment Advisers Act, and certain of our firms are regulated by state securities regulators under applicable state securities laws |
| Each firm that is a federally registered investment adviser is regulated and subject to examination by the SEC The Investment Advisers Act imposes numerous obligations on registered investment advisers, including disclosure obligations, recordkeeping and reporting requirements, marketing restrictions and general anti-fraud prohibitions |
| Each firm that is a state-regulated investment adviser is subject to regulation under the laws of the states in which it provides investment advisory services |
| Violations of applicable federal or state laws or regulations can result in the imposition of fines or censures, disciplinary actions, including the revocation of licenses or registrations, and reputational damage |
| Our revenue and earnings may be more exposed than other financial services firms to the revocation or suspension of the licenses or registrations of our firms’ principals because the revenue and earnings of many of our firms are largely dependent on the individual production of their respective principals for whom designated successors may not be in place |
| 26 ______________________________________________________________________ [50]Table of Contents The geographic concentration of our firms could leave us vulnerable to an economic downturn or regulatory changes in those areas, resulting in a decrease in our revenue |
| Our firms located in New York produced approximately 13dtta9prca, 13dtta5prca, 12dtta2prca and 9dtta2prca of our revenue for the years ended December 31, 2002, 2003, 2004 and 2005, respectively |
| Our firms located in Florida produced approximately 13dtta4prca, 14dtta0prca, 15dtta4prca and 19dtta2prca of our revenue for the years ended December 31, 2002, 2003, 2004 and 2005, respectively |
| Our firms located in California produced approximately 13dtta3prca, 11dtta9prca, 11dtta3prca and 9dtta6prca of our revenue for the years ended December 31, 2002, 2003, 2004 and 2005, respectively |
| The concentration of revenue in New York and California decreased from the year ended December 31, 2002 to the year ended December 31, 2005 due primarily to the acquisition of firms located in other states |
| The concentration of revenue in Florida increased due to the acquisition of several Florida-based firms and the growth of certain of our firms located in Florida |
| Because our business is concentrated in these three states, the occurrence of adverse economic conditions or an adverse regulatory climate in any of these states could negatively affect our financial results more than would be the case if our business were more geographically diversified |
| A weakening economic environment in any state or region could result in a decrease in employment or wages that may reduce the demand for employee benefit products in that state or region |
| Reductions in personal income could reduce individuals’ demand for various financial products in that state or region |
| Between 2000 and 2002, one of our firms involved in employee and executive benefits experienced decline in revenue due to reductions in employment in the financial services sectors in New York |
| The loss of key personnel could negatively affect our financial results and impair our ability to implement our business strategy |
| Our success substantially depends on our ability to attract and retain key members of our senior management team and the principals of our firms |
| If we lose one or more of these key employees or principals, our ability to successfully implement our business plan and the value of our common stock could be materially adversely affected |
| Jessica M Bibliowicz, the chairman of our board of directors, president and chief executive officer, is particularly important to our company |
| Although she has an employment agreement, there can be no assurance that she will serve the term of her employment agreement or renew her employment agreement upon expiration |
| Other than with respect to Ms |
| Bibliowicz and many of the principals of our firms, we do not maintain key person life insurance policies |
| The securities brokerage business has inherent risks |
| The securities brokerage and advisory business is, by its nature, subject to numerous and substantial risks, particularly in volatile or illiquid markets, or in markets influenced by sustained periods of low or negative economic growth, including the risk of losses resulting from the ownership of securities, trading, counterparty failure to meet commitments, client fraud, employee processing errors, misconduct and fraud (including unauthorized transactions by registered representatives), failures in connection with the processing of securities transactions and litigation |
| We cannot be certain that our risk management procedures and internal controls will prevent losses from occurring |
| A substantial portion of our total revenue is generated by NFPSI, and any losses at NFPSI due to the risks noted above could have a significant impact on our revenue and earnings |
| Failure to comply with net capital requirements could subject our wholly owned broker-dealers to suspension or revocation of their licenses by the SEC or expulsion from the NASD The SEC, the NASD and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities brokerage firms |
| Failure to maintain the required net capital may subject a firm to suspension or revocation of registration by the SEC and suspension or expulsion from the NASD and other regulatory bodies, which ultimately could prevent NFPSI or our other broker-dealers from performing as a broker-dealer |
| Although our broker-dealers have compliance procedures in place to ensure 27 ______________________________________________________________________ [51]Table of Contents that the required levels of net capital are maintained, there can be no assurance that our broker-dealers will remain in compliance with the net capital requirements |
| In addition, a change in the net capital rules, the imposition of new rules or any unusually large charge against net capital could limit the operations of NFPSI or our other broker-dealers, which could harm our business |
| Our business, financial condition and results of operations may be negatively affected by errors and omissions claims |
| We have significant insurance agency, brokerage and intermediary operations as well as securities brokerage and investment advisory operations and activities, and are subject to claims and litigation in the ordinary course of business resulting from alleged and actual errors and omissions in placing insurance, effecting securities transactions and rendering investment advice |
| These activities involve substantial amounts of money |
| Since errors and omissions claims against our firms may allege our liability for all or part of the amounts in question, claimants may seek large damage awards |
| These claims can involve significant defense costs |
| Errors and omissions could include, for example, failure, whether negligently or intentionally, to place coverage or effect securities transactions on behalf of clients, to provide insurance carriers with complete and accurate information relating to the risks being insured or to appropriately apply funds that we hold on a fiduciary basis |
| It is not always possible to prevent or detect errors and omissions, and the precautions we take may not be effective in all cases |
| We have errors and omissions insurance coverage to protect us against the risk of liability resulting from alleged and actual errors and omissions |
| Recently, prices for this insurance have increased and coverage terms have become far more restrictive because of reduced insurer capacity in the marketplace |
| While we endeavor to purchase coverage that is appropriate to our assessment of our risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages |
| Since our inception, we have successfully resolved by settlement or favorable disposition in litigation or arbitration approximately 72 errors and omissions claims against different acquired firms |
| Each claim was covered by liability insurance |
| Approximately 36 errors and omissions claims are currently pending against different acquired firms |
| We believe there is liability insurance coverage available for most of these claims |
| Although management does not believe that these claims, either individually or in the aggregate, will materially impact our business, financial condition or results of operations, there can be no assurance that we will successfully dispose of or settle these claims or that insurance coverage will be available or adequate to pay the amounts of any award or settlement |
| Our business, financial condition and results of operations may be negatively affected if in the future our insurance proves to be inadequate or unavailable |
| In addition, errors and omissions claims may harm our reputation or divert management resources away from operating our business |
| Because our firms’ clients can withdraw the assets our firms manage on short notice, poor performance of the investment products and services our firms recommend or sell may have a material adverse effect on our business |
| Our firms’ investment advisory and administrative contracts with their clients are generally terminable upon 30 days’ notice |
| These clients can terminate their relationship with our firms, reduce the aggregate amount of assets under management or shift their funds to other types of accounts with different rate structures for any of a number of reasons, including investment performance, changes in prevailing interest rates, financial market performance and personal client liquidity needs |
| Poor performance of the investment products and services that our firms recommend or sell relative to the performance of other products available in the market or the performance of other investment management firms tends to result in the loss of accounts |
| 28 ______________________________________________________________________ [52]Table of Contents Our results of operations could be adversely affected if we are unable to facilitate smooth succession planning at our firms |
| We seek to acquire firms in which the principals are not ready to retire, but instead will be motivated to grow their firm’s earnings and participate in the growth incentives we offer |
| However, we cannot predict with certainty how long the principals of our firms will continue working |
| The personal reputation of the principals of our firms and the relationships they have are crucial to success in the independent distribution channel |
| Upon retirement of a principal, the business of a firm may be adversely affected if that principal’s successor in the firm’s management is not as successful as the original principal |
| Although we have had few successions to date as a result of our short operating history, succession will be a larger issue for us in the future |
| We will attempt to facilitate smooth transitions but if we are not successful, our results of operations could be adversely affected |
| Government regulation relating to the supplemental executive benefits plans we design and implement could negatively affect our financial results |
| In our executive benefits business, we have designed and implemented supplemental executive retirement plans that use split dollar life insurance as a funding source |
| Split dollar life insurance policies are arrangements in which premiums, ownership rights and death benefits are generally split between an employer and an employee |
| The employer pays either the entire premium or the portion of each year’s premium that at least equals the increase in cash value of the policy |
| Split dollar life insurance has traditionally been used because of its federal tax advantages |
| However, in recent years, the IRS has adopted regulations relating to the tax treatment of some types of these life insurance arrangements, including regulations that treat premiums paid by an employer in connection with split dollar life insurance arrangements as compensation or loans for federal income tax purposes |
| In addition, the Sarbanes-Oxley Act may affect these arrangements |
| Specifically, the Sarbanes-Oxley Act includes a provision that prohibits most loans from a public company to its directors or executives |
| Because a split dollar life insurance arrangement between a public company and its directors or executives could be viewed as a personal loan, we will face a reduction in sales of split dollar life insurance policies to our clients that are subject to the Sarbanes-Oxley Act |
| Moreover, members of Congress have proposed, from time to time, other laws reducing the tax incentive of, or otherwise impacting, these arrangements |
| As a result, our supplemental executive retirement plans that use split dollar life insurance have become less attractive to some of our firms’ customers, which could result in lower revenue to us, and, in recent years we have seen a reduction in sales of split dollar life insurance policies to our clients |
| Our business is dependent upon information processing systems |
| Our ability to provide financial services to clients and to create and maintain comprehensive tracking and reporting of client accounts depends on our capacity to store, retrieve and process data, manage significant databases and expand and periodically upgrade our information processing capabilities |
| As we continue to grow, we will need to continue to make investments in new and enhanced information systems |
| Interruption or loss of our information processing capabilities or adverse consequences from implementing new or enhanced systems could have a material adverse effect on our business and the value of our common stock |
| As our information system providers revise and upgrade their hardware, software and equipment technology, we may encounter difficulties in integrating these new technologies into our business |
| These new revisions and upgrades may not be appropriate for our business |
| Although we have experienced no significant breaches of our network security by unauthorized persons, our systems may be subject to infiltration by unauthorized persons |
| If our systems or facilities were infiltrated and damaged by unauthorized persons, our clients could experience data loss, financial loss and significant business interruption |
| If that were to occur, it could have a material adverse effect on our business, financial condition and results of operations |
| We may overestimate management fees advanced to principals and/or certain entities they own, which may negatively affect our financial condition and results |
| We typically advance management fees monthly to principals and/or certain entities they own |
| We set each principal’s and/or such entity’s management fee amount after estimating how much operating cash flow the firm 29 ______________________________________________________________________ [53]Table of Contents that the principal and/or such entity manages will produce |
| If the firm produces less operating cash flow than what we estimated, an overadvance may occur, which may negatively affect our financial condition and results |
| Further, since contractually we are unable to unilaterally adjust payments to the principals and/or certain entities they own until after a three, six or nine-month calculation period depending on the firms, we may not be able to promptly take corrective measures, such as adjusting the monthly management fee lower or requiring the principal and/or such entity to repay the overadvance within a limited time period |
| In addition, if a principal and/or certain entities they own fail to repay an overadvance in a timely manner and any security we receive from the principal and/or such entities for the overadvance is insufficient, our financial condition and results may be negatively affected, which could negatively affect our results of operations |
| NFPSI relies heavily on Pershing and Fidelity, its clearing firms, and termination of its agreements with the clearing firms could harm its business |
| Pursuant to NFPSI’s clearing agreements with Pershing and Fidelity, the clearing firms process all securities transactions for NFPSI’s account and the accounts of its clients |
| Services of the clearing firms include billing and credit extension and control, receipt, custody and delivery of securities |
| NFPSI is dependent on the ability of its clearing firms to process securities transactions in an orderly fashion |
| Clearing agreements with Pershing and Fidelity may be terminated by either party upon 90 days’ prior written notice |
| If these agreements were terminated, NFPSI’s ability to process securities transactions on behalf of its clients could be adversely affected |