SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 001-15251
LABRANCHE & CO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-4064735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE EXCHANGE PLAZA, NEW YORK, NEW YORK 10006
(Address of principal executive offices)
(212) 425-1144
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
The number of shares of the registrant's common stock outstanding as of
August 14, 2002 was 58,988,632.
LABRANCHE & CO INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION................................................ 3
Item 1. Financial Statements................................................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS............................ 3
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION.................................................................. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS............................ 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS....................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 26
PART II OTHER INFORMATION.................................................... 27
SIGNATURES................................................................. 29
-2-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LaBRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000'S OMITTED EXCEPT PER SHARE DATA)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------------------------------------------------------
2002 2001 2002 2001
----------- ---------- ----------- ----------
REVENUES:
Net gain on principal transactions $ 72,731 $ 89,354 $ 161,855 $ 170,814
Commissions 22,420 16,491 43,393 28,818
Other 2,957 6,916 15,540 10,889
----------- ---------- ----------- ----------
Total revenues 98,108 112,761 220,788 210,521
----------- ---------- ----------- ----------
EXPENSES:
Employee compensation and related benefits 31,080 27,109 62,153 51,701
Interest 12,848 13,240 25,684 25,385
Exchange, clearing and brokerage fees 9,203 6,447 16,980 9,484
Lease of exchange memberships 6,398 5,176 13,107 9,031
Depreciation and amortization of intangibles 3,359 11,064 6,689 17,197
Other 6,996 5,985 14,435 9,299
----------- ---------- ----------- ----------
Total expenses 69,884 69,021 139,048 122,097
----------- ---------- ----------- ----------
Income before provision for income taxes 28,224 43,740 81,740 88,424
PROVISION FOR INCOME TAXES 13,283 24,523 39,147 48,283
----------- ---------- ----------- ----------
Net Income $ 14,941 $ 19,217 $ 42,593 $ 40,141
Series A Preferred dividends and discount accretion 1,741 2,378 3,817 2,767
----------- ---------- ----------- ----------
Net income available to common stockholders $ 13,200 $ 16,839 $ 38,776 $ 37,374
=========== ========== =========== ==========
Weighted-average shares outstanding:
Basic 58,859 57,025 58,782 53,651
Diluted 59,991 58,432 59,995 54,847
Earnings per share:
Basic $ 0.22 $ 0.30 $ 0.66 $ 0.70
Diluted $ 0.22 $ 0.29 $ 0.65 $ 0.68
The accompanying notes are an integral part of these condensed
consolidated statements.
-3-
LaBRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED EXCEPT SHARE DATA)
As of
--------------------------------------
June 30, 2002 December 31, 2001
-------------- ------------------
(unaudited) (audited)
ASSETS
CASH AND CASH EQUIVALENTS $ 39,919 $ 52,043
CASH AND SECURITIES SEGREGATED UNDER FEDERAL REGULATIONS 24,116 78,368
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 12,019 59,113
RECEIVABLE FROM BROKERS, DEALERS AND CLEARING ORGANIZATIONS 267,100 177,506
RECEIVABLE FROM CUSTOMERS 7,162 11,005
SECURITIES OWNED, at market value:
Corporate equities 197,966 156,088
United States Government obligations 322,557 328,048
Options and other 76,318 69,471
COMMISSIONS RECEIVABLE 5,363 4,971
EXCHANGE MEMBERSHIPS CONTRIBUTED FOR USE, at market value 31,050 26,760
EXCHANGE MEMBERSHIPS OWNED, at cost (market value of $97,305 and $84,453,
respectively) 75,315 75,315
OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of $6,973 and $5,485, 6,756 6,475
respectively
INTANGIBLE ASSETS, net of accumulated amortization:
Specialist Stock List 387,144 392,332
Trade Name 25,011 25,011
Goodwill 466,231 469,963
OTHER ASSETS 73,131 68,368
-------------- ------------------
Total assets $ 2,017,158 $ 2,000,837
============== ==================
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable to brokers and dealers $ 43,340 $ 62,879
Payable to customers 33,734 63,238
Securities sold, but not yet purchased, at market value:
Corporate equities 198,756 131,355
Options 64,895 58,822
Accrued compensation 53,850 54,113
Accounts payable and other accrued expenses 52,143 65,813
Income taxes payable -- 14,753
-------------- ------------------
446,718 450,973
-------------- ------------------
DEFERRED TAX LIABILITIES 169,027 165,541
-------------- ------------------
LONG TERM DEBT 357,412 363,170
-------------- ------------------
SUBORDINATED LIABILITIES
Exchange memberships, at market value 31,050 26,760
Other subordinated indebtedness 66,035 66,035
-------------- ------------------
97,085 92,795
-------------- ------------------
PREFERRED STOCK, liquidation value of $1,000 per share; 10,000,000 shares
authorized; 71,836 and 100,000 shares issued and outstanding as of June 30,
2002 and December 31, 2001, respectively 68,495 94,531
COMMON STOCK, $.01 par value, 200,000,000 shares authorized;
58,988,632 and 58,733,955 shares issued and outstanding as of June 30, 2002
and December 31, 2001, respectively 590 587
ADDITIONAL PAID-IN-CAPITAL 672,764 671,422
RETAINED EARNINGS 207,560 168,780
UNEARNED COMPENSATION (2,493) (6,962)
-------------- ------------------
946,916 928,358
-------------- ------------------
Total liabilities and stockholders' equity $ 2,017,158 $ 2,000,837
============== ==================
The accompanying notes are an integral part of these condensed
consolidated statements.
-5-
LaBRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
Six Months Ended
----------------------------------------
June 30, 2002 June 30, 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,593 $ 40,141
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of intangibles 6,689 17,197
Amortization of bond discount and debt issuance costs 1,044 857
Compensation expense related to stock-based compensation 1,618 3,391
Deferred tax provision 4,738 (798)
Acceleration of preferred stock discount accretion 1,485 --
Tax benefit related to employee stock transactions 3,733 18,290
Change in assets and liabilities:
Cash and securities segregated under federal regulations 54,252 (85,200)
Securities purchased under agreements to resell 47,094 107,789
Receivable from brokers, dealers and clearing organizations (89,594) (211,159)
Receivable from customers 3,844 (14,071)
Securities owned, Corporate equities (41,878) (39,326)
Securities owned, United States Government obligations 5,491 --
Securities owned, Options and others (6,847) (74,550)
Commissions receivable (392) 91
Other assets (5,536) (44,379)
Payable to brokers and dealers (19,539) 25,652
Payable to customers (29,505) 76,188
Securities sold, Corporate equities 67,401 113,179
Securities sold, Options 6,073 1,533
Accrued compensation (264) 24,935
Accounts payable and other accrued expenses (18,573) 26,457
Income taxes payable (16,004) (10,329)
---------------- ----------------
Net cash provided by (used in) operating activities 17,923 (24,112)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for office equipment and leasehold improvements (1,779) (533)
Net cash received from acquisitions -- 66,490
Payment for the purchase of an exchange membership -- (2,000)
---------------- ----------------
Net cash (used in) provided by investing activities (1,779) 63,957
---------------- ----------------
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 4,196 9,409
Payment of preferred dividends (4,300) --
Payment for preferred stock buyback (28,164) --
---------------- ----------------
Net cash (used in) provided by financing activities (28,268) 9,409
---------------- ----------------
(Decrease) increase in cash and cash equivalents (12,124) 49,254
CASH AND CASH EQUIVALENTS, beginning of period 52,043 152,220
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of the period $ 39,919 $ 201,474
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 22,485 $ 22,422
Income taxes 48,960 45,150
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES:
Acquisitions:
Intangibles assets $ -- $ 452,488
Fair value of tangible assets acquired, other than cash -- 71,555
Deferred tax liabilities related to intangible assets -- 95,995
Other liabilities -- 38,950
Common stock issuance -- 260,463
Exercise of options granted to former RPM stockholders 12,367 37,811
The accompanying notes are an integral part of these condensed
consolidated statements.
-7-
LaBRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The condensed consolidated financial statements include the accounts of
LaBranche & Co Inc., a Delaware corporation (the "Holding Company"), and its
subsidiaries, LaBranche & Co. LLC, a New York limited liability company
("LaBranche"), LaBranche Financial Services, Inc., a New York corporation
("LFSI"), and LaBranche & Co. B.V., a Netherlands private limited liability
company (collectively with the Holding Company, LaBranche and LFSI, the
"Company"). The Holding Company is the sole member of LaBranche, the 100%
stockholder of LFSI and the sole owner of LaBranche & Co. B.V. LaBranche is a
registered broker-dealer and operates primarily as a specialist in equity
securities listed on the New York Stock Exchange, Inc. (the "NYSE") and as a
specialist in equities and options on the American Stock Exchange (the "AMEX").
LFSI is a registered broker-dealer and a member of the NYSE and other exchanges,
and provides securities clearing and other related services to its own
individual customers, customers of introducing brokers and institutional
customers, including traders, professional investors and broker-dealers. LFSI
also provides direct access floor brokerage services to institutional customers.
In addition, LFSI provides front-end order execution, analysis and reporting
solutions for the wholesale securities dealer market. LaBranche & Co. B.V. was
recently organized to represent LaBranche in European markets and to provide
client services to LaBranche's European listed companies. As of December 31,
2001, Henderson Brothers, Inc. ("Henderson Brothers") and Internet Trading
Technologies, Inc. ("ITTI"), former subsidiaries of the Holding Company, were
merged with and into another Holding Company subsidiary, ROBB PECK McCOOEY
Clearing Corporation ("RPM Clearing Corporation"), which changed its name to
LFSI in January 2002.
2. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
INFORMATION
The unaudited interim condensed consolidated financial information as of
June 30, 2002 and for the six months ended June 30, 2002 and 2001 is presented
in the accompanying condensed consolidated financial statements. The unaudited
interim condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial information. The unaudited interim
condensed consolidated financial information reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for such periods. This interim condensed consolidated financial information as
of June 30, 2002 should be read in conjunction with the audited consolidated
financial statements and notes thereto as of December 31, 2001 included in the
Company's Form 10-K filed with the Securities and Exchange Commission ("SEC") on
March 15, 2002, as amended by the Company's Form 10K/A filed with the SEC on
March 22, 2002. Results of the interim periods are not necessarily indicative of
results to be obtained for a full fiscal year.
-8-
3. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial
accounting and reporting for goodwill and other intangible assets acquired in a
business combination, requiring that the purchase method of accounting be used
in all business combinations initiated after June 30, 2001. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets acquired individually or with a group of assets. Under the new
standard, trade name and goodwill will no longer be amortized; instead these
assets will be tested at least annually for impairment by applying a fair-value
based test. The specialist stock lists will continue to be amortized over their
respective lives. Accordingly, effective January 1, 2002, the Company has ceased
amortization of goodwill and trade name and the amortization expense for these
intangible assets is no longer included in the results of operations. During the
second quarter of 2002, the Company performed the required impairment tests of
goodwill as of December 31, 2001 and determined that there was no impairment.
However, it is possible that in the future, after periodic testing, the Company
may incur impairment charges related to the carrying value of goodwill and
intangible assets recorded in its financial statements.
The reported net earnings and EPS, as adjusted to exclude amortization of
goodwill and trade name, are set forth below (000's omitted):
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------ ------------------ ----------------- -----------------
Net income available to common
stockholders, as reported $ 13,200 $ 16,839 $ 38,776 $ 37,374
Net income available to common
stockholders, as adjusted 13,200 24,886 38,776 49,809
EPS, as reported
Basic $ 0.22 $ 0.30 $ 0.66 $ 0.70
Diluted 0.22 0.29 0.65 0.68
EPS, as adjusted
Basic $ 0.22 $ 0.44 $ 0.66 $ 0.93
Diluted 0.22 0.43 0.65 0.91
Under the new standard, the specialist stock lists will continue to be
amortized. The gross carrying amount, accumulated amortization and net carrying
amount of the specialist stock lists are set forth below (000's omitted):
-9-
As of June 30, 2002 As of December 31, 2001
------------------- -----------------------
Gross carrying amount $ 406,190 $ 406,190
Accumulated amortization (19,046) (13,858)
------------------- -----------------------
Net carrying amount $ 387,144 $ 392,332
=================== =======================
Amortization expense associated with the specialist stock lists was $2.6
million and $5.2 million for the three months and six months ended June 30,
2002, respectively, and $2.3 million and $3.7 million for the three months and
six months ended June 30, 2001, respectively. Estimated amortization expense for
the existing specialist stock lists is $10.4 million for each of the fiscal
years ending December 31, 2002 through December 31, 2006.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The implementation of SFAS No. 144 did not have a material impact on the
Company's condensed consolidated financial information.
4. INCOME TAXES
The Company accounts for taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes," which requires the recognition of tax benefits or expenses on
temporary differences between the financial reporting and tax bases of its
assets and liabilities. Deferred tax assets and liabilities primarily relate to
stock-based compensation, amortization periods of certain intangibles and
differences between the financial and tax basis of assets acquired. The
Company's effective tax rate differs from the federal statutory rate primarily
due to its non-deductible amortization of intangible assets and the effects of
state and local taxes in 2002 and 2001. The components of the provision for
income taxes reflected on the condensed consolidated statements of operations
are set forth below (000's omitted):
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------- -------------------- ------------------ -----------------
Current federal, state and local taxes $ 13,708 $ 25,528 $ 34,409 $ 49,081
Deferred tax (benefit)/provision (425) (1,005) 4,738 (798)
------------------- -------------------- ------------------ -----------------
Total provision for income taxes $ 13,283 $ 24,523 $ 39,147 $ 48,283
=================== ==================== ================== =================
5. REGULATORY REQUIREMENTS
As a specialist and member of the NYSE, LaBranche is subject to SEC Rule
15c3-1 adopted and administered by the NYSE. LaBranche is required to maintain
minimum net capital, as defined, equivalent to the greater of $100,000 or 1/15
of aggregate indebtedness, as defined.
-10-
As of June 30, 2002 and December 31, 2001, LaBranche's net capital, as
defined under SEC Rule 15c3-1, was $450.1 million and $484.2 million,
respectively. As of those dates LaBranche exceeded the minimum requirements by
$446.4 million and $481.4 million, respectively. LaBranche's aggregate
indebtedness to net capital ratio on those dates was .12 to 1 and .09 to 1,
respectively.
The NYSE generally requires members registered as specialists to maintain a
minimum dollar regulatory capital amount in order to establish that they can
meet, with their own net liquid assets, their position requirement.
As of June 30, 2002 and December 31, 2001, LaBranche's NYSE minimum
required dollar amount of net liquid assets, as defined, was $446.0 million,
compared to actual net liquid assets, as defined, of $470.6 million and $491.5
million, respectively.
As a registered broker-dealer and NYSE member firm, LFSI is also subject to
SEC Rule 15c3-1, as adopted and administered by the NYSE. Under the alternative
method permitted by the rule, the minimum required net capital for LFSI is equal
to the greater of $250,000 or 2% of aggregate debit items, as defined.
As of June 30, 2002, LFSI's net capital as defined under SEC Rule 15c3-1
was $22.9 million and exceeded minimum requirements by $22.2 million. As of
December 31, 2001, the combined net capital of Henderson Brothers and RPM
Clearing Corporation as defined under SEC Rule 15c3-1 was $20.5 million, which
exceeded minimum requirements by $19.7 million.
6. COMMITMENTS
Minimum rental commitments under existing non-cancelable leases for office
space and equipment are as follows:
Year Ending December 31,:
-------------------------
2002 $ 1,623,709
2003 2,964,575
2004 2,478,948
2005 2,409,777
2006 1,629,679
Thereafter 1,351,345
These leases contain escalation clauses providing for increased rentals
based upon maintenance and tax increases.
7. EARNINGS PER SHARE
Earnings per share ("EPS") are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic EPS is calculated by dividing net income available
to common shareholders by the weighted-average number of common shares
outstanding. Diluted EPS includes the determinants of basic EPS and, in
addition, gives effect to dilutive potential common shares.
-11-
The computations of basic and diluted EPS are set forth below (000's
omitted, except per share data):
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------ --------------- ----------------- -----------------
Net income $ 14,941 $ 19,217 $ 42,593 $ 40,141
Less preferred dividends and
accretion 1,741 2,378 3,817 2,767
------------------ --------------- ----------------- -----------------
Numerator for basic and
diluted earnings per common
share - net income available
to common stockholders $ 13,200 $ 16,839 $ 38,776 $ 37,374
Denominator for basic
earnings per share -
weighted-average number
of common shares 58,859 57,025 58,782 53,651
Dilutive Shares
Stock options 684 965 761 745
Restricted stock 32 87 36 94
Restricted stock units 416 355 416 357
------------------ --------------- ----------------- -----------------
Denominator for diluted
Earnings per share -
Weighted-average number
of common shares 59,991 58,432 59,995 54,847
Basic earnings per share $ 0.22 $ 0.30 $ 0.66 $ 0.70
Diluted earnings per share $ 0.22 $ 0.29 $ 0.65 $ 0.68
The exercise prices for options to purchase an aggregate of 1,732,500
shares of common stock exceeded the average market price of the Company's common
stock for the three and six months ended June 30, 2002. Accordingly the
calculation of diluted earnings per share does not include the antidilutive
effect of these options for the three and six months ended June 30, 2002.
8. EMPLOYEE INCENTIVE AWARDS
On January 17, 2002 options to purchase an aggregate of 1,470,000 shares of
common stock were granted to employees of the Company at a purchase price of
$35.00 per share. These options are subject to continuing service with the
Company and other restrictions and one third are exercisable on the second
anniversary of issuance and the remaining two thirds will become exercisable on
the third anniversary of issuance. These options will generally expire ten years
from the date of grant, unless sooner terminated or exercised. Pursuant to APB
No. 25, no compensation expense was recognized on the date of grant, since these
options had no intrinsic value.
On July 20, 2001, the Board of Directors approved, subject to the
subsequent approval of the Company's stockholders, an increase in the number
of shares of the Company's common stock available for issuance under the
Equity Incentive Plan by an additional 3,000,000 shares. This increase was
approved by a majority of the stockholders of the Company at its annual
meeting of stockholders on May 21, 2002.
-12-
On May 1, 2002, restricted stock units with respect to 20,000 shares of the
Company's common stock were granted to an employee with an issue cost of $0 to
the employee and a fair market value of $27.28 per share. The restricted stock
units, which are subject to continuing service with the Company and other
restrictions, will vest in three installments on January 1, 2003, 2004 and 2005.
Compensation expense is being recognized over the 32-month vesting period on a
straight-line basis.
9. REPURCHASE OF PREFERRED STOCK
During January 2002, the Company offered to repurchase up to 30,000 shares
of its outstanding Series A preferred stock for $1,000 per share, plus accrued
and unpaid dividends up to but not including the date of purchase. On February
15, 2002, the offer expired, and on February 19, 2002, the Company purchased all
of the approximately 28,164 shares that had been tendered for approximately
$28.5 million, including accrued but unpaid dividends. As a result of the
purchase, the Company recorded a one-time expense due to the acceleration of the
discount accretion on the shares purchased of approximately $1.5 million, which
was included in other expenses.
10. SUBSEQUENT EVENTS
On August 7, 2002, the Company issued to RPM Nautical Foundation, Inc.
("RPM Nautical"), a non-profit organization of which George E. Robb, Jr., a
member of the Company's Board of Directors, is a founder and director,
subordinated notes in the aggregate principal amount of $8,000,000 (the
"Notes") in exchange for the 8,000 shares of the Company's Series A Preferred
Stock then held by RPM Nautical. The Notes accrue interest at the rate of 10%
per year until August 7, 2003 and at the rate of 9% per year thereafter. The
principal amount of the Notes, together with all accrued and unpaid interest,
is due on August 7, 2007. The Company also paid to RPM Nautical in cash the
amount of accrued and unpaid dividends with respect to the shares of the
Company's Series A Preferred Stock held by RPM Nautical as of August 6, 2002.
On July 18, 2002, the Company established a Nominating and Corporate
Governance Committee consisting solely of independent directors. In addition,
on July 18, 2002, Michael LaBranche resigned from the Company's Compensation
Committee. The Compensation Committee is now composed only of independent
directors.
On July 18, 2002, the Board of Directors approved and adopted the Company's
Business Policies and Code of Conduct (the "Business Code"). The Business Code
was adopted in an attempt to assure that the Company's employees adhere to the
highest professional standards, and the Business Code is consistent with recent
corporate governance reform proposals and federal legislation which require,
among other things, that listed companies adopt and maintain a code of business
conduct and ethics for directors, officers and employees.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY," "LABRANCHE" OR "WE"
SHALL MEAN LABRANCHE & CO INC. AND ITS WHOLLY-OWNED SUBSIDIARIES.
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH LABRANCHE'S CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED IN THIS
REPORT.
REVENUES
Our revenues consist primarily of net gain earned from principal
transactions in securities for which we act as specialist, and commissions
revenue earned from specialist and clearance activities. Net gain on principal
transactions represents trading gains net of trading losses and SEC transaction
fees, and are earned by us when we act as principal buying and selling our
specialist stocks and options. Commissions revenue consists of fees we earn when
our specialists act as agents to match buyers and sellers for limit orders
executed by us on behalf of brokers or other trading professionals after a
specified period of time; we do not earn commissions when we match market
orders. In addition, commissions revenue includes fees charged to customers for
execution and clearance activities by our subsidiary, LaBranche Financial
Services, Inc. ("LFSI"). Other revenue consists of proprietary trading gains or
losses, appreciation or depreciation of our nonmarketable investments, interest
income, and fees charged to customers for use of the front-end order execution
system developed by LFSI. For the three months ended June 30, 2002, net gain on
principal transactions represented 74.1% of our total revenues, commissions
revenue represented 22.9% of our total revenues, and other revenues represented
3.0% of our total revenues. For the six months ended June 30, 2002, net gain on
principal transactions represented 73.3% of our total revenues, commissions
revenue represented 19.7% of our total revenues, and other revenues represented
7.0% of our total revenues.
EXPENSES
Our largest operating expense is employee compensation and related
benefits, which primarily consist of salaries, wages and profitability-based
compensation. Profitability-based compensation includes compensation and
benefits paid to managing directors, trading professionals and other employees
based on our profitability.
RECENT DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial
accounting and reporting for goodwill and other intangible assets acquired in a
business combination, requiring that the purchase method of accounting be used
in all business combinations initiated after June 30, 2001. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets acquired individually or with a group of assets. Under the new
standard, trade name and goodwill will no longer be amortized, instead these
assets will be tested at least annually for impairment by applying a fair-value
-14-
based test. Our acquired specialist stock lists will continue to be amortized
over their respective lives. During the second quarter of 2002, a fair value
analysis of our acquired intangible assets as of December 31, 2001 has
concluded that the value of these assets has not been impaired. We will
continue to perform the required impairment tests on our intangible assets to
determine if there is a need to write down their value. Although we do not
expect to incur any impairment of our acquired intangible assets, it is
possible that in the future the carrying value of our acquired goodwill and
intangible assets may be reduced.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The implementation of SFAS No. 144 has not had an impact on our condensed
consolidated financial information.
CRITICAL ACCOUNTING POLICIES
All of our principal securities transactions and the related gains and
losses are recorded on a trade date basis. Customer securities transactions and
the related revenues and expenses are recorded on a settlement date basis, which
does not differ materially from trade date basis. Securities owned and
securities sold, but not yet purchased are reflected at market value and
unrealized gains and losses are reflected in net gain on principal transactions.
Securities not readily marketable have been valued at fair value as determined
by management using standard industry valuation methods. The resulting gain or
loss is reflected in the accompanying statements of operations.
Our balance sheet contains significant intangible assets. These intangible
assets are comprised of the specialist stock lists, trade name and goodwill
acquired in connection with our various acquisitions and the limited partner
buyout that occurred in connection with our reorganization from partnership to
corporate form in August 1999. The specialist stock lists are being amortized on
a straight-line basis over 15 to 40 years. The allocations of purchase price for
these assets and the determinations of their respective useful lives were based
on independent appraisals for all acquisitions through March 2001. The useful
lives of our acquired specialist stock lists were determined based on an
analysis of the historical turnover characteristics of the specialist stocks
comprising these lists. For acquisitions subsequent to March 2001, the
allocations of purchase price to the acquired intangible assets and the
determinations of their respective useful lives were based on management's
analysis of revenues, consideration paid, common stock listings and other
relevant data and ratios. This information was analyzed and compared to the
results of the independent appraisals conducted in connection with our
acquisitions prior to March 2001.
As discussed under "Recent Developments," with the implementation of SFAS
No. 142, we no longer amortize goodwill and intangible assets with indefinite
useful lives, which includes goodwill and trade name. During the second quarter
of 2002, a fair value analysis of our acquired intangible assets as of December
31, 2001 has concluded that the value of these assets has not been impaired. We
will continue to perform periodic impairment tests on these assets to
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determine if there is a need to write down their value. Although we do not
expect to incur any impairment of our intangible assets, it is possible that in
the future the carrying value of our acquired goodwill and intangible assets may
be reduced.
REPURCHASE OF OUR PREFERRED STOCK
On January 18, 2002, we offered to repurchase up to 30,000 shares of our
outstanding Series A preferred stock for $1,000 per share, plus accrued and
unpaid dividends up to but not including the date of purchase. On February 15,
2002, the offer expired, and on February 19, 2002, we purchased all of the
approximately 28,164 shares that had been tendered for approximately $28.5
million, including accrued but unpaid dividends. As a result of the purchase, we
recorded a one-time expense due to the acceleration of the discount accretion on
the shares purchased of approximately $1.5 million, which was included in other
expenses.
TRUST DECS OFFERING
On February 8, 2002, certain managing directors of LaBranche & Co. LLC
entered into prepaid forward contracts with DECS Trust IX, a statutory business
trust, pursuant to which the trust agreed to purchase from the participating
managing directors, on a date which is expected to be February 8, 2005, an
aggregate of 3,800,000 shares of our common stock owned by these managing
directors, subject to the terms and conditions set forth in the contracts. The
trust concurrently sold 3,800,000 trust securities, known as DECS, to investors.
We did not receive, nor will we receive, any portion of the proceeds from the
sale of shares pursuant to the contracts or from the sale of the DECS. The
participating managing directors bore responsibility for payment of the expenses
incurred by them in connection with this transaction.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
REVENUES
Total revenues decreased 13.0% to $98.1 million for the three months ended
June 30, 2002, from $112.8 million for the same period in 2001, due to decreases
in net gain on principal transactions and other revenue, which were partially
offset by an increase in commissions. Net gain on principal transactions
decreased 18.7% to $72.7 million for the three months ended June 30, 2002, from
$89.4 million for the same period in 2001. This decrease was the result of
unfavorable market conditions during the second quarter of 2002 as compared to
the second quarter of 2001. During the second quarter of 2002, the aggregate
share volume of our specialist stocks traded on the NYSE increased 29.5% to 25.0
billion shares from 19.3 billion shares for the same period in 2001, while the
aggregate dollar volume of our specialist stocks traded on the NYSE increased
2.2% to $692.6 billion for the second quarter 2002 from $677.9 billion for the
same period in 2001, indicating the lower average share prices of our listed
company stocks. Notwithstanding these unfavorable market conditions, we were
required to fulfill our obligation as a specialist to minimize short-term
imbalances between supply and demand and maintain fair and orderly markets in
our listed company stocks. Our share volume as principal increased 30.9%
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to 8.9 billion shares for the three months ended June 30, 2002, from 6.8
billion shares for the same period in 2001.
Commissions revenue increased 35.8% to $22.4 million for the three months
ended June 30, 2002, from $16.5 million for the same period in 2001. This
increase was primarily due to an increase in commissions revenue earned by LFSI
for execution and clearing services to $9.4 million for the three months ended
June 30, 2002 from $6.1 million for the same period in 2001, as a result of the
expansion of LFSI's business. In addition, floor brokerage income from our
LaBranche & Co. LLC subsidiary increased to $13.0 million from $10.4 million as
a result of increased share volume executed by us as agent, as well as the
impact of our acquisitions in 2001, which increased the number of our specialist
stocks. The share volume executed by us as agent in our specialist stocks
increased by 33.3% to 2.0 billion shares for the three months ended June 30,
2002, from 1.5 billion shares for the same period in 2001.
Other revenue decreased 56.5% to $3.0 million for the three months ended
June 30, 2002, from $6.9 million for the same period in 2001. This decrease was
primarily due to the decrease in interest income as a result of significantly
lower interest rates for both stock borrow transactions and liquidity
investments. In addition, the decrease was also due to a decrease in proprietary
trading revenues.
EXPENSES
Total expenses before provision for income taxes increased 1.3% to $69.9
million for the three months ended June 30, 2002, from $69.0 million for the
same period in 2001.
Employee compensation and related benefits expense increased 14.8% to $31.1
million for the three months ended June 30, 2002, from $27.1 million for the
same period in 2001. This increase was primarily due to our 2001 acquisitions,
which increased our average headcount by approximately 70 individuals for the
three months ended June 30, 2002 as compared to the same period in 2001.
Employee compensation and related benefits expense increased to 31.7% of total
revenues for the three months ended June 30, 2002, from 24.0% of total revenues
for the same period in 2001.
Interest expense decreased 3.0% to $12.8 million for the three months ended
June 30, 2002, from $13.2 million for the same period in 2001. The lower
interest payments were the result of the scheduled repayment of indebtedness.
Interest expense increased to 13.1% of total revenues for the three months ended
June 30, 2002, from 11.7% of total revenues for the same period in 2001.
Exchange, clearing and brokerage fees expense increased 43.8% to $9.2
million for the three months ended June 30, 2002, from $6.4 million for the same
period in 2001. This increase was primarily due to an increase in clearing and
execution fees incurred by LFSI. Exchange, clearing and brokerage fees expense
increased to 9.4% of total revenues for the three months ended June 30, 2002,
from 5.7% of total revenues for the same period in 2001.
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Lease of exchange memberships expense increased 23.1% to $6.4 million for
the three months ended June 30, 2002, from $5.2 million for the same period in
2001. This increase was the result of our leasing approximately 10 additional
NYSE and 10 additional AMEX memberships during the second quarter of 2002 as
compared to the second quarter of 2001. The additional NYSE and AMEX membership
leases were attributable to acquisitions during the second half of 2001. An
increase in the average annual leasing cost of the NYSE memberships from
approximately $312,000 to $330,000 per membership also contributed to the
increase. The increase was partially offset by a decrease in the average annual
seat rental cost on the AMEX from approximately $140,000 during the second
quarter of 2001 to approximately $65,000 during the second quarter of 2002.
Lease of exchange memberships expense increased to 6.5% of total revenues for
the three months ended June 30, 2002, from 4.6% of total revenues for the same
period in 2001.
Depreciation and amortization of intangibles expense decreased 69.4% to
$3.4 million for the three months ended June 30, 2002, from $11.1 million for
the same period in 2001. The decrease was due to the adoption of SFAS No. 142
commencing January 1, 2002, which requires that we cease amortization of
acquired goodwill and intangible assets with indefinite useful lives.
Amortization of intangibles expense amounted to approximately $2.6 million, and
depreciation amounted to approximately $0.8 million. Depreciation and
amortization of intangibles expense decreased to 3.4% of total revenues for the
three months ended June 30, 2002, from 9.8% of total revenues for the same
period in 2001.
Other expenses increased 16.7% to $7.0 million for the three months ended
June 30, 2002, from $6.0 million for the same period in 2001. The increase was
due to additional occupancy, communication, legal and professional expenses as a
result of the general expansion of our business and the enhanced services we
provide to our listed companies.
INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes decreased 35.5% to $28.2 million
for the three months ended June 30, 2002, from $43.7 million for the same period
in 2001. This decrease was due to the decrease in our total revenues, as well as
the increase in employee compensation and related benefits expense, exchange,
clearing and brokerage fees and lease of exchange memberships expense, which
were partially offset by the decrease in depreciation and amortization expenses.
INCOME TAXES
Provision for income taxes decreased 45.7% to $13.3 million for the three
months ended June 30, 2002, from $24.5 million for the same period in 2001. This
decrease was primarily due to the decline in our profitability.
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SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
REVENUES
Total revenues increased 4.9% to $220.8 million for the six months ended
June 30, 2002, from $210.5 million for the same period in 2001, due to increases
in commissions and other revenue, which were offset by a decrease in net gain on
principal transactions. Net gain on principal transactions decreased 5.2% to
$161.9 million for the six months ended June 30, 2002, from $170.8 million for
the same period in 2001. This decrease was the result of unfavorable market
conditions, during which the average price of our listed company stocks
decreased while we were required to fulfill our obligation as specialist to
minimize short-term imbalances between supply and demand and maintain fair and
orderly markets in our listed company stocks. The decrease was offset by a full
six months of revenues from our 2001 acquisitions. Our total share volume as
principal increased 41.6% to 17.7 billion shares for the six months ended June
30, 2002, from 12.5 billion shares for the same period in 2001.
Commissions revenue increased 50.7% to $43.4 million for the six months
ended June 30, 2002, from $28.8 million for the same period in 2001. This
increase was primarily due to an increase in commissions revenue earned by LFSI
for execution and clearing services to $17.2 million for the six months ended
June 30, 2002 from $8.2 million for the same period in 2001. The increase in
commissions revenue at LFSI was the result of having a full six months of
revenues from our former ROBB PECK McCOOEY Clearing Corporation ("RPM Clearing
Corporation") subsidiary, which was acquired on March 15, 2001 and changed its
name to LFSI in January 2002. In addition, commission income from our LaBranche
& Co. LLC subsidiary increased to $26.2 million from $20.6 million as a result
of increased share volume executed by us as agent, as well as the impact of our
2001 acquisitions, which increased the number of our specialist stocks. The
total share volume executed by us as agent in our specialist stocks increased by
37.9% to 4.0 billion shares for the six months ended June 30, 2002, from 2.9
billion shares for the same period in 2001.
Other revenue increased 42.2% to $15.5 million for the six months ended
June 30, 2002, from $10.9 million for the same period in 2001. This increase was
primarily due to the appreciation of approximately $9.4 million in the value of
our minority position in Lava Trading Inc. ("Lava"). The recognition of this
increase in the value of our investment in Lava was the result of Lava's private
placement of securities on March 29, 2002. Lava Trading Inc. provides market
data distribution, trading technology, electronic communications networks and
exchange connectivity for NASDAQ market makers, broker-dealers and large
institutional investors. The increase in other revenue due primarily to our
investment in Lava was partially offset by the decrease in interest income as a
result of significantly lower interest rates for our short to medium term
investments, as well as decreases in our proprietary trading revenues.
EXPENSES
Total expenses before provision for income taxes increased 13.8% to $139.0
million for the six months ended June 30, 2002, from $122.1 million for the same
period in 2001.
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Employee compensation and related benefits expense increased 20.3% to $62.2
million for the six months ended June 30, 2002, from $51.7 million for the same
period in 2001. This increase was primarily due to our 2001 acquisitions, which
increased our average headcount by approximately 135 individuals for the six
months ended June 30, 2002 as compared to the same period in 2001. This increase
was partially offset by a decrease in incentive-based compensation. Employee
compensation and related benefits expense increased to 28.2% of total revenues
for the six months ended June 30, 2002, from 24.6% of total revenues for the
same period in 2001.
Interest expense increased 1.2% to $25.7 million for the six months ended
June 30, 2002, from $25.4 million for the same period in 2001. This increase was
primarily due to additional interest charges associated with the issuance of
$16.4 million of subordinated indebtedness in connection with the Bocklet
acquisition in October 2001, as well as a full six months of interest on the
$9.0 million of secured demand notes assumed in connection with our 2001
acquisitions. The increase in interest expense was partially offset by scheduled
repayments of indebtedness from June 30, 2001 through June 30, 2002. Interest
expense decreased to 11.6% of total revenues for the six months ended June 30,
2002, from 12.1% of total revenues for the same period in 2001.
Exchange, clearing and brokerage fees expense increased 78.9% to $17.0
million for the six months ended June 30, 2002, from $9.5 million for the same
period in 2001. This increase was primarily due to increased clearing and
execution volume and a full six months of fees at our clearing operations,
increased principal trading volumes as a result of our 2001 acquisitions and an
increase in NYSE regulatory fees based on exchange membership use. Exchange,
clearing and brokerage fees expense increased to 7.7% of total revenues for the
six months ended June 30, 2002, from 4.5% of total revenues for the same period
in 2001.
Lease of exchange memberships expense increased 45.6% to $13.1 million for
the six months ended June 30, 2002, from $9.0 million for the same period in
2001. This increase was the result of an increase of 19 in the average number of
our leased memberships for the six months ended June 30, 2002 as compared to the
same period in 2001. An increase in the average annual leasing cost of the
memberships from approximately $312,000 to $330,000 per membership also
contributed to the increase. Additionally, the increase was the result of
leasing 10 additional AMEX memberships during the first six months of 2002, as
compared to the first six months of 2001. These additional AMEX membership
leases arose out of our acquisition of Cranmer & Cranmer, Inc. in August 2001.
Lease of exchange memberships expense increased to 5.9% of total revenues for
the six months ended June 30, 2002, from 4.3% of total revenues for the same
period in 2001.
Depreciation and amortization of intangibles expense decreased 61.0% to
$6.7 million for the six months ended June 30, 2002, from $17.2 million for the
same period in 2001. The decrease was due to the adoption of SFAS No. 142
commencing January 1, 2002, which requires that we cease amortization of
acquired goodwill and intangible assets with indefinite useful lives.
Amortization of intangibles expense amounted to approximately $5.2 million, and
depreciation amounted to approximately $1.5 million. Depreciation and
amortization of intangibles expense decreased to 3.0% of total revenues for the
six months ended June 30, 2002, from 8.2% of total revenues for the same period
in 2001.
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Other expenses increased 54.8% to $14.4 million for the six months ended
June 30, 2002, from $9.3 million for the same period in 2001. This increase was
due to a $1.5 million charge related to the buyback of approximately 28,164
shares of our Series A preferred stock, and additional communication, occupancy
and legal and professional expenses as a result of the general expansion of our
business and our 2001 acquisitions.
INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes decreased 7.6% to $81.7 million
for the six months ended June 30, 2002, from $88.4 million for the same period
in 2001. This decrease was due to the increase in employee compensation and
related benefits expense, exchange, clearing and brokerage fees and lease of
exchange memberships expense, which was partially offset by the increase in our
total revenues and the decrease in depreciation and amortization expenses.
INCOME TAXES
Provision for income taxes decreased 19.0% to $39.1 million for the six
months ended June 30, 2002, from $48.3 million for the same period in 2001. This
decrease was primarily due to the decline in our profitability.
LIQUIDITY
As of June 30, 2002, we had $2,017.2 million in assets, of which $76.1
million consisted of cash, short-term investments in government obligations with
original maturities within three months, cash and securities segregated under
federal regulations and overnight repurchase agreements.
In February 2002, our LaBranche & Co. LLC subsidiary extended its $200.0
million committed line-of-credit with a U.S. commercial bank until February 27,
2003. Borrowings under this U.S. commercial bank credit facility would be
secured by our inventory of specialist stocks and would bear interest at the
U.S. commercial bank's broker loan rate. To date, we have not utilized this
facility. In order to maintain the availability of funds under this credit
facility, we must comply with certain customary covenants.
As of June 30, 2002, the subordinated indebtedness of LaBranche & Co. LLC
aggregated $66.0 million (excluding subordinated liabilities related to
contributed exchange memberships) and consisted of the following:
- $35.0 million in senior subordinated notes,
- $20.0 million of which were privately placed pursuant to note
purchase agreements, mature on September 15, 2002 and bear
interest at an annual rate of 8.17%, payable on a quarterly
basis; and
- $15.0 million of which were privately placed pursuant to note
purchase agreements, mature on June 3, 2008 and bear interest at
an annual rate of 7.69%, payable on a quarterly basis.
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- $31.0 million in junior subordinated notes,
- $8.0 million of which were issued to former limited partners,
family members of former employees and former equity owners of
Bocklet and their respective family members. These notes mature
on varying dates ranging from the second half of 2002 and the
first half of 2004 and bear interest at annual rates ranging from
8.0% to 10.0%, payable on a quarterly basis;
- $9.0 million in secured demand note obligations which were
assumed in connection with our March 2001 acquisition of ROBB
PECK McCOOEY Financial Services, Inc. ("RPM"), of which $1.0
million matures in April 2003 and $8.0 million matures in June
2003, and bear interest at variable rates, payable monthly; and
- $14.0 million in secured demand note obligations to two former
members of Bocklet & Company, LLC ("Bocklet"), which were
incurred in connection with our acquisition of Bocklet in October
2001, bear interest at an annual rate of 10.0% and mature in
October 2002.
Of the total $31.0 million of junior subordinated notes, $14.6 million have
automatic rollover provisions, which extend their respective maturities for an
additional year, unless the lender provides at least seven months' advance
notice prior to maturity. LaBranche & Co. LLC also is entitled to prepay the
junior subordinated notes and the secured demand note obligations without
penalty under the terms of the agreements relating thereto.
On August 24, 1999, in connection with our reorganization from partnership
to corporate form, we issued a $16.0 million senior note as partial payment for
the acquisition of a certain limited partnership interest in LaBranche & Co. LLC
(prior to its conversion to a limited liability company). The note is payable in
three annual installments and bears interest at the annual rate of 9.5%. We
repaid an aggregate principal amount of $11.0 million of this note in August
2000 and 2001, and the remaining principal amount of $5.0 million, plus accrued
and unpaid interest, is payable on August 24, 2002.
As of June 30, 2002, we had an aggregate of $12.7 million of outstanding
indebtedness, which we had assumed in connection with the RPM acquisition and
which consisted of:
- $3.0 million in subordinated notes which were issued to family members
of former employees of RPM and which mature in the first half of 2003
and in the first half of 2006 and bear interest at annual rates of
12.0% and 12.5%, payable on a quarterly basis;
- a $295,000 promissory note which has an automatic rollover provision
that extends the maturity for an additional year, unless the lender
provides notice at least 30 days prior to maturity, and bears interest
at an annual rate of 9.0% payable on a quarterly basis;
- $7.5 million in promissory notes issued to former RPM employees and
their
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family members which are payable in equal annual installments on the
anniversaries of issuance, mature on dates ranging from the second
half of 2002 to the first half of 2005, and bear interest at annual
rates ranging from 8.0% to 12.0%, payable on a quarterly basis; and
- $1.9 million in notes representing deferred compensation owed to
former RPM employees which are payable in equal annual installments on
the anniversaries of issuance, mature on dates ranging from the second
half of 2002 to the second half of 2004 and bear interest at annual
rates ranging from 9.5% to 10.0%, payable on a quarterly basis.
In connection with our acquisition of RPM, we issued 100,000 shares of our
nonconvertible Series A preferred stock to the former stockholders of RPM. Each
outstanding share of our Series A preferred stock entitles the holder to
cumulative preferred cash dividends at an annual rate of 8.0% of the liquidation
preference per share until the fourth anniversary of the closing of the merger,
10.0% until the fifth anniversary of the closing, and 10.8% thereafter.
Dividends are payable on the first day of January and the first day of July of
each year (or if such date is not a regular business day, then the next business
day thereafter). The first payment of dividends was made on July 1, 2001.
Dividends on the issued and outstanding shares of Series A preferred stock are
preferred and cumulative and accrue daily from the date on which the shares were
originally issued. On January 18, 2002, we offered to repurchase up to 30,000
shares of our outstanding Series A preferred stock for $1,000 per share, plus
accrued and unpaid dividends up to but not including the date of purchase. On
February 15, 2002, the offer expired, and on February 19, 2002, we purchased all
of the approximately 28,164 shares that had been tendered for a purchase price
of approximately $28.5 million, including accrued but unpaid dividends. As of
June 30, 2002, 71,836 shares of our Series A preferred stock were outstanding.
In connection with our acquisition of RPM, we assumed its liabilities and
obligations under its deferred compensation plan. The deferred compensation plan
provides for the payment, on or before December 15, 2007, of approximately $30.2
million, plus interest at 8.0% per year, to certain former employees of RPM.
While the payment of benefits under this deferred compensation plan may be
accelerated in certain circumstances, no more than $6.0 million in deferred
compensation benefits (including interest) may be paid in any 12 consecutive
month period beginning March 15, 2001. We paid $6.0 million in deferred
compensation plan benefits in March 2002. During April 2002, the following plan
year, we paid approximately $1.2 million in deferred compensation plan benefits.
If the plan is terminated, the deferred compensation benefits (including
interest) of all participants, to the extent not previously paid, must be
distributed to the participants in a lump sum. The amounts payable under this
deferred compensation plan may be reduced to satisfy any indemnification
obligations of the plan participants to us under the agreements governing our
acquisition of RPM.
In connection with our acquisition of RPM, we assumed its liabilities and
obligations under the Robb Peck McCooey Pension Trust. The pension trust was
amended prior to our acquisition of RPM to freeze all future benefit accruals as
of March 15, 2001. The pension trust was terminated, effective as of August 31,
2001, and we contributed $1.2 million to the trust in May 2002 in order to fund
a deficiency in the required value of the assets of the trust.
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We also assumed RPM's liabilities and obligations under its retention bonus
pool. The retention bonus pool requires $9.0 million to be paid as bonus
compensation on March 15, 2004 to as many as 31 former employees of RPM. The
portion of this retention bonus pool payable to each of these former employees
will be determined by the majority vote of a committee consisting of Robert M.
Murphy, George E. Robb, Jr. and Michael LaBranche or their respective
successors.
On August 24, 1999, we issued $100.0 million aggregate principal amount of
Senior Notes. The Senior Notes bear interest at a rate of 9.5% annually and
mature in August 2004. The indenture covering the Senior Notes includes certain
covenants that, among other things, limit our ability to borrow money, pay
dividends on our stock or purchase our stock, make investments, engage in
transactions with stockholders and affiliates, create liens on our assets, and
sell assets or engage in mergers and consolidations, except in accordance with
certain specified conditions.
On March 2, 2000, we issued $250.0 million aggregate principal amount of
Senior Subordinated Notes. These Senior Subordinated Notes bear interest at a
rate of 12.0% annually and mature in March 2007. The indenture covering the
Senior Subordinated Notes includes certain covenants that, among other things,
limit our ability to borrow money, pay dividends on our stock or purchase our
stock, make investments, engage in transactions with stockholders and
affiliates, create liens on our assets, and sell assets or engage in mergers and
consolidations, except in accordance with certain specified conditions.
The Senior Subordinated Notes also require us, within 150 days after the
end of each fiscal year, to offer to redeem from all holders of the Senior
Subordinated Notes a principal amount equal to our Excess Cash Flow during the
preceding fiscal year at a price equal to 103.0% of the principal amount being
offered for purchase plus accrued and unpaid interest, if any, to the date of
redemption. Each holder is entitled to be offered his or her pro rata share
based upon his or her ownership percentage of the outstanding Senior
Subordinated Notes. Excess Cash Flow is defined for this purpose as 40.0% of the
amount by which our consolidated EBITDA exceeds the sum of our interest expense,
tax expense, increase in net capital or net liquid asset requirements, capital
expenditures, any cash amounts related to acquisitions of NYSE specialists or
any cash payments related to our payment at maturity of the principal amount of
our existing or certain other indebtedness. In May 2001, we offered to purchase
an aggregate principal amount of approximately $9.9 million of Senior
Subordinated Notes pursuant to this Excess Cash Flow offer requirement and no
Senior Subordinated Notes were tendered. In 2002, we were not required to make
an Excess Cash Flow offer to the holders of Senior Subordinated Notes because we
did not have Excess Cash Flow as of December 31, 2001, as defined for this
purpose.
As a registered broker-dealer, LaBranche & Co. LLC is subject to regulatory
requirements intended to ensure the general financial soundness and liquidity of
broker-dealers and requiring the maintenance of minimum levels of net capital,
as defined in SEC Rule 15c3-1. LaBranche & Co. LLC is required to maintain
minimum net capital, as defined, equivalent to the greater of $100,000 or 1/15
of aggregate indebtedness, as defined. NYSE Rule 326(c) also prohibits a
broker-dealer from repaying subordinated borrowings, paying cash dividends,
making loans to any parent, affiliate or employee, or otherwise entering into
transactions which would
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result in a reduction of its total net capital to less than 150.0% of its
required minimum capital. Moreover, broker-dealers are required to notify the
SEC prior to repaying subordinated borrowings, paying dividends and making loans
to any parent, affiliate or employee, or otherwise entering into transactions
which, if executed, would result in a reduction of 30.0% or more of their excess
net capital (net capital less amount of minimum requirement). The SEC has the
ability to prohibit or restrict such transactions if the result is deemed
detrimental to the financial integrity of the broker-dealer.
As of June 30, 2002, LaBranche & Co. LLC's net capital, as defined under
SEC Rule 15c3-1, was $450.1 million, which exceeded its minimum requirement by
$446.4 million.
The NYSE generally requires its specialist firms to maintain a minimum
dollar regulatory capital amount in order to establish that they can meet, with
their own net liquid assets, their position requirement. As of June 30, 2002,
LaBranche & Co. LLC's NYSE minimum required dollar amount of net liquid assets,
as defined, was $446.0 million, compared to actual net liquid assets, as
defined, of $470.6 million.
Failure to maintain the required net capital and net liquid assets may
subject LaBranche & Co. LLC to suspension or revocation of its SEC registration
or suspension or expulsion by the NYSE.
As a registered broker-dealer and NYSE member firm, LFSI also is subject to
SEC Rule 15c3-1, as adopted and administered by the NYSE. Under the alternative
method permitted by the rule, LFSI's minimum required net capital is equal to
the greater of $250,000 or 2% of aggregate debit items, as defined. As of June
30, 2002, LFSI's net capital, as defined under SEC Rule 15c3-1, was $22.9
million and exceeded its minimum requirement by $22.2 million.
We currently anticipate that our available cash resources will be
sufficient to meet our working capital, regulatory capital and capital
expenditure requirements through the end of 2002.
CREDIT RATINGS
Our $100.0 million Senior Notes and our $250.0 million Senior Subordinated
Notes were both sold to public investors on their respective issuance dates. The
following table sets forth the credit ratings on both of these issues as of June
30, 2002:
Moody's Investors Services Standard & POOR'S
-------------------------- -----------------
Senior Notes Baa3 BB+
Senior Subordinated Notes Ba1 BB-
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A majority of our specialist related revenues are derived from trading as
principal. Additionally, a high concentration of our specialist trading revenue
is generated from our 25 most profitable specialist stocks. However, the
percentage of our specialist trading revenue generated from our 25 most
profitable specialist stocks has decreased to 48.5% of principal trading revenue
for the quarter ended June 30, 2002 from 50.2% of principal trading revenue for
the same period last year. We are not overly reliant on a particular group of
specialist stocks, as the composition of our ten most profitable specialist
stocks changes from year to year. We also operate a proprietary trading desk
separately from our NYSE and AMEX specialist operations. Its revenues
represented (.05)% of our total revenues for the six months ended June 30, 2002
and .04% of our total revenues for the same period in 2001. We may continue to
incur trading losses as a result of these trading activities. These activities
involve primarily the purchase, sale and short sale of securities for our own
account. These activities are subject to a number of risks, including risks of
price fluctuations and rapid changes in the liquidity of markets. In any period,
we may incur trading losses in our specialist stocks for a variety of reasons,
including price fluctuations of our specialist stocks, lack of trading volume in
our specialist stocks and the 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 significant
price movement in these securities could result in a reduction of our revenues
and operating profits.
We have developed a risk management process, which is intended to balance
our ability to profit from our specialist activities with our exposure to
potential losses. In addition, we have trading limits relating to our
proprietary trading activities.
Although we have adopted risk management policies, we cannot be sure that
these policies have been formulated properly to identify or limit our risks.
Even if these policies are formulated properly, we cannot be sure that we will
successfully implement these policies. As a result, we may not be able to manage
our risks successfully or avoid trading losses.
LFSI's clearance activities involve settlement and financing of various
customer securities transactions on a cash or margin basis. These activities may
expose LFSI to off-balance sheet risk in the event a customer or other broker is
unable to fulfill its contractual obligations and LFSI has to purchase or sell
securities at a loss. For margin transactions, LFSI may be exposed to
significant off-balance sheet risk in the event margin requirements are not
sufficient to fully cover losses that customers may incur in their accounts.
LFSI seeks to control the risks associated with customer activities by
requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. LFSI monitors margin levels daily and,
pursuant to such guidelines, requires customers to deposit additional collateral
or to reduce positions when necessary.
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PART II OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
The Company and, in particular, certain of the business operations
conducted by RPM Clearing Corporation, have been the target, from time to
time, of various claims and lawsuits incidental to the ordinary course of
their respective businesses. While the ultimate outcome of those claims and
lawsuits which currently are pending cannot be predicted with certainty, we
believe, based on our understanding of the facts of these proceedings, that
their ultimate resolution will not, in the aggregate, have a material adverse
effect on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on May 21, 2002. The
following proposals were adopted by the margins indicated:
1. To elect three Class III directors, each of whom is to serve for a
term of three years.
Number of Shares
For Withheld Authority
E. Margie Filter 46,407,124 929,689
Thomas E. Dooley 46,407,174 929,639
Harvey S. Traison 42,004,752 5,332,061
2. To approve an amendment to the Company's Equity Incentive Plan
which increases the number of shares of common stock available for
issuance thereunder by 3,000,000 shares to 7,687,500 shares.
For 32,387,609
Against 8,577,317
Abstain 31,181
ITEM 5. OTHER INFORMATION.
We have included in this Form 10-Q filing, and from time to time our
management may make, statements which may constitute "forward-looking
statements" within the meaning of the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. The Company's quarterly and annual
operating results are affected by a wide variety of factors that could
materially and adversely affect actual results, including: a decrease in trading
volume on the New York Stock Exchange or the American Stock Exchange, excessive
volatility in the equity securities market and changes in the value of its
securities positions. As a result of these and other factors, the Company may
experience material fluctuations in future operating results on a quarterly or
annual basis, which could materially and adversely affect its business,
financial condition, operating results, and stock price. An investment in the
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Company involves various risks, including those mentioned above and those
that are detailed from time to time in the Company's SEC filings.
Certain statements contained in this report, including without limitation,
statements containing the words "believes," "intends," "expects," "anticipates"
and words of similar import, also may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance, and since such statements involve risks and
uncertainties, the actual results and performance of the Company and the
specialist industry may turn out to be materially different from the results
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company also disclaims any obligation to update
its view of any such risks or uncertainties or to publicly announce the result
of any revisions to the forward-looking statements made in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Amendment No. 1 to the LaBranche & Co Inc. Equity Incentive Plan
(b) REPORTS ON FORM 8-K.
On May 20, 2002, the Company filed a Form 8-K, with respect to the
change of its independent accountants from Arthur Andersen LLP to KPMG
LLP, under Item 4 of Form 8-K.
All other items of this report are inapplicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 14, 2002 LABRANCHE & CO INC.
By: /s/ Harvey S. Traison
------------------------------
Name: Harvey S. Traison
Title: Chief Financial Officer
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