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, 2001
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, 2001 was 57,427,838.
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........................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......24
PART II OTHER INFORMATION................................................26
Item 6. Exhibits and Reports on Form 8-K.................................26
SIGNATURES...............................................................27
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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,
-----------------------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES:
Net gain on principal transactions $ 89,354 $ 73,323 $170,814 $138,714
Commissions 16,491 11,147 28,818 20,332
Other 6,916 3,154 10,889 7,268
-------- -------- -------- --------
Total revenues 112,761 87,624 210,521 166,314
-------- -------- -------- --------
EXPENSES:
Employee compensation and related benefits 27,109 22,969 51,701 45,768
Interest 13,240 11,603 25,385 18,050
Depreciation and amortization of intangibles 11,064 4,871 17,197 7,625
Exchange, clearing and brokerage fees 6,447 1,340 9,484 2,373
Lease of exchange memberships 5,176 2,781 9,031 5,338
Other 5,985 2,960 9,299 5,626
-------- -------- -------- --------
Total expenses 69,021 46,524 122,097 84,780
-------- -------- -------- --------
Income before provision for income taxes 43,740 41,100 88,424 81,534
PROVISION FOR INCOME TAXES 24,523 20,975 48,283 40,853
-------- -------- -------- --------
Net income $ 19,217 $ 20,125 $ 40,141 $ 40,681
======== ======== ======== ========
Weighted-average shares outstanding:
Basic 57,025 48,675 53,651 47,614
Diluted 58,432 48,838 54,847 47,739
Earnings per share
Basic $ 0.30 $ 0.41 $ 0.70 $ 0.85
Diluted $ 0.29 $ 0.41 $ 0.68 $ 0.85
-3-
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED)
As of
--------------------------------
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(unaudited)
ASSETS
CASH AND CASH EQUIVALENTS $ 201,474 $ 152,220
CASH AND SECURITIES SEGREGATED UNDER FEDERAL REGULATIONS 88,810 3,610
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 26,322 134,111
RECEIVABLE FROM BROKERS, DEALERS AND CLEARING ORGANIZATIONS 274,627 63,468
RECEIVABLE FROM CUSTOMERS 14,983 912
SECURITIES OWNED, at market value:
Corporate equities 171,715 132,389
Other 87,096 8,664
EXCHANGE MEMBERSHIPS CONTRIBUTED FOR USE, at market value 32,200 24,000
EXCHANGE MEMBERSHIPS OWNED, at cost (market value of
$87,400 and $52,000, respectively) 75,315 50,300
OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of
$6,769 and $2,622, respectively 5,298 3,371
INTANGIBLE ASSETS, net of accumulated amortization
Specialist Stock List 362,266 185,982
Trade Name 25,344 25,676
Goodwill 437,214 191,235
OTHER ASSETS 68,589 28,184
----------- -----------
Total assets $ 1,871,253 $ 1,004,122
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable to brokers and dealers $ 29,720 $ 4,068
Payable to customers 80,239 4,051
Securities sold, but not yet purchased, at market value 175,438 60,726
Accounts payable and other accrued expenses 97,096 57,559
Income taxes payable -- 10,329
----------- -----------
382,493 136,733
----------- -----------
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DEFERRED TAX LIABILITIES 168,606 74,660
----------- -----------
LONG TERM DEBT 369,459 355,893
----------- -----------
SUBORDINATED LIABILITIES
Exchange memberships, at market value 32,200 24,000
Other subordinated indebtedness 50,935 41,935
----------- -----------
83,135 65,935
----------- -----------
PREFERRED STOCK, at carrying value, liquidation
value of $1,000 per share; 10,000,000 shares
authorized; 100,000 and 0 shares issued and
outstanding as of June 30, 2001 and
December 31, 2000, respectively 93,826 --
COMMON STOCK, $.01 par value, 200,000,000 shares
authorized; 57,427,838 and 49,069,521 shares
issued and outstanding as of June 30, 2001
and December 31, 2000, respectively 574 491
OPTIONS ON COMMON STOCK 49,883 --
ADDITIONAL PAID-IN-CAPITAL 589,904 273,347
RETAINED EARNINGS 142,040 104,665
UNEARNED COMPENSATION (8,667) (7,602)
----------- -----------
867,560 370,901
----------- -----------
Total liabilities and stockholders' equity $ 1,871,253 $ 1,004,122
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated statements.
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LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
Six Months Ended
----------------------------
June 30, 2001 June 30, 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization of intangibles $ 40,141 $ 40,681
Amortization of bond discount and debt issuance costs 17,197 7,624
Compensation expense related to stock-based compensation 857 627
Deferred tax provision 3,391 1,495
Tax benefit related to employee stock transactions (2,000) 72
Change in assets and liabilities: 18,290 --
Cash segregated under federal regulations (85,200) --
Securities purchased under agreements to resell 107,789 (36,378)
Receivable from brokers, dealers and clearing organizations (211,159) (88,626)
Receivable from customers (14,071) (1,403)
Corporate equities (39,326) (177,099)
United States Government obligations -- 1,471
Other securities owned (74,553) (3,959)
Other assets (44,285) (10,649)
Payable to brokers and dealers 25,652 105,037
Payable to customers 76,188 4,115
Securities sold, but not yet purchased 114,712 51,522
Accounts payable and other accrued expenses 52,865 39,024
Income taxes payable (10,329) (7,026)
--------- ---------
Net cash used in operating activities (24,112) (73,472)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received from (paid for) acquisitions 66,490 (184,364)
Payment for purchase of an exchange membership (2,000) --
Payments for office equipment and leasehold improvements (533) (1,162)
--------- ---------
Net cash provided by (used in) investing activities 63,957 (185,526)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 9,409 --
Net cash received from issuance of senior subordinated debt -- 245,693
--------- ---------
Net cash provided by financing activities 9,409 245,693
--------- ---------
Increase/(decrease) in cash and cash equivalents 49,254 (13,305)
--------- ---------
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CASH AND CASH EQUIVALENTS, beginning of period 152,220 83,774
CASH AND CASH EQUIVALENTS, end of the period $201,474 $ 70,469
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 22,422 $ 6,478
Income taxes 45,150 48,538
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING
ACTIVITIES:
Acquisitions:
Intangibles assets $452,488 $171,936
Fair value of tangible assets acquired, other than cash 71,555 33,863
Deferred tax liabilities related to intangible assets 95,995 61,774
Other liabilities 38,950 --
Common stock issuance 260,463 32,312
Exercise of options granted to former RPM stockholders 37,811 --
The accompanying notes are an integral part of these condensed
consolidated statements.
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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"), Henderson Brothers, Inc., a Delaware corporation ("Henderson
Brothers"), ROBB PECK McCOOEY Clearing Corporation, a New York corporation ("RPM
Clearing Corporation"), and Internet Trading Technologies, Inc., a Delaware
corporation ("ITTI" and, collectively with the Holding Company, LaBranche,
Henderson Brothers and RPM Clearing Corporation the "Company"). The Holding
Company is the sole member of LaBranche and 100% stockholder of Henderson
Brothers, RPM Clearing Corporation and ITTI. 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 options
on the American Stock Exchange (the "AMEX"). Henderson Brothers is also a
registered broker-dealer and a member of the NYSE and primarily provides
clearance services to customers of several introducing brokers and provides
direct access floor brokerage to institutional customers. RPM Clearing
Corporation is a registered broker-dealer and a member of the NYSE and other
exchanges and provides clearing, prime brokerage and execution services. ITTI
provides front-end order execution systems, analysis and reporting solutions for
the wholesale securities dealer market.
2. NEW ACCOUNTING PRONOUNCEMENTS
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. The statement
provides that intangible assets with indefinite useful lives will no longer be
amortized, effective January 1, 2002 for intangible assets existing at June 30,
2001 or effective immediately for intangible assets acquired after June 30,
2001. Rather, these assets will be tested at least annually for impairment by
applying a fair-value based test. In addition, intangible assets with finite
useful lives continue to be amortized over their useful lives, which are no
longer limited to 40 years. The provisions of SFAS No. 142 are effective for
fiscal years beginning after December 15, 2001. Accordingly, commencing January
2002, the Company will cease amortization of recorded goodwill and certain
intangible assets and the amortization expense for these intangible assets will
no longer be included in the results of operations. The Company does not
anticipate incurring any impairment charges upon implementation of SFAS No. 142.
However, it is possible that in the future, the Company may incur impairment
charges related to the carrying value of goodwill and intangible assets recorded
in its financial statements. The Company expects the effect of
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adoption of SFAS No. 142, as it relates to no longer amortizing goodwill and
certain intangible assets, will materially increase its future results of
operations. The estimated annual amortization expenses for intangible assets at
June 30 in 2001 that will no longer be amortized are (000's omitted):
Tradename amortization,
net of deferred tax benefit $ 349
Goodwill amortization 27,499
-------
Total amortization expense $27,848
=======
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
INFORMATION
The unaudited interim condensed consolidated financial information as of
June 30, 2001 and for the three months ended June 30, 2001 and 2000 are
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, 2001 should be read in conjunction with the audited
consolidated financial statements and notes thereto as of December 31, 2000
included in the Company's Form 10-K filed with the Securities and Exchange
Commission ("SEC") on March 30, 2001. Results of the interim periods are not
necessarily indicative of results to be obtained for a full fiscal year.
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 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 in 2001 and 2000.
The components of the provision for income taxes reflected on the condensed
consolidated statements of operations are set forth below (000's omitted):
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Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Current federal, state
and local taxes $ 25,528 $ 20,831 $ 47,485 $ 39,456
Deferred tax
(benefit)/provision (1,005) (81) 798 72
Unincorporated business tax -- 225 -- 1,325
------------------------------------------------------------
Total provision for income
taxes $ 24,523 $ 20,975 $ 48,283 $ 40,853
============================================================
5. REGULATORY REQUIREMENTS
LaBranche, a specialist and member of the NYSE 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.
As of June 30, 2001 and as of December 31, 2000, LaBranche's net capital,
as defined under SEC Rule 15c3-1, was $394.6 million and $293.4 million,
respectively. As of those dates LaBranche exceeded the minimum requirements by
$391.7 million and $290.3 million, respectively. LaBranche's aggregate
indebtedness to net capital ratio on those dates was .11 to 1 and .16 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, 2001 and as of December 31, 2000, LaBranche's NYSE minimum
required dollar amount of net liquid assets, as defined, was $405.0 million and
$284.3 million, respectively, compared to actual net liquid assets, as defined,
of $426.3 million and $305.0 million, respectively.
As registered broker-dealers and NYSE member firms, Henderson Brothers and
RPM Clearing Corporation are 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 each subsidiary is equal to the greater of
$250,000 or 2% of aggregate debit items as defined.
As of June 30, 2001, Henderson Brothers' and RPM Clearing Corporation's
combined net capital as defined under SEC Rule 15c3-1 was $23.9 million and
exceeded minimum requirements by $23.0 million.
6. ACQUISITIONS DURING THE FIRST QUARTER 2001
On March 15, 2001, the Company acquired, through a merger, ROBB PECK
McCOOEY Financial Services, Inc. ("RPM") for an aggregate of approximately 6.9
million shares of the
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Company's common stock and shares of the Company's nonconvertible Series A
preferred stock having an aggregate face and liquidation value of
approximately $100.0 million and a fair value of approximately $93.4 million.
Each share of the Series A preferred stock entitles the holder thereof to
cumulative preferred cash dividends at an annual rate of 8% for the first
four years, 10% for the fifth year and 10.8% thereafter, certain voting
rights and preferred distributions upon liquidation. In addition, the Company
assumed RPM's obligations under RPM's outstanding option agreements with its
employees. Thus, each option to purchase RPM common stock was converted into
a vested option to purchase 98.778 shares of the Company's common stock. The
acquisition was accounted for under the purchase method and the results of
RPM's operations have been included in the Company's consolidated financial
statements since March 16, 2001. The Company finalized its purchase
accounting during the second quarter of 2001 without any significant
adjustment to the original allocation of purchase price. The adjusted excess
of purchase price over fair value of tangible assets of approximately $433.8
million was allocated to intangible assets with corresponding respective
lives as follows (000's omitted):
ORIGINAL
AMOUNT LIFE
------ ----
Specialist Stock List $ 180.0 40 years
Goodwill 253.8 15 years
-------
$ 433.8
The allocation of purchase price and determination of useful lives for the
acquisition was based upon an independent appraisal. The useful life of the
specialist stock list was determined based upon analysis of historical turnover
characteristics of RPM's specialist stocks.
Effective March 13, 2001, the Company acquired all the outstanding capital
stock of ITTI, a company that provides front-end order execution systems,
analysis and reporting solutions for the wholesale securities dealer market.
ITTI is operated by the Company as a separate subsidiary. The excess of purchase
price over fair value of net tangible assets of approximately $4.3 million was
allocated to goodwill.
7. COMMITMENTS
Minimum rental commitments under existing non-cancelable leases for office
space and equipment are as follows:
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YEAR ENDING DECEMBER 31:
-----------------------
2001 $1,212,130
2002 1,980,037
2003 1,696,898
2004 1,297,750
2005 1,238,650
Thereafter $2,648,894
These leases contain escalation clauses providing for increased rentals
based upon maintenance and tax increases.
8. 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.
The computations of basic and diluted EPS are set forth below (000's
omitted, except per share data):
Three Months Three Six Months Six Months
Ended Months Ended Ended Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Net income $19,217 $20,125 $40,141 $40,681
Less preferred dividends and
accretion 2,378 -- 2,767 --
------- ------- ------- -------
Numerator for basic and
diluted earnings per common
share - net income $16,839 $20,125 $37,374 $40,681
Denominator for basic
earnings per share -
weighted-average number
of common shares 57,025 48,675 53,651 47,614
Dilutive Shares
Stock options 965 -- 745 --
Restricted stock 87 -- 94 --
Restricted stock units 355 163 357 125
------- ------- ------- -------
Denominator for diluted
earnings per share -
weighted-average number
of common shares 58,432 48,838 54,847 47,739
Basic earnings per share $ 0.30 $ 0.41 $ 0.70 $ 0.85
Diluted earnings per share $ 0.29 $ 0.41 $ 0.68 $ 0.85
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Under the treasury stock method of accounting, restricted stock units
representing 404,657 and 402,412 shares of common stock, restricted stock
representing 272,649 and 265,962 shares of common stock and options to purchase
an aggregate of 1,913,921 and 2,134,865 shares of common stock for the three
months and the six months ended June 30, 2001, respectively, were not included
in the calculation of diluted earnings per share due to their antidilutive
effect.
9. EMPLOYEE INCENTIVE AWARDS
During the first quarter of 2001, the Company assumed RPM's obligations
under existing option agreements with RPM's employees, whereby the Company
issued 2,775,662 options, of which 1,144,658 were exercised at prices between
$2.78 and $13.67. During the second quarter of 2001 options to purchase 64,778
shares of common stock, which were issued in connection with the RPM
acquisition, were exercised at prices between $2.78 and $13.67. The tax benefit
associated with the exercise of replacement options has been recorded as an
adjustment to goodwill, resulting in a decrease in the amount of approximately
$811,000 for the quarter ended June 30, 2001.
10. PROMISSORY NOTES PAYABLE
As of June 30, 2001, the Company has $16.1 million of promissory notes
payable as a result of debt assumed by the Company in the RPM acquisition. Three
of these notes, representing approximately $3.3 million, are subordinated debt
placed with family members of former employees of RPM. This debt has maturities
ranging from the first half of 2002 through the first half of 2006, and bears
interest at an annual rate between 9.0% and 12.5%, payable on a quarterly basis.
One of these agreements, representing $295,000, 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. Seven additional notes,
representing $10.0 million, are promissory notes placed with former RPM
employees and their family members. These notes are payable in equal annual
installments on the anniversaries of issuance, with maturity dates ranging from
the second half of 2002 through the first half of 2005, and bear interest at
annual rates ranging from 9.5% to 12.0%, payable on a quarterly basis. The
remaining four notes, representing $2.7 million, represent deferred compensation
of former RPM employees. These notes are payable in equal annual installments on
the anniversaries of issuance, with maturity dates ranging from the second half
of 2002 through the second half of 2004, and bear interest at annual rates
ranging from 9.5% to 10.0%.
11. PRO FORMA FINANCIAL INFORMATION
The following 2000 pro forma consolidated results give effect to the
Company's March 2000 acquisition of all the outstanding capital stock of
Henderson Brothers, the March 2000 acquisition of Webco Securities, Inc.
("Webco") and the March 2000 issuance of $250.0 million of Senior Subordinated
Notes as if they occurred on January 1, 2000. In addition, the 2000 pro forma
consolidated results give effect to the March 2001 acquisition of RPM, including
the issuance of common stock, the issuance of preferred stock, the assumption of
all obligations under RPM's option agreements and the reversal of the historical
results of operations for certain business lines (the "Acquisition
Transactions"), as if they occurred on January 1, 2000. The 2001
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pro forma consolidated results give effect to the Acquisition Transactions as if
they occurred on January 1, 2001. The pro forma impact on revenues, pre-tax
income and earnings are as follows (000's omitted, except per share data):
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30,
2001 2000
---- ----
(PRO FORMA) (PRO FORMA)
Revenues $237,319 $261,071
Pre-Tax Income 61,716 95,922
Net Income 24,792 43,410
EPS $ 0.35 $ 0.69
12. SUBSEQUENT EVENTS
During May 2001, the Company signed a letter of intent to acquire
Bocklet & Company, LLC, a specialist for approximately 60 listed companies on
the NYSE. A definitive agreement has not been completed, but the transaction
consideration will include cash and shares of the Company's common stock.
During July 2001, the board of directors approved 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. The
effectiveness of this increase is subject to the approval of the stockholders
of the Company at the next annual or special meeting of stockholders.
On August 2, 2001, the Company entered into a sublease commitment for
office space located at 120 Broadway, New York, New York. The sublease is for
approximately 45,000 square feet and expires on March 30, 2006. Additionally,
one of the lease commitments at 20 Broad Street for approximately 21,000 square
feet will not be renewed upon expiration on December 31, 2001.
As of August 9, 2001, LaBranche entered into an asset purchase
agreement with Cranmer & Cranmer, Inc. ("Cranmer") and Cranmer's stockholders
pursuant to which LaBranche will acquire substantially all the assets of
Cranmer, a specialist in stocks and options on the AMEX. Pursuant to this
agreement, the consideration will include cash and shares of the Company's
common stock. In addition, LaBranche will remit funds to Cranmer equal to the
equity capital of Cranmer, including the net value of Cranmer's open
positions on the closing date of the acquisition.
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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.
LABRANCHE'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,
VOLATILITY IN THE EQUITY SECURITIES MARKET AND CHANGES IN THE VALUE OF OUR
SECURITIES POSITIONS. AS A RESULT OF THESE AND OTHER FACTORS, LABRANCHE 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
LABRANCHE INVOLVES VARIOUS RISKS, INCLUDING THOSE MENTIONED ABOVE AND THOSE THAT
ARE DETAILED FROM TIME TO TIME IN LABRANCHE'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, 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 LABRANCHE 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. LABRANCHE 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.
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 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 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 at our
Henderson Brothers and RPM Clearing Corporation subsidiaries. Other revenue
consists of proprietary trading revenue, an investment in a hedge fund, interest
income and fees charged to customers for use of ITTI's front-end order execution
system. For the three months ended June 30, 2001, net gain on principal
transactions represented 79.2% of our total revenues, commissions revenue
represented 14.6% of our total revenues, and other revenues represented
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6.1% of our total revenues. For the six months ended June 30, 2001, net gain on
principal transactions represented 81.1% of our total revenues, commissions
revenue represented 13.7% of our total revenues, and other revenues represented
5.2% of our total revenues.
EXPENSES
Our largest operating expense is employee compensation and related
benefits, which primarily consist of salaries and 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 and each employee's overall performance.
ACQUISITIONS DURING THE SIX MONTHS ENDED JUNE 30, 2001
On March 13, 2001, we acquired all the outstanding capital stock of
Internet Trading Technologies, Inc. ("ITTI"), a company that provides front-end
order execution systems, analysis and reporting solutions for the wholesale
securities dealer market. We operate ITTI as a separate subsidiary. The excess
of purchase price over fair value of tangible assets of approximately $4.3
million was allocated to goodwill.
On March 15, 2001, we acquired ROBB PECK McCOOEY Financial Services,
Inc. ("RPM") for an aggregate of approximately 6.9 million shares of our
common stock and shares of nonconvertible Series A preferred stock having an
aggregate face and liquidation value of approximately $100.0 million and a
fair value of approximately $93.4 million. In addition, we assumed all
obligations under RPM's outstanding option agreements with its employees,
with each option to purchase RPM common stock having been converted into an
immediately exercisable option to purchase 98.778 shares of our common stock.
The adjusted excess of purchase price over fair value of net tangible assets
of approximately $433.8 million was allocated to intangible assets. The
results of the operations of RPM have been included in our financial
statements beginning March 16, 2001. As a result of the exercise of
replacement options granted to former RPM employees, we recorded a tax
benefit not reflected through the results of operations of $15.8 million.
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. The statement
provides that intangible assets with indefinite useful lives will no longer be
amortized, effective January 1, 2002 for intangible assets existing at June 30,
2001 or effective immediately for intangible assets acquired after June 30,
2001. Rather, these assets will be tested at least annually for impairment by
applying a fair-value based test. In addition, intangible assets with finite
useful lives continue
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to be amortized over their useful lives, which are no longer limited to 40
years. The provisions of SFAS No. 142 are effective for fiscal years beginning
after December 15, 2001. Accordingly, commencing January 2002, we will cease
amortization of recorded goodwill and certain intangible assets and the
amortization expense for these intangible assets will no longer be included in
our results of operations. We do not anticipate incurring any impairment charges
upon implementation of SFAS No. 142. However, it is possible that in the future,
we may incur impairment charges related to the carrying value of goodwill and
intangible assets recorded in our financial statements.
During May 2001, we signed a letter of intent to acquire Bocklet &
Company, LLC, a specialist for approximately 60 listed companies on the NYSE.
A definitive agreement has not been completed, but the transaction
consideration will include cash and shares of our common stock.
On August 2, 2001 we entered into a sublease commitment for office space
located at 120 Broadway, New York, New York. The sublease is for approximately
45,000 square feet and expires on March 30, 2006. Additionally, one of our lease
commitments at 20 Broad Street for approximately 21,000 square feet will not be
renewed upon expiration on December 31, 2001.
As of August 9, 2001, LaBranche & Co. LLC entered into an asset
purchase agreement with Cranmer & Cranmer, Inc. ("Cranmer") and Cranmer's
stockholders pursuant to which LaBranche will acquire substantially all the
assets of Cranmer, a specialist in stocks and options on the AMEX. Pursuant
to this agreement, the consideration will include cash and shares of our
common stock. In addition, LaBranche & Co. LLC will remit funds to Cranmer
equal to the equity capital of Cranmer, including the net value of Cranmer's
open positions on the closing date of the acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
REVENUES
Total revenues increased 28.8% to $112.8 million for the three months
ended June 30, 2001, from $87.6 million for the same period in 2000, principally
due to the increase in revenue from net gain on principal transactions. Net gain
on principal transactions increased 22.0% to $89.4 million for the three months
ended June 30, 2001, from $73.3 million for the same period in 2000. This
increase was primarily due to a full quarter of revenues from the RPM
acquisition on March 15, 2001, as a result of which we became the specialist for
129 additional common stock listings. In addition, this increase was due to an
increase in share volume of our specialist stocks traded on the NYSE. Our share
volume as principal increased 51.1% to 6.8 billion shares for the three months
ended June 30, 2001, from 4.5 billion shares for the same period in 2000.
Commissions revenue increased 48.6% to $16.5 million for the three months
ended June 30, 2001, from $11.1 million for the same period in 2000. This
increase was primarily due to a
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full quarter of commissions revenue earned by our clearing subsidiaries for
execution and clearing services. The share volume executed by us as agent in our
specialist stocks remained relatively flat at 1.5 billion shares, reflecting the
competitive price pressures within the marketplace and our continuing efforts to
provide low-cost services to our customers.
Other revenue increased 115.6% to $6.9 million for the three months ended
June 30, 2001, from $3.2 million for the same period in 2000. This increase was
primarily due to a full quarter of fees from other clearance and order execution
activities, short-term interest income and an increase in our proprietary
trading revenues.
EXPENSES
Total expenses before provision for income taxes increased 48.4% to $69.0
million for the three months ended June 30, 2001 from $46.5 million for the same
period in 2000.
Employee compensation and related benefits increased 17.8% to $27.1
million for the three months ended June 30, 2001, from $23.0 million for the
same period in 2000. This increase was primarily due to a full quarter of
employee compensation and related benefits expense as a result of the RPM
acquisition, which resulted in our employment of 215 additional individuals on
March 15, 2001. This increase was offset by a decrease in profitability-based
compensation. As a percentage of total revenues, employee compensation decreased
to 24.0% of total revenues for the three months ended June 30, 2001, from 26.2%
of total revenues for the same period in 2000.
Interest expense increased 13.8% to $13.2 million for the three months
ended June 30, 2001, from $11.6 million for the same period in 2000. This
increase was primarily due to additional interest charges associated with our
clearance activities, as well as the assumption of approximately $16.1 and $9.0
million of promissory notes and subordinated debt, respectively, as a result of
the RPM acquisition. As a percentage of total revenues, interest decreased to
11.7% of total revenues for the three months ended June 30, 2001, from 13.2% of
total revenues for the same period in 2000.
Depreciation and amortization of intangibles expense increased 126.5% to
$11.1 million for the three months ended June 30, 2001, from $4.9 million for
the same period in 2000. The increase was due to the full quarter of
amortization on the $433.8 million of intangible assets recorded as a result of
our acquisition of RPM on March 15, 2001. As a percentage of total revenues,
depreciation and amortization of intangibles increased to 9.8% of total revenues
for the three months ended June 30, 2001, from 5.6% of total revenues for the
same period in 2000.
Exchange, clearing and brokerage fees consist primarily of fees paid by us
as a specialist to the NYSE and to clearing houses. Fees paid by us to the NYSE
primarily include fees based on the volume of transactions executed as principal
and as agent, as well as a flat annual fee. Exchange, clearing and brokerage
fees expense increased 392.3% to $6.4 million for the three months ended June
30, 2001, from $1.3 million the same period in 2000. This increase was due to a
new NYSE allocation fee, whereby specialist firms share the cost of newly
allocated firms listing on the NYSE, an increase in NYSE regulatory fees based
upon exchange seat use, a full
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quarter of fees from our clearing operations and increased trading volumes as a
result of the RPM acquisition.
Lease of exchange memberships expense increased 85.7% to $5.2 million for
the three months ended June 30, 2001, from $2.8 million for the same period in
2000. This increase was due to the increase in the number of leased memberships
from 48 to 68, and was also due to an increase in the average annual leasing
cost of the memberships from approximately $276,000 to $312,000 per membership.
Other expenses increased 100.0% to $6.0 million for the three months ended
June 30, 2001, from $3.0 million for the same period in 2000. This increase was
primarily the result of a full quarter of additional occupancy and professional
fees as a result of our recent acquisitions, as well as an increase in
advertising and promotional costs. INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes increased 6.3% to $43.7 million
for the three months ended June 30, 2001, from $41.1 million for the same period
in 2000. This increase was primarily due to the increase in our total revenues
which was offset by the increase in employee compensation and related benefits,
depreciation and amortization of intangibles and exchange clearing and brokerage
fees as the result of a full quarter of the RPM acquisition and increased
regulatory fees.
INCOME TAXES
Provision for income taxes increased 16.7% to $24.5 million for the three
months ended June 30, 2001, from $21.0 million for the same period in 2000, due
to the increase in nondeductible amortization of intangibles expense as result
of the RPM and ITTI acquisitions.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
REVENUES
Total revenues increased 26.6% to $210.5 million for the six months ended
June 30, 2001, from $166.3 million for the same period in 2000, principally due
to the increase in revenue from net gain on principal transactions. Net gain on
principal transactions increased 23.1% to $170.8 million for the six months
ended June 30, 2001, from $138.7 million for the same period in 2000. This
increase was primarily due to our acquisition of RPM on March 15, 2001 as well
as a full six months of revenue from our Henderson Brothers and Webco
acquisitions on March 2, 2000 and March 9, 2000, respectively. In addition, the
increase is the result of increased share volume in principal trading in our
existing specialist stocks traded on the NYSE. Our share volume as principal
increased 43.7% to 12.5 billion shares for the six months ended June 30, 2001,
from 8.7 billion shares for the same period in 2000.
Commissions revenue increased 41.9% to $28.8 million for the six months
ended June 30, 2001, from $20.3 million for the same period in 2000. This
increase was primarily due to the
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increase in commissions earned by our subsidiaries for clearing and executions
services. In addition, our acquisition of RPM and a full six months of revenue
from our Henderson Brothers and Webco acquisitions contributed to the increase.
The share volume executed by us as agent in our specialist stocks increased
11.5% to 2.9 billion shares for the six months ended June 30, 2001, from 2.6
billion shares for the same period in 2000.
Other revenue increased 49.3% to $10.9 million for the six months ended
June 30, 2001, from $7.3 million for the same period in 2000. This increase was
primarily due to an increase in our interest income and revenue earned by our
clearing subsidiaries, which was offset by a decrease in our proprietary trading
revenues and a decrease in our other investments.
EXPENSES
Total expenses before provision for income taxes increased 44.0% to $122.1
million for the six months ended June 30, 2001 from $84.8 million for the same
period in 2000.
Employee compensation and related benefits increased 12.9% to $51.7
million for the six months ended June 30, 2001, from $45.8 million for the same
period in 2000. This increase was due to the completion of the RPM acquisition
on March 15, 2001, whereby we employed an additional 215 individuals, as well as
a full six months of compensation and related benefits expense from the
additional 97 individuals employed as a result of our Henderson and Webco
acquisitions. As a percentage of total revenues, employee compensation decreased
to 24.6% of total revenues for the six months ended June 30, 2001, from 27.5% of
total revenues for the same period in 2000.
Interest expense increased 40.3% to $25.4 million for the six months ended
June 30, 2001, from $18.1 million for the same period in 2000. This increase was
primarily due to a full six months of interest expense on the $250.0 million
issued in connection with the Henderson Brothers and Webco acquisitions. An
increase in interest expense related to the activities of our clearing
subsidiaries also caused the increase. As a percentage of total revenues,
interest increased to 12.1% of total revenues for the six months ended June 30,
2001, from 10.9% of total revenues for the same period in 2000.
Depreciation and amortization of intangibles expense increased 126.3% to
$17.2 million for the six months ended June 30, 2001, from $7.6 million for the
same period in 2000. Amortization of intangibles increased as a result of the
$433.8 million of intangible assets recorded as a result of our acquisition of
RPM, as well as a full six months of amortization on the $233.7 million of
intangible assets recorded as a result of the Henderson Brothers and Webco
acquisitions. As a percentage of total revenues, depreciation and amortization
of intangibles increased to 8.2% of total revenues for the six months ended June
30, 2001, from 4.6% of total revenues for the same period in 2000.
Exchange, clearing and brokerage fees consist primarily of fees paid by us
as a specialist to the NYSE and to clearing houses. Fees paid by us to the NYSE
primarily include fees based on the volume of transactions executed as principal
and as agent, as well as a flat annual fee. Exchange, clearing and brokerage
fees expense increased 295.8% to $9.5 million for the six
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months ended June 30, 2001, from $2.4 million the same period in 2000. This
increase was due to a new NYSE allocation fee, whereby specialist firms share
the cost of newly allocated firms listing on the NYSE, an increase in NYSE
regulatory fees based upon exchange seat use, a increased fees from our clearing
operations and increased trading volumes as a result of the RPM acquisition and
a full six months of the Henderson and Webco acquisitions.
Lease of exchange memberships expense increased 69.8% to $9.0 million for
the six months ended June 30, 2001, from $5.3 million for the same period in
2000. This increase was due to the increase in the number of leased memberships
from 48 to 68, and was also due to an increase in the average annual leasing
cost of the memberships from approximately $276,000 to $312,000 per membership.
Other expenses increased 66.1% to $9.3 million for the six months ended
June 30, 2001, from $5.6 million for the same period in 2000. This increase was
primarily the result of additional communication, occupancy and professional
fees as a result of our recent acquisitions, as well as an increase in
advertising and promotional costs.
INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes increased 8.5% to $88.4 million
for the six months ended June 30, 2001, from $81.5 million for the same period
in 2000. This increase was due to an increase in our total revenues which was
offset by the increase in employee compensation and related benefits,
depreciation and amortization of intangibles and exchange clearing and brokerage
fees as the result of a full quarter of the RPM acquisition and increased
regulatory fees.
INCOME TAXES
Provision for income taxes increased 18.1% to $48.3 million for the six
months ended June 30, 2001, from $40.9 million for the same period in 2000, as a
result of the increase in nondeductible amortization of intangibles expense as
well as an increase in our overall profitability.
LIQUIDITY
As of June 30, 2001, we had $1,871.3 million in assets, of which $290.3
million consisted of cash and short-term investments, which primarily consist of
commercial paper maturing within 180 days.
In January 2001, we extended our $200 million line-of-credit with a U.S.
commercial bank until February 1, 2002. Amounts outstanding under the U.S.
commercial bank credit facility are secured by our inventory of specialist
stocks and bear interest at U.S. commercial banks' broker loan rate. To date, we
have not utilized this facility.
As of June 30, 2001, the subordinated debt of LaBranche & Co. LLC totaled
$50.9 million (excluding subordinated liabilities related to contributed
exchange memberships). Of this
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amount, $35.0 million represented senior subordinated debt privately placed
pursuant to several note purchase agreements. Of this $35.0 million, $20.0
million matures on September 15, 2002 and bears interest at an annual rate of
8.17%, payable on a quarterly basis, and $15.0 million matures on June 3, 2008
and bears interest at an annual rate of 7.69%, payable on a quarterly basis.
These notes are senior to all other subordinated notes of LaBranche & Co. LLC.
As of June 30, 2001 subordinated debt totaling $6.9 million represented junior
subordinated debt of LaBranche & Co. LLC placed with former limited partners,
their family members and our employees. This debt has maturities ranging from
the first half of 2002 through the second half of 2002, and bears interest at an
annual rate between 8.0% and 10.0%, payable on a quarterly basis. The agreements
relating to the junior subordinated debt generally have automatic rollover
provisions that extend the maturities for an additional year, unless the lender
provides notice at least seven months prior to maturity.
As a result of our acquisition of RPM, LaBranche & Co. LLC acquired
subordinated demand notes for $1.0 million and $8.0 million with maturity dates
of April 2002 and December 2001 respectively. Interest is payable monthly at
adjusting variable rates. These agreements have automatic rollover provisions,
and the scheduled maturity date will be extended an additional six months,
unless the lender gives LaBranche & Co. LLC six months' advance notice that the
maturity date will not be extended.
As of June 30, 2001, we had $16.1 million of promissory notes payable as a
result of the RPM acquisition. Three of these notes, representing approximately
$3.3 million, are subordinated debt placed with family members of former
employees of RPM. This debt has maturities ranging from the first half of 2002
through the first half of 2006, and bears interest at an annual rate between
9.0% and 12.5%, payable on a quarterly basis. One of these agreements,
representing $295,000, 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. Seven additional notes, representing $10.0 million, are
promissory notes placed with former RPM employees and their family members.
These notes are payable in equal annual installments on the anniversaries of
issuance, with maturity dates ranging from the second half of 2002 through the
first half of 2005, and bear interest at annual rates ranging from 9.5% to
12.0%, payable on a quarterly basis. The remaining four notes, representing $2.7
million, represent deferred compensation of former RPM employees. These notes
are payable in equal annual installments on the anniversaries of issuance, with
maturity dates ranging from the second half of 2002 through the second half of
2004, and bear interest at annual rates ranging from 9.5% to 10.0%.
As a result of 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 thereof to
cumulative preferred cash dividends at an annual rate of 8% of the liquidation
preference per share until the fourth anniversary of the closing of the merger,
10% 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), commencing on July 1, 2001. Dividends on the issued and outstanding
shares of Series A preferred stock will be preferred and cumulative and accrue
from day to day from the date on which they are originally issued.
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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 these
notes includes certain covenants that, among other things, limit our ability to
borrow money, pay dividends 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 the Company, 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 the Excess Cash Flow
for such fiscal year at a price equal to 103% 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 pro rata share based
upon his ownership percentage of the outstanding Senior Subordinated Notes.
Excess Cash Flow is defined for this purpose as 40% 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. On April 12, 2001, we offered
to purchase approximately $9.9 million aggregate principal amount of our
Senior Subordinated Notes based upon the Excess Cash Flow for the year ending
2000. This offer expired on May 22, 2001 without the tender of any Senior
Subordinated Notes.
In connection with the Webco acquisition, we issued unsecured senior
promissory notes in the aggregate principal amount of $3.0 million to the
stockholders of Webco. These notes bear interest at an annual rate of 10.0%. Of
the aggregate principal amount, $500,000 has already been paid. The remaining
$2.5 million is due September 9, 2001 and is subject to set-off for any amounts
for which the former stockholders of Webco may be obligated to indemnify us for
any breaches of their or Webco's representations, warranties and covenants under
the Webco acquisition agreement.
As a 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, affiliates or employees, or otherwise entering into
transactions which would result in a reduction of its total net capital to less
than 150% of its required minimum capital.
At June 30, 2001, LaBranche & Co. LLC had net capital of $394.6 million,
which was $391.7 million in excess of its required net capital of $2.9 million.
As clearing brokers, pursuant to SEC Rule 15c3-1, our Henderson Brothers
and RPM subsidiaries are required to maintain a minimum net capital equal to the
greater of $250,000 or
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2% of aggregate debit items as defined. As of June 30, 2001, the combined net
capital of these subsidiaries was $23.9 million and exceeded requirements by
$23.0 million.
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. After our
acquisition of RPM, our net liquid asset requirement is $405.0 million, which
represents the previous combined net liquid assets of the two firms as separate
entities. As of June 30, 2001, our actual net liquid assets were approximately
$426.3 million.
Failure to maintain the required net capital and net liquid assets may
subject us to suspension or revocation of SEC registration or suspension or
expulsion by the NYSE.
We currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our anticipated working capital,
regulatory capital and capital expenditure requirements through the end of 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A majority of our specialist related revenues are derived from trading as
principal. We also operate a proprietary trading desk separately from our NYSE
and American Stock Exchange ("AMEX") specialist operations, which represented
.04% of our total revenues in the six months ended June 30, 2001 and .2% of our
total revenues in the same period in 2000. We may incur trading losses as a
result of these trading activities. These activities involve primarily the
purchase, sale or 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 downward price movement in these
securities will 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.
Henderson Brothers' and RPM's clearance activities involve settlement and
financing of various customer securities transactions on a cash or margin basis.
These activities may expose Henderson Brothers and RPM to off-balance sheet risk
in the event the customer or other broker
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is unable to fulfill its contractual obligations and Henderson Brothers and RPM
has to purchase or sell securities at a loss. For margin transactions, Henderson
Brothers and RPM 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.
Henderson Brothers and RPM seek to control the risks associated with
customer activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. Henderson Brothers
and RPM monitor margin levels daily and, pursuant to such guidelines, require
customers to deposit additional collateral or to reduce positions when
necessary.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Agreement and Plan of Merger, dated as of January 18, 2001, by and
between the Company and ROBB PECK McCOOEY Financial Services, Inc.
(1)
10.2 Amendment to Agreement and Plan of Merger, dated as of February 15,
2001, by and between the Company and ROBB PECK McCOOEY Financial
Services, Inc. (1)
99.1 Press release dated August 14, 2001.
(b) REPORTS ON FORM 8-K.
(i) On June 1, 2001, we filed a Form 8-K, dated May 22, 2001, with
respect to the execution of a letter of intent to acquire Bocklet &
Company, LLC, under Item 5 of Form 8-K.
All other items of this report are inapplicable.
----------
(1) Previously filed as an exhibit to the company's Report on Form 8-K dated
March 15, 2001.
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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, 2001 LABRANCHE & CO INC.
By: /s/ HARVEY S. TRAISON
-------------------------
Name: Harvey S. Traison
Title: Chief Financial Officer
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