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 September 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 November
9, 2001 was 58,706,366.
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.......23
PART II OTHER INFORMATION................................................25
Item 6. Exhibits and Reports on Form 8-K.................................25
SIGNATURES...............................................................26
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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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES:
Net gain on principal transactions $ 71,267 $ 64,460 $242,081 $203,174
Commissions 14,784 12,035 43,602 32,367
Other 3,069 4,727 13,958 11,995
-------- -------- -------- --------
Total revenues 89,120 81,222 299,641 247,536
-------- -------- -------- --------
EXPENSES:
Employee compensation and related benefits 22,993 18,667 74,694 64,435
Interest 13,435 11,860 38,820 29,910
Depreciation and amortization of 11,004 4,779 28,201 12,404
intangibles 6,281 1,258 15,765 3,631
Exchange, clearing and brokerage fees 5,178 2,789 14,209 8,127
Lease of exchange memberships 5,612 3,010 14,911 8,636
-------- -------- -------- --------
Other
Total expenses 64,503 42,363 186,600 127,143
-------- -------- -------- --------
Income before provision for income taxes 24,617 38,859 113,041 120,393
PROVISION FOR INCOME TAXES 13,379 19,911 61,662 60,764
-------- -------- -------- --------
Net income $ 11,238 $ 18,948 $ 51,379 $ 59,629
======== ======== ======== ========
Weighted-average shares outstanding:
Basic 57,163 48,675 54,835 47,970
Diluted 58,323 49,331 56,030 48,272
Earnings per share
Basic $ 0.16 $ 0.39 $ 0.84 $ 1.24
Diluted $ 0.15 $ 0.38 $ 0.83 $ 1.24
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LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED)
As of
---------------------------------------
ASSETS September 30, 2001 December 31, 2000
------ ------------------ -----------------
(unaudited)
CASH AND CASH EQUIVALENTS $ 223,848 $ 152,220
CASH AND SECURITIES SEGREGATED UNDER FEDERAL REGULATIONS 84,201 3,610
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 114,411 134,111
RECEIVABLE FROM BROKERS, DEALERS AND CLEARING ORGANIZATIONS 225,824 63,468
RECEIVABLE FROM CUSTOMERS 11,094 912
SECURITIES OWNED, at market value:
Corporate equities 128,667 132,389
Other 174,458 8,664
EXCHANGE MEMBERSHIPS CONTRIBUTED FOR USE, at market value 32,705 24,000
EXCHANGE MEMBERSHIPS OWNED, at cost (market value of $88,283 and $52,000,
respectively) 75,315 50,300
OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of $7,423 and $2,622, 5,841 3,371
respectively
INTANGIBLE ASSETS, net of accumulated amortization
Specialist Stock List 370,852 185,982
Trade Name 25,177 25,676
Goodwill 447,267 191,235
OTHER ASSETS 58,508 28,184
----------- -----------
Total assets $ 1,978,168 $ 1,004,122
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable to brokers and dealers $ 108,033 $ 4,068
Payable to customers 68,681 4,051
Securities sold, but not yet purchased, at market value 203,674 60,726
Accounts payable and other accrued expenses 91,697 57,559
Income taxes payable 10,179 10,329
----------- -----------
482,264 136,733
----------- -----------
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DEFERRED TAX LIABILITIES 166,422 74,660
----------- -----------
LONG TERM DEBT 364,586 355,893
----------- -----------
SUBORDINATED LIABILITIES
Exchange memberships, at market value 32,705 24,000
Other subordinated indebtedness 49,635 41,935
----------- -----------
82,340 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 September 30, 2001 and December 31, 2000, respectively 94,179 --
COMMON STOCK, $.01 par value, 200,000,000 shares authorized;
57,606,366 and 49,069,521 shares issued and outstanding as of September 30,
2001 and December 31, 2000, respectively 576 491
OPTIONS ON COMMON STOCK 49,123 --
ADDITIONAL PAID-IN-CAPITAL 595,637 273,347
RETAINED EARNINGS 150,925 104,665
UNEARNED COMPENSATION (7,884) (7,602)
----------- -----------
882,556 370,901
----------- -----------
Total liabilities and stockholders' equity $ 1,978,168 $ 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)
Nine Months Ended
---------------------------------
September 30, September 30,
2001 2000
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,379 $ 59,629
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of intangibles 28,201 13,439
Amortization of bond discount and debt issuance costs 1,306
Compensation expense related to stock-based compensation 4,756 2,325
Deferred tax (benefit) (5,036) (49)
Tax benefit related to employee stock transactions 18,489 --
Change in assets and liabilities:
Cash segregated under federal regulations (80,591) --
Securities purchased under agreements to resell 19,700 (131,287)
Receivable from brokers, dealers and clearing organizations (162,356) (45,013)
Receivable from customers (10,182) (1,274)
Corporate equities 3,722 17,436
United States Government obligations -- 1,471
Other securities owned (161,915) (2,023)
Other assets (34,203) (13,271)
Payable to brokers and dealers 103,965 (5,655)
Payable to customers 64,630 3,767
Securities sold, but not yet purchased 142,948 12,806
Accounts payable and other accrued expenses 47,466 26,356
Income taxes payable (150) (5,293)
--------- ---------
Net cash used in operating activities 32,129 (66,636)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received from (paid for) acquisitions 41,690 (184,364)
Payment for purchase of an exchange membership (2,000) --
Repayment of subordinated debt and promissory note (6,300) (6,000)
Payments for office equipment and leasehold improvements (1,137) (2,003)
--------- ---------
Net cash provided by (used in) investing activities 32,253 (192,367)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 9,613 --
Payment of preferred dividends (2,367) --
Net cash received from issuance of senior subordinated debt -- 245,693
--------- ---------
Net cash provided by financing activities 7,246 245,693
--------- ---------
Increase/(decrease) in cash and cash equivalents 71,628 (13,310)
--------- ---------
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CASH AND CASH EQUIVALENTS, beginning of period 152,220 83,774
CASH AND CASH EQUIVALENTS, end of the period $ 223,848 $ 70,464
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 44,397 $ 28,640
Income taxes 45,150 66,848
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES:
Acquisitions:
Intangibles assets
Fair value of tangible assets acquired, other than cash $ 481,503 $ 171,936
Deferred tax liabilities related to intangible assets 228,242 33,863
Other liabilities 95,994 61,774
Common stock issuance 181,164 --
Exercise of options granted to former RPM stockholders 264,678 32,312
40,500 --
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
equities and 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 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 for fiscal years beginning after December 15, 2001 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 intangible assets with indefinite useful lives 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, after periodic testing, the Company may incur impairment
charges related to the carrying value of goodwill and
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intangible assets recorded in its financial statements. The Company expects the
effect of adoption of SFAS No. 142 will materially increase its future results
of operations. The estimated annual amortization expenses for intangible assets
in 2001 that will no longer be amortized are (000's omitted):
Tradename amortization, net of
deferred tax benefit $ 356
Goodwill amortization 27,495
-------
Total amortization expense $27,851
=======
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
INFORMATION
The unaudited interim condensed consolidated financial information as of
September 30, 2001 and for the three months ended September 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 September 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 Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
------------------ ------------------ ------------------ ------------------
Current federal, state and local
taxes $ 14,424 $ 20,032 $ 61,909 $ 59,488
Deferred tax (benefit)/provision (1,045) (121) (247) (49)
Unincorporated business tax -- -- -- 1,325
-------- -------- -------- --------
Total provision for income taxes $ 13,379 $ 19,911 $ 61,662 $ 60,764
======== ======== ======== ========
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 September 30, 2001 and as of December 31, 2000, LaBranche's net
capital, as defined under SEC Rule 15c3-1, was $441.7 million and $293.4
million, respectively. As of those dates LaBranche exceeded the minimum
requirements by $438.7 million and $290.3 million, respectively. LaBranche's
aggregate indebtedness to net capital ratio on those dates was .10 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 September 30, 2001 and as of December 31, 2000, LaBranche's NYSE
minimum required dollar amount of net liquid assets, as defined, was $415.0
million and $284.3 million, respectively, compared to actual net liquid assets,
as defined, of $451.7 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 September 30, 2001, Henderson Brothers' and RPM Clearing
Corporation's combined net capital as defined under SEC Rule 15c3-1 was $21.2
million and exceeded minimum requirements by $19.0 million. As of December 31,
2000, Henderson Brothers' net capital as defined under SEC Rule 15c3-1 was $8.5
million and exceeded minimum requirements by $8.2 million.
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6. ACQUISITIONS DURING THE THIRD QUARTER 2001
On August 13, 2001, LaBranche acquired all the assets relating to the AMEX
operations of Cranmer & Cranmer, Inc. ("Cranmer"), a specialist in stocks and
options on the AMEX, for an aggregate of approximately $9.2 million and 100,000
shares of the Company's common stock. The acquisition was accounted for under
the purchase method of accounting. The results of Cranmer's AMEX specialist
operations have been included in the Company's consolidated financial statements
since August 14, 2001 and the Company does not expect any significant adjustment
to the allocation of purchase price. The Company intends to finalize its
purchase accounting during the fourth quarter of 2001. The excess of purchase
price over fair value of net tangible assets of approximately $14.0 million was
allocated to various intangible assets.
On September 20, 2001, LaBranche acquired the remaining outstanding
interest not already owned in the Freedom Specialist Inc., R. Adrian & Company,
LLC, LaBranche & Co. LLC Joint Book (the "Joint Book") for an aggregate of $13.6
million and 54,750 shares of the Company's common stock. The acquisition was
accounted for under the purchase method of accounting. The results of the Joint
Book's operations in which the Company did not own an interest have been
included in the Company's consolidated financial statements since September 21,
2001. The excess of purchase price over fair value of net tangible assets of
approximately $15.0 million was allocated to various intangible assets.
7. COMMITMENTS
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 Company's lease commitments at 20 Broad Street for approximately
21,000 square feet will not be renewed upon expiration on December 31, 2001.
Minimum rental commitments under existing non-cancelable leases for office
space and equipment are as follows:
Year Ending December 31:
------------------------
2001 $ 914,826
2002 3,178,222
2003 2,836,999
2004 2,437,880
2005 2,378,781
Thereafter 2,933,927
These leases contain escalation clauses providing for increased rentals
based upon maintenance and tax increases.
-11-
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 Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------------ ------------------ ------------------ ------------------
Net income $11,238 $18,948 $51,379 $59,629
Less preferred dividends and
accretion 2,353 -- 5,119 --
------- ------- ------- -------
Numerator for basic and
diluted earnings per common
share - net income $ 8,885 $18,948 $46,260 $59,629
Denominator for basic
earnings per share -
weighted-average number
of common shares 57,163 48,675 54,835 47,970
Dilutive Shares
Stock options 799 270 791 90
Restricted stock -- 22 35 7
Restricted stock units 361 364 369 205
------- ------- ------- -------
Denominator for diluted
earnings per share -
weighted-average number
of common shares 58,323 49,331 56,030 48,272
Basic earnings per share $ 0.16 $ 0.39 $ 0.84 $ 1.24
Diluted earnings per share $ 0.15 $ 0.38 $ 0.83 $ 1.24
Under the treasury stock method of accounting, restricted stock units
representing 398,828 and 390,745 shares of common stock, restricted stock
representing 285,000 and 249,578 shares of common stock and options to purchase
an aggregate of 2,055,708 and 2,063,973 shares of common stock for the three
months and the nine months ended September 30, 2001, respectively, were not
included in the calculation of diluted earnings per share due to their
antidilutive effect.
9. EMPLOYEE INCENTIVE AWARDS
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.
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10. 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 ROBB PECK
McCOOEY Financial Services, Inc. ("RPM"), including the issuance of common
stock, the issuance of preferred stock, the assumption of 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 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 NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
-------- --------
(PRO FORMA) (PRO FORMA)
Revenues $326,439 $372,683
Pre-Tax Income 82,905 136,207
Net Income 35,172 61,035
EPS $ 0.49 $ 0.95
11. SUBSEQUENT EVENTS
Effective October 18, 2001 the Company acquired, through a merger,
substantially all the assets of Bocklet & Company, LLC ("Bocklet"), a specialist
for approximately 60 listed companies on the NYSE, for approximately $20.0
million and 1.1 million shares of the Company's common stock. In addition, the
Company will remit funds to the former members of Bocklet equal to Bocklet's
positive net working capital, as defined in the merger agreement, in equal
installments three, six and nine months after the closing date. The acquisition
will be accounted for under the purchase method and the results of Bocklet's
operations will be included in the Company's consolidated financial statements
from the closing date of the transaction.
-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.
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 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 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
two clearing subsidiaries, Henderson Brothers, Inc. ("Henderson Brothers") and
ROBB PECK McCOOEY Clearing Corporation ("RPM Clearing Corporation"). Other
revenue consists of proprietary trading revenue, earnings from an investment in
a hedge fund, interest income and fees charged to customers for use of the
front-end order execution system developed by our subsidiary, Internet Trading
Technologies, Inc. ("ITTI"). For the three months ended
-14-
September 30, 2001, net gain on principal transactions represented 80.0% of our
total revenues, commissions revenue represented 16.6% of our total revenues, and
other revenues represented 3.4% of our total revenues. For the nine months ended
September 30, 2001, net gain on principal transactions represented 80.8% of our
total revenues, commissions revenue represented 14.6% of our total revenues, and
other revenues represented 4.7% 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.
ACQUISITIONS DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2001
On March 13, 2001, we 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. The results of
the operations of ITTI have been included in our financial statements since
March 14, 2001. The excess of purchase price over fair value of net 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 of 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 various 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 $16.0 million.
On August 13, 2001, LaBranche & Co. LLC acquired all the assets relating
to the AMEX stocks and options specialist operations of Cranmer & Cranmer, Inc.
("Cranmer") for an aggregate of approximately $9.2 million, 100,000 shares of
our common stock and an amount equal to the equity capital of Cranmer, including
the net value of Cranmer's open security positions on the closing date of the
acquisition. The excess of purchase price over fair value of net tangible assets
of approximately $14.0 million was allocated to various intangible assets. The
results of the AMEX specialist operations formerly conducted by Cranmer have
been included in the Company's consolidated financial statements since August
14, 2001.
On September 20, 2001, LaBranche & Co. LLC acquired the interests in the
Freedom Specialist Inc. ("Freedom"), R. Adrian & Company, LLC ("Adrian") and
LaBranche & Co. LLC Joint Book (the "Joint Book") which it did not previously
own for an aggregate of approximately
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$13.6 million in cash, 54,750 shares of our common stock and an amount equal to
Freedom's and Adrian's respective shares of the equity capital of the Joint Book
on the closing date of the acquisition. The excess of purchase price over fair
value of net tangible assets of approximately $15.0 million was allocated to
various intangible assets. The results of the operations formerly conducted by
the Joint Book in which we previously did not own an interest have been included
in the Company's consolidated financial statements since September 21, 2001.
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 for fiscal years beginning after December 15, 2001 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, we will cease amortization of
recorded goodwill and intangible assets with indefinite useful lives 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,
after periodic testing, we may incur impairment charges related to the carrying
value of goodwill and intangible assets recorded in our financial statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUES
Total revenues increased 9.7% to $89.1 million for the three months ended
September 30, 2001, from $81.2 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 10.5% to $71.3 million for the three months
ended September 30, 2001, from $64.5 million for the same period in 2000. This
increase was primarily due to 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, the increase is due to an increase in principal
trading share volume in our existing specialist stocks traded on the NYSE. These
factors were partially offset by unfavorable market conditions during the third
quarter of 2001. Our share volume as principal increased 48.9% to 6.7
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billion shares for the three months ended September 30, 2001, from 4.5 billion
shares for the same period in 2000.
Commissions revenue increased 23.3% to $14.8 million for the three months
ended September 30, 2001, from $12.0 million for the same period in 2000. This
increase was primarily due to commissions revenue earned by our clearing
subsidiaries for execution and clearing services. The share volume executed by
us as agent in our specialist stocks decreased slightly by 6.7% to 1.4 billion
shares for the three months ended September 30, 2001, from 1.5 billion shares
for the same period in 2000, reflecting competitive price pressures within the
marketplace.
Other revenue decreased 34.0% to $3.1 million for the three months ended
September 30, 2001, from $4.7 million for the same period in 2000. This decrease
was due to losses by our proprietary trading desk and losses from our investment
in a hedge fund. These losses were offset by interest income, as well as
revenues from trading activities of RPM Clearing Corporation and fee revenue
from ITTI, both of which were acquired in March 2001.
EXPENSES
Total expenses before provision for income taxes increased 52.1% to $64.5
million for the three months ended September 30, 2001, from $42.4 million for
the same period in 2000.
Employee compensation and related benefits expense increased 23.0% to
$23.0 million for the three months ended September 30, 2001, from $18.7 million
for the same period in 2000. This increase was primarily due to additional
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 partially offset by a decrease in
profitability-based compensation. As a percentage of total revenues, employee
compensation increased to 25.8% of total revenues for the three months ended
September 30, 2001, from 23.0% of total revenues for the same period in 2000.
Interest expense increased 12.6% to $13.4 million for the three months
ended September 30, 2001, from $11.9 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 $15.6 million
and $9.0 million of promissory notes and subordinated debt, respectively, in
connection with the RPM acquisition. As a percentage of total revenues, interest
expense increased to 15.0% of total revenues for the three months ended
September 30, 2001, from 14.7% of total revenues for the same period in 2000.
Depreciation and amortization of intangibles expense increased 129.2% to
$11.0 million for the three months ended September 30, 2001, from $4.8 million
for the same period in 2000. The increase was due to the amortization on the
$433.6 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 12.3% of total revenues for the three
months ended September 30, 2001, from 5.9% of total revenues for the same period
in 2000.
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Exchange, clearing and brokerage fees expense increased 384.6% to $6.3
million for the three months ended September 30, 2001, from $1.3 million the
same period in 2000. This increase was due to a new NYSE allocation fee,
requiring specialist firms to share the cost of newly allocated firms listing on
the NYSE, an increase in NYSE regulatory fees based upon exchange seat use,
increased fees from our clearing operations and increased principal 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 September 30, 2001, from $2.8 million for the same period
in 2000. This increase was due to the increase in the number of our leased NYSE
memberships from 48 to 66, 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. Additionally, the increase is the result of leasing eight AMEX
memberships during the third quarter of 2001.
Other expenses increased 86.7% to $5.6 million for the three months ended
September 30, 2001, from $3.0 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 acquisitions during the first nine months
of 2001, as well as an increase in advertising and other promotional costs.
INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes decreased 36.8% to $24.6 million
for the three months ended September 30, 2001, from $38.9 million for the same
period in 2000. This decrease was primarily due to the increase in employee
compensation and related benefits expense, depreciation and amortization of
intangibles and exchange, clearing and brokerage fees as a result of the RPM
acquisition and increased regulatory fees.
INCOME TAXES
Provision for income taxes decreased 32.7% to $13.4 million for the three
months ended September 30, 2001, from $19.9 million for the same period in 2000.
This decrease was due to a decrease in income before provision for income taxes,
as well as a reduction in the statutory New York State tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
REVENUES
Total revenues increased 21.1% to $299.6 million for the nine months ended
September 30, 2001, from $247.5 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 19.1% to $242.1 million for the nine months
ended September 30, 2001, from $203.2 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 nine 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
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result of the increase in principal trading share volume in our existing
specialist stocks traded on the NYSE. These factors were offset by unfavorable
market conditions during the second and third quarters of 2001. Our share volume
as principal increased 46.2% to 19.3 billion shares for the nine months ended
September 30, 2001, from 13.2 billion shares for the same period in 2000.
Commissions revenue increased 34.6% to $43.6 million for the nine months
ended September 30, 2001, from $32.4 million for the same period in 2000. This
increase was primarily due to the increase in commissions earned by our
subsidiaries for clearing and execution services, which was partially offset by
a slight decrease in commission revenue earned by our specialist activities. The
share volume executed by us as agent in our specialist stocks increased 7.3% to
4.4 billion shares for the nine months ended September 30, 2001, from 4.1
billion shares for the same period in 2000.
Other revenue increased 16.7% to $14.0 million for the nine months ended
September 30, 2001, from $12.0 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 partially offset by losses from
our proprietary trading and nonmarketable investments.
EXPENSES
Total expenses before provision for income taxes increased 46.8% to $186.6
million for the nine months ended September 30, 2001 from $127.1 million for the
same period in 2000.
Employee compensation and related benefits expense increased 16.0% to
$74.7 million for the nine months ended September 30, 2001, from $64.4 million
for the same period in 2000. This increase was primarily due to the RPM
acquisition on March 15, 2001, as a result of which we employed an additional
215 individuals, as well as a full nine months of compensation and related
benefits expense from the additional 97 individuals employed as a result of our
Henderson and Webco acquisitions. This increase was partially offset by a
decrease in profitability-based compensation. As a percentage of total revenues,
employee compensation decreased to 24.9% of total revenues for the nine months
ended September 30, 2001, from 26.0% of total revenues for the same period in
2000.
Interest expense increased 29.8% to $38.8 million for the nine months
ended September 30, 2001, from $29.9 million for the same period in 2000. This
increase was due to a full nine months of interest expense on the $250.0 million
of senior subordinated indebtedness issued in connection with the Henderson
Brothers and Webco acquisitions. In addition, the assumption of approximately
$15.6 million and $9.0 million of promissory notes and subordinated debt,
respectively, in connection with the RPM acquisition contributed to the
increase. Interest expense related to the activities of our clearing
subsidiaries also contributed to the increase. As a percentage of total
revenues, interest expense increased to 13.0% of total revenues for the nine
months ended September 30, 2001, from 12.1% of total revenues for the same
period in 2000.
Depreciation and amortization of intangibles expense increased 127.4% to
$28.2 million for the nine months ended September 30, 2001, from $12.4 million
for the same period in 2000. Amortization of intangibles increased as a result
of the $433.6 million of intangible assets
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recorded as a result of our acquisition of RPM, as well as a full nine 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 9.4% of
total revenues for the nine months ended September 30, 2001, from 5.0% of total
revenues for the same period in 2000.
Exchange, clearing and brokerage fees expense increased 338.9% to $15.8
million for the nine months ended September 30, 2001, from $3.6 million for the
same period in 2000. This increase was due to a new NYSE allocation fee,
requiring specialist firms to share the cost of newly allocated firms listing on
the NYSE, an increase in NYSE regulatory fees based upon exchange seat use,
increased fees from our clearing operations and increased principal trading
volumes as a result of the RPM acquisition and a full nine months of the
Henderson and Webco acquisitions.
Lease of exchange memberships expense increased 75.3% to $14.2 million for
the nine months ended September 30, 2001, from $8.1 million for the same period
in 2000. This increase was due to the increase in the number of our leased
memberships from 48 to 66, 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 73.3% to $14.9 million for the nine months ended
September 30, 2001, from $8.6 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 acquisitions during the first nine months of 2001, as
well as an increase in advertising and other promotional costs.
INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes decreased 6.1% to $113.0 million
for the nine months ended September 30, 2001, from $120.4 million for the same
period in 2000. This decrease was due to an increase in employee compensation
and related benefits expense, depreciation and amortization of intangibles,
exchange, clearing and brokerage fees and other expenses as a result of the RPM
acquisition and increased regulatory fees.
INCOME TAXES
Provision for income taxes increased 1.5% to $61.7 million for the nine
months ended September 30, 2001, from $60.8 million for the same period in 2000.
The increase was due to an increase in nondeductible amortization of intangibles
expense which was offset by a decrease in income before provision for income
taxes, as well as a reduction in the statutory New York State tax rate.
LIQUIDITY
As of September 30, 2001, we had $1,978.2 million in assets, of which
$308.0 million consisted of cash and short-term investments, primarily
consisting of U.S. Government
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obligations, commercial paper maturing within 90 days and cash segregated under
federal regulations.
In January 2001, we extended our $200.0 million line-of-credit with a U.S.
commercial bank until February 1, 2002. Amounts outstanding under the U.S.
commercial bank credit facility would be 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 September 30, 2001, the subordinated debt of LaBranche & Co. LLC
totaled $49.6 million (excluding subordinated liabilities related to contributed
exchange memberships). Of this amount, $35.0 million represented senior
subordinated debt privately placed pursuant to 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 September 30, 2001, subordinated debt totaling
approximately $5.6 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 second half of 2002 through
the first half of 2003, 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.
In connection with our acquisition of RPM, LaBranche & Co. LLC assumed
subordinated secured demand note obligations in the amount of $1.0 million and
$8.0 million with maturity dates of April 2002 and June 2002, respectively.
Interest with respect to these obligations is payable monthly at adjusting
variable rates. These agreements have automatic rollover provisions, and the
scheduled maturity date of each such obligation 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 September 30, 2001, we had $15.6 million of promissory notes payable
which had been assumed in connection with 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
approximately $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 8.0% to 12.0%, payable on a quarterly basis. The
remaining four notes, representing approximately $2.3 million, represent
deferred compensation of former RPM employees. These notes are payable in equal
annual installments on the anniversaries of issuance,
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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%.
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 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), with the first payment 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 they were originally issued.
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, with $11.0 million of the aggregate principal amount
already having been paid on the first and second anniversaries of issuance. The
remaining $5.0 million principal amount is payable on the third anniversary of
issuance, and bears interest at the annual rate of 9.5%.
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.
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In connection with the Webco acquisition on March 9, 2000, 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 was repaid during
1999, and the balance, plus all accrued interest, was paid in full on September
9, 2001.
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 September 30, 2001, LaBranche & Co. LLC had net capital of $441.7
million, which was $438.7 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 Clearing Corporation subsidiaries are required to maintain a minimum net
capital equal to the greater of $250,000 or 2% of aggregate debit items as
defined. As of September 30, 2001, the combined net capital of these
subsidiaries was $21.2 million and exceeded requirements by $19.0 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 and the Joint Book during 2001, our net liquid asset
requirement is $415.0 million, which represents the previous combined net liquid
assets of the firms as separate entities. As of September 30, 2001, our actual
net liquid assets were approximately $451.7 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 AMEX specialist operations, which represented (0.4%) of our total revenues
for the nine months ended September 30, 2001 and 0.5% of our total revenues for
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,
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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 Clearing Corporation'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
Clearing Corporation to off-balance sheet risk in the event the customer or
other broker is unable to fulfill its contractual obligations and Henderson
Brothers and RPM Clearing Corporation have to purchase or sell securities at a
loss. For margin transactions, Henderson Brothers and RPM Clearing Corporation
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 Clearing Corporation 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 Clearing Corporation 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.
None.
(b) REPORTS ON FORM 8-K.
(i) On October 24, 2001, we filed a Current Report on Form 8-K,
dated October 22, 2001, relating to the release of our third
quarter earnings and announcing our acquisition of (i) Bocklet
& Company, LLC, (ii) the interests of Freedom Specialist, Inc.
and R. Adrian & Company, LLC in the NYSE specialist joint
account in which we also owned an interest, and (iii) the AMEX
specialist operations of Cranmer & Cranmer, Inc., under Item 5
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.
November 9, 2001 LABRANCHE & CO INC.
By: /s/ Harvey S. Traison
----------------------
Name: Harvey S. Traison
Title: Chief Financial Officer
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