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, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 001-15251
LABRANCHE & CO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-4064735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE EXCHANGE PLAZA, NEW YORK, NEW YORK 10006
(Address of principal executive offices)
(212) 425-1144
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding as of November
14, 2002 was 59,500,148.
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........................................16
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......29
PART II OTHER INFORMATION................................................32
SIGNATURES.......................................................34
CERTIFICATIONS...................................................35
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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,
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Net gain on principal transactions $ 93,829 $ 71,267 $255,684 $242,081
Commissions 24,383 14,784 67,776 43,602
Other 53 3,069 15,593 13,958
-------- -------- -------- --------
Total revenues 118,265 89,120 339,053 299,641
-------- -------- -------- --------
EXPENSES:
Employee compensation and related benefits 36,085 22,993 98,238 74,694
Interest 12,554 13,435 38,238 38,820
Exchange, clearing and brokerage fees 11,105 6,281 28,085 15,765
Lease of exchange memberships 6,380 5,178 19,487 14,209
Depreciation and amortization of intangibles 3,366 11,004 10,055 28,201
Other 8,092 5,612 22,527 14,911
-------- -------- -------- --------
Total expenses 77,582 64,503 216,630 186,600
-------- -------- -------- --------
Income before provision for income taxes 40,683 24,617 122,423 113,041
Provision for income taxes 19,306 13,379 58,453 61,662
-------- -------- -------- --------
Net Income $ 21,377 $ 11,238 $ 63,970 $ 51,379
Series A Preferred dividends and discount accretion 1,600 2,353 5,417 5,119
-------- -------- -------- --------
Net income available to common stockholders $ 19,777 $ 8,885 $ 58,553 $ 46,260
======== ======== ======== ========
Weighted-average shares outstanding:
Basic 59,008 57,163 58,858 54,835
Diluted 59,784 58,323 59,813 56,030
Earnings per share:
Basic $ 0.34 $ 0.16 $ 0.99 $ 0.84
Diluted $ 0.33 $ 0.15 $ 0.98 $ 0.83
The accompanying notes are an integral part of these condensed
consolidated statements.
-3-
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED EXCEPT SHARE DATA)
As of
-----------------------------
September 30, December 31,
2002 2001
---------- ----------
(unaudited) (audited)
ASSETS
Cash and cash equivalents $ 100,087 $ 52,043
Cash and securities segregated under federal regulations 32,621 78,368
Securities purchased under agreements to resell 6,000 59,113
Receivable from brokers, dealers and clearing organizations 200,875 177,506
Receivable from customers 11,353 11,005
United States Government obligations 337,440 328,048
Securities owned, at market value:
Corporate equities 112,637 156,088
Options and other 78,179 69,471
Commissions receivable 4,533 4,971
Exchange memberships contributed for use, at market value 30,190 26,760
Exchange memberships owned, at cost (market value
of $95,365 and $84,453, respectively) 75,315 75,315
Office equipment and leasehold improvements, at cost,
less accumulated depreciation and amortization
of $7,748 and $5,485, respectively 6,358 6,475
Intangible assets, net of accumulated amortization:
Specialist stock list 384,550 392,332
Trade name 25,011 25,011
Goodwill 465,994 469,963
Other assets 77,838 68,368
---------- ----------
Total assets $1,948,981 $2,000,837
========== ==========
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As of
-----------------------------
September 30, December 31,
2002 2001
----------- -----------
(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to brokers and dealers $ 58,749 $ 62,879
Payable to customers 28,292 63,238
Securities sold, but not yet purchased, at market value:
Corporate equities 123,338 131,355
Options 74,444 58,822
Accrued compensation 58,858 54,113
Accounts payable and other accrued expenses 26,605 65,813
Income taxes payable 12,755 14,753
----------- -----------
383,041 450,973
----------- -----------
Deferred tax liabilities 172,429 165,541
----------- -----------
Long term debt 356,801 363,170
----------- -----------
Subordinated liabilities
Exchange memberships, at market value 30,190 26,760
Other subordinated indebtedness 44,685 66,035
----------- -----------
74,875 92,795
----------- -----------
Preferred stock, liquidation value of $1,000 per share;
10,000,000 shares authorized; 63,836 and 100,000 shares
issued and outstanding as of September 30, 2002 and
December 31, 2001, respectively 61,114 94,531
Common stock, $.01 par value, 200,000,000 shares authorized;
59,245,370 and 58,733,955 shares issued and outstanding as
of September 30, 2002 and December 31, 2001, respectively 592 587
Additional paid-in-capital 673,918 671,422
Retained earnings 227,339 168,780
Unearned compensation (1,128) (6,962)
----------- -----------
961,835 928,358
----------- -----------
Total liabilities and stockholders' equity $ 1,948,981 $ 2,000,837
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated statements.
-5-
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
Nine Months Ended
------------------------------
September 30, September 30,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,970 $ 51,379
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of intangibles 10,055 28,201
Amortization of bond discount and debt issuance costs 1,567 1,306
Compensation expense related to stock-based compensation 2,349 4,756
Deferred tax provision 1,874 (247)
Acceleration of preferred stock discount accretion 1,844 --
Tax benefit related to employee stock transactions 5,085 18,489
Change in assets and liabilities:
Cash and securities segregated under federal regulations 45,747 (80,591)
Securities purchased under agreements to resell 53,113 19,700
Receivable from brokers, dealers and clearing organizations (23,370) (162,356)
Receivable from customers (347) (10,182)
Securities owned, Corporate equities 43,451 3,722
Securities owned, Options and other (8,708) (161,915)
United States Government obligations (9,392) --
Commissions receivable 438 482
Other assets (10,949) (34,685)
Payable to brokers and dealers (4,130) 103,965
Payable to customers (34,947) 64,630
Securities sold, but not yet purchased, Corporate equities (8,017) 89,667
Securities sold, but not yet purchased, Options 15,622 53,281
Accrued compensation 4,745 21,419
Accounts payable and other accrued expenses (36,485) 26,047
Income taxes payable 3,017 (4,939)
--------- ---------
Net cash provided by operating activities 116,532 32,129
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for office equipment and leasehold improvements (2,151) (1,137)
Net cash received from acquisitions -- 41,690
Payment for the purchase of an exchange membership -- (2,000)
--------- ---------
Net cash (used in) provided by investing activities (2,151) 38,553
--------- ---------
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Nine Months Ended
------------------------------
September 30, September 30,
2002 2001
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subordinated debt and promissory note (35,131) (6,300)
Proceeds from the exercise of stock options 4,196 9,613
Payment of preferred dividends (7,238) (2,367)
Payment for preferred stock buyback (28,164) --
--------- ---------
Net cash (used in) provided by financing activities (66,337) 946
--------- ---------
Increase in cash and cash equivalents 48,044 71,628
CASH AND CASH EQUIVALENTS, beginning of period 52,043 152,220
--------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 100,087 $ 223,848
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 44,719 $ 44,397
Income taxes 56,920 45,150
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES:
Acquisitions:
Intangibles assets $ -- $ 481,503
Fair value of tangible assets acquired, other than cash -- 228,242
Deferred tax liabilities related to intangible assets -- 95,994
Other liabilities -- 181,164
Common stock issuance -- 264,678
Exercise of options granted to former RPM stockholders 13,823 40,500
The accompanying notes are an integral part of these condensed
consolidated statements.
-7-
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The condensed consolidated financial statements include the accounts of
LaBranche & Co Inc., a Delaware corporation (the "Holding Company"), and its
subsidiaries, LaBranche & Co. LLC, a New York limited liability company
("LaBranche"), LaBranche Financial Services, Inc., a New York corporation
("LFSI"), LaBranche Structured Products, LLC, a New York limited liability
company ("LSP"), and LaBranche & Co. B.V., a Netherlands private limited
liability company (collectively with the Holding Company, LaBranche, LFSI, and
LSP, the "Company"). The Holding Company is the sole member of LaBranche and
LSP, the 100% stockholder of LFSI and the sole owner of LaBranche & Co. B.V.
LaBranche is a registered broker-dealer and operates primarily as a specialist
in equity securities listed on the New York Stock Exchange, Inc. (the "NYSE")
and on the American Stock Exchange LLC (the "AMEX"). LFSI is a registered
broker-dealer and a member of the NYSE and other exchanges, and provides
securities clearing, securities execution and other related services to its own
individual customers, customers of introducing brokers and institutional
customers, including traders, professional investors and broker-dealers. LFSI
also provides direct access floor brokerage services to institutional customers.
In addition, LFSI provides front-end order execution, analysis and reporting
solutions for the wholesale securities dealer market. LaBranche & Co. B.V. was
recently organized to represent LaBranche in European markets and to provide
client services to LaBranche's European listed companies. LSP was organized in
September 2002 and is a registered broker-dealer and operates primarily as a
specialist in options on the AMEX. As of December 31, 2001, Henderson Brothers,
Inc. ("Henderson Brothers") and Internet Trading Technologies, Inc. ("ITTI"),
former subsidiaries of the Holding Company, were merged with and into another
Holding Company subsidiary, ROBB PECK McCOOEY Clearing Corporation ("RPM
Clearing Corporation"), which changed its name to LFSI in January 2002.
2. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
INFORMATION
The unaudited interim condensed consolidated financial information as of
September 30, 2002 and for the nine months ended September 30, 2002 and 2001 is
presented in the accompanying condensed consolidated financial statements. The
unaudited interim condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial information. The unaudited interim
condensed consolidated financial information reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the results
for such periods. This interim condensed consolidated financial information as
of September 30, 2002 should be read in conjunction with the audited
consolidated financial statements and notes thereto as of December 31, 2001
included in the Company's Form 10-K filed with the Securities and Exchange
Commission ("SEC") on March
-8-
15, 2002, as amended by the Company's Form 10K/A filed with the SEC on March 22,
2002. Results of the interim periods are not necessarily indicative of results
to be obtained for a full fiscal year.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for goodwill and other intangible assets
acquired in a business combination, requiring that the purchase method of
accounting be used in all business combinations initiated after June 30, 2001.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets acquired individually or with a group of assets.
Under the new standard, acquired trade name and goodwill will no longer be
amortized; instead these assets will be tested at least annually for impairment
by applying a fair-value based test. The Company's acquired specialist stock
lists will continue to be amortized over their respective lives. Accordingly,
effective January 1, 2002, the Company has ceased amortization of acquired
goodwill and trade name and the amortization expense for these intangible assets
is no longer included in the results of operations. During the second quarter of
2002, the Company performed the required impairment tests of these acquired
intangible assets as of December 31, 2001 and determined that there was no
impairment. In addition, as of September 30, 2002, management determined that
there was no impairment of goodwill or trade name. However, it is possible that
in the future, after periodic testing, the Company may incur impairment charges
related to the carrying value of acquired goodwill and intangible assets
recorded in its financial statements.
The reported net earnings and EPS, as adjusted to exclude amortization of
goodwill and trade name, are set forth below (000's omitted):
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Net income available to common
stockholders, as reported $ 19,777 $ 8,885 $ 58,553 $ 46,260
Net income available to common
stockholders, as reported 19,777 16,861 58,553 66,671
EPS, as reported
Basic $ 0.34 $ 0.16 $ 0.99 $ 0.84
Diluted 0.33 0.15 0.98 0.83
EPS, as adjusted
Basic $ 0.34 $ 0.29 $ 0.99 $ 1.22
Diluted 0.33 0.29 0.98 1.19
Under the new standard, the Company's acquired specialist stock lists
will continue to be amortized. The gross carrying amount, accumulated
amortization and net carrying amount of the Company's acquired specialist stock
lists are set forth below (000's omitted):
-9-
As of September 30, 2002 As of December 31, 2001
------------------------ -----------------------
Gross carrying amount $406,190 $406,190
Accumulated amortization (21,640) (13,858)
-------- --------
Net carrying amount $384,550 $392,332
======== ========
Amortization expense associated with the Company's acquired specialist
stock lists was $2.6 million and $7.8 million for the three months and nine
months ended September 30, 2002, respectively, and $2.4 million and $6.1 million
for the three months and nine months ended September 30, 2001, respectively.
Estimated amortization expense for the existing specialist stock lists is $10.4
million for each of the fiscal years ending December 31, 2003 through December
31, 2007.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The implementation of SFAS No. 144 did not have a material impact on the
Company's condensed consolidated financial information.
4. INCOME TAXES
The Company accounts for taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of tax benefits or
expenses on temporary differences between the financial reporting and tax bases
of its assets and liabilities. Deferred tax assets and liabilities primarily
relate to compensation accruals, consulting agreements, amortization periods of
certain intangibles and differences between the financial and tax basis of
assets acquired. The Company's effective tax rate differs from the federal
statutory rate primarily due to its non-deductible amortization of intangible
assets and the effects of state and local taxes in 2002 and 2001. The components
of the provision for income taxes reflected on the condensed consolidated
statements of operations are set forth below (000's omitted):
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Current federal, state and
local taxes $22,280 $14,424 $56,579 $61,909
Deferred tax (benefit)/provision (2,974) (1,045) 1,874 (247)
------- ------- ------- -------
Total provision for
income taxes $19,306 $13,379 $58,453 $61,662
======= ======= ======= =======
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5. REGULATORY REQUIREMENTS
As a specialist and member of the NYSE, LaBranche is subject to SEC Rule
15c3-1, as 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, 2002 and December 31, 2001, LaBranche's net capital,
as defined under SEC Rule 15c3-1, was $474.9 million and $484.2 million,
respectively. As of those dates LaBranche exceeded the minimum requirements by
$470.8 million and $481.4 million, respectively. LaBranche's aggregate
indebtedness to net capital ratio on those dates was .13 to 1 and .09 to 1,
respectively.
The NYSE generally requires members registered as specialists to maintain
a minimum dollar regulatory capital amount in order to establish that they can
meet, with their own net liquid assets, their position requirement.
As of September 30, 2002 and December 31, 2001, LaBranche's NYSE minimum
required dollar amount of net liquid assets, as defined, was $446.0 million,
compared to actual net liquid assets, as defined, of $469.9 million and $491.5
million, respectively.
As a registered broker-dealer and NYSE member firm, LFSI is also subject
to SEC Rule 15c3-1, as adopted and administered by the NYSE. Under the
alternative method permitted by the rule, the minimum required net capital for
LFSI is equal to the greater of $250,000 or 2% of aggregate debit items, as
defined.
As of September 30, 2002, LFSI's net capital, as defined under SEC Rule
15c3-1, was $21.2 million and exceeded minimum requirements by $20.5 million. As
of December 31, 2001, the combined net capital, as defined under SEC Rule
15c3-1, of Henderson Brothers and RPM Clearing Corporation was $20.5 million,
which exceeded minimum requirements by $19.7 million.
As a registered broker-dealer and AMEX member firm, LSP is subject to SEC
Rule 15c3-1, as adopted and administered by the AMEX. LSP 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, 2002, LSP's
net capital, as defined under SEC Rule 15c3-1, was $8.7 million, which exceeded
minimum requirements by $8.6 million.
6. EARNINGS PER SHARE
Earnings per share ("EPS") are computed in accordance with SFAS No. 128,
"Earnings Per Share." Basic EPS is calculated by dividing net income available
to common shareholders by the weighted-average number of common shares
outstanding. Diluted EPS includes the determinants of basic EPS and, in
addition, gives effect to dilutive potential common shares.
-11-
The computations of basic and diluted EPS are set forth below (000's
omitted, except per share data):
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Net income $21,377 $11,238 $63,970 $51,379
Less preferred dividends and
Accretion 1,600 2,353 5,417 5,119
------- ------- ------- -------
Numerator for basic and
Diluted earnings per common
share--net income available to
common stockholders $19,777 $ 8,885 $58,553 $46,260
Denominator for basic
Earnings per share--
Weighted-average number
of common shares 59,008 57,163 58,858 54,835
Dilutive Shares
Stock options 543 799 710 791
Restricted stock -- -- -- 35
Restricted stock units 233 361 245 369
------- ------- ------- -------
Denominator for diluted
Earnings per share--
Weighted-average number
of common shares 59,784 58,323 59,813 56,030
Basic earnings per share $ 0.34 $ 0.16 $ 0.99 $ 0.84
Diluted earnings per share $ 0.33 $ 0.15 $ 0.98 $ 0.83
The exercise prices for options to purchase an aggregate of 1,732,500
shares of common stock exceeded the average market price of the Company's common
stock for the three and nine months ended September 30, 2002. Accordingly the
calculation of diluted earnings per share does not include the antidilutive
effect of these options for the three and nine months ended September 30, 2002.
7. EMPLOYEE INCENTIVE AWARDS
On January 17, 2002, options to purchase an aggregate of 1,470,000 shares
of common stock were granted to employees of the Company at a purchase price of
$35.00 per share. These options are subject to continuing service with the
Company and other restrictions. One third of these options are exercisable on
the second anniversary of issuance and the remaining two thirds will become
exercisable on the third anniversary of issuance. These options will generally
expire ten years from the date of grant, unless sooner terminated or exercised.
Pursuant to APB No. 25, no compensation expense was recognized on the date of
grant, since these options had no intrinsic value.
On July 20, 2001, the Board of Directors approved, subject to the
subsequent approval of the Company's stockholders, an increase in the number of
shares of the Company's common stock available for issuance under the Equity
Incentive Plan by an additional 3,000,000 shares.
-12-
This increase was approved by a majority of the stockholders of the Company at
its annual meeting of stockholders on May 21, 2002.
On May 1, 2002, restricted stock units with respect to 20,000 shares of
the Company's common stock were granted to an employee with an issue cost of $0
to the employee and a fair market value of $27.28 per share. The restricted
stock units, which are subject to continuing service with the Company and other
restrictions, will vest in three installments on January 1, 2003, 2004 and 2005.
Compensation expense is being recognized over the 32-month vesting period on a
straight-line basis.
8. BUSINESS SEGMENTS
Currently, the Company views its business under two separate segments:
Specialist Services and Execution and Clearing Services. The Company's business
segments are based upon the nature of the financial services provided as well as
their revenue source.
The Company's Specialist Services segment operates as a specialist in
equities on the NYSE and in equities and options on the AMEX and provides
support services for the specialist activities.
The Company's Execution and Clearing Services segment provides securities
clearing, securities execution and other related services to its own individual
customers, customers of introducing brokers and institutional customers,
including traders, professional investors and broker-dealers. The segment also
provides direct access floor brokerage services to institutional customers. In
addition, this segment provides front-end order execution, analysis and
reporting solutions for the wholesale securities dealer market.
Revenues and expenses directly associated with each segment are included
in determining its operating results. Other expenses, including corporate
overhead, which are not directly attributable to a particular segment, generally
are allocated to each segment based on its resource usage levels or other
appropriate measures. Certain administrative expenses, corporate overhead
expenses and other sources of revenues are not specifically related to our two
business segments, and appear in the Other section. Selected financial
information for each segment is set forth below (000's omitted):
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
SPECIALIST SERVICES SEGMENT:
Revenues $ 107,757 $ 81,927 $ 300,372 $ 280,095
Expenses 47,989 40,129 132,623 119,370
----------- ----------- ----------- -----------
Pre-Tax Income 59,768 41,798 167,749 160,725
=========== =========== =========== ===========
Segment Assets 1,774,025 1,687,667 1,774,025 1,687,667
EXECUTION AND CLEARING
SERVICES SEGMENT:
Revenues $ 12,855 $ 6,861 $ 31,824 $ 18,060
-13-
Expenses 14,809 10,891 39,882 27,574
----------- ----------- ----------- -----------
Pre-Tax Income (1,954) (4,030) (8,058) (9,514)
=========== =========== =========== ===========
Segment Assets 109,546 234,921 109,546 234,921
OTHER: (1)
Revenues $ (2,347) $ 332 $ 6,857 $ 1,486
Expenses 14,784 13,483 44,125 39,656
----------- ----------- ----------- -----------
Pre-Tax Income (17,131) (13,151) (37,268) (38,170)
=========== =========== =========== ===========
Segment Assets 65,410 55,580 65,410 55,580
TOTAL:
Revenues $ 118,265 $ 89,120 $ 339,053 $ 299,641
Expenses 77,582 64,503 216,630 186,600
----------- ----------- ----------- -----------
Pre-Tax Income 40,683 24,617 122,423 113,041
=========== =========== =========== ===========
Assets 1,948,981 1,978,168 1,948,981 1,978,168
(1) Other is comprised primarily of the interest on the Company's public
indebtedness, unallocated corporate administrative expenses, including
legal costs, unallocated revenues (primarily income from non-marketable
investments as well as interest income), and elimination entries.
9. REPURCHASES OF PREFERRED STOCK
During January 2002, the Company offered to repurchase up to 30,000
shares of its outstanding Series A preferred stock for $1,000 per share, plus
accrued and unpaid dividends up to but not including the date of purchase. On
February 15, 2002, the offer expired, and on February 19, 2002, the Company
purchased all of the approximately 28,164 shares that had been tendered for
approximately $28.5 million, including accrued but unpaid dividends. As a result
of the purchase, the Company recorded an expense due to the acceleration of the
discount accretion on the shares purchased of approximately $1.5 million, which
was included in other expenses.
On August 7, 2002, the Company issued to RPM Nautical Foundation, Inc.
("RPM Nautical"), a non-profit organization of which George E. Robb, Jr., a
member of the Company's Board of Directors, is a founder and director,
subordinated notes in the aggregate principal amount of $8.0 million (the
"Notes") in exchange for the 8,000 shares of the Company's Series A preferred
stock then held by RPM Nautical. The Company's Series A preferred stock entitles
the holder to cumulative preferred cash dividends at an annual rate of 8.0% of
the liquidation preference per share until March 15, 2005, 10.0% until March 15,
2006 and 10.8% thereafter. The Notes accrue interest at the rate of 10.0% per
year until August 7, 2003 and at the rate of 9.0% per year thereafter. The
principal amount of the Notes, together with all accrued and unpaid interest, is
due on August 7, 2007. The Company also paid to RPM Nautical in cash the amount
of accrued and unpaid dividends with respect to the shares of the Company's
Series A preferred stock held by RPM Nautical as of August 6, 2002. As a result
of the exchange, the Company
-14-
recorded an expense due to the acceleration of the discount accretion on the
shares exchanged of approximately $0.4 million, which was included in other
expenses.
10. SUBSEQUENT EVENTS
On October 24, 2002, the Holding Company acquired all the outstanding
stock of Hochstin & Company, Inc. ("Hochstin"), which conducted a rights
specialist and floor brokerage business on the NYSE, for an aggregate of $7.8
million in cash. The purchase included the acquisition of one NYSE membership.
Of the $7.8 million consideration, $3.6 million was paid at the closing. The
remainder of the purchase price will be paid by the Holding Company as follows:
(a) $1.0 million on each of October 24, 2003, 2004 and 2005, and (b) $1.2
million on October 24, 2007, provided that if a certain former employees of
Hochstin is no longer employed by LFSI on October 24, 2007, the final payment
will be reduced to $200,000. In addition, the October 24, 2003 payment of the
purchase price is subject to adjustment based on the difference between the
actual net working capital of Hochstin as of October 24, 2002 and an amount
agreed upon by the Holding Company and Hochstin prior to the acquisition date.
The purchase price adjustment is not expected to have a significant impact on
the total consideration paid for Hochstin. The acquisition was accounted for
under the purchase method of accounting. The Company intends to finalize its
purchase accounting during the fourth quarter of 2002 and does not expect any
significant adjustment to the allocation of purchase price. The excess purchase
price over fair value of net intangible assets of approximately $4.6 million was
allocated to goodwill.
Currently, the Company elects to account for stock-based employee
compensation plans in accordance with Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS
No. 123, "Accounting for Stock-Based Compensation". In accordance with APB No.
25, compensation expense is not recognized for stock options that have no
intrinsic value on the date of grant. In October 2002, the Company's board of
directors approved the implementation of procedures to account for stock-based
employee compensation issued on or after January 1, 2003 in accordance with the
fair-value method prescribed by SFAS No. 123. Under this new method,
compensation expense will be recognized over the related service period based on
the fair-value of stock options on the date of grant.
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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.
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH LABRANCHE'S CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED IN THIS
REPORT.
GENERAL
We currently view our business under two separate business segments:
specialist services and execution and clearing services. Our specialist services
segment operates as a specialist in equities on the NYSE and in equities and
options on the AMEX and provides support services for our specialist activities.
Our execution and clearing services segment provides securities clearing,
securities execution and other related services to its own individual customers,
customers of introducing brokers and institutional customers, including traders,
professional investors and broker-dealers. Our execution and clearing services
segment also provides direct access floor brokerage services to institutional
customers and front-end order execution, analysis and reporting solutions for
the wholesale securities dealer market. The specialist services segment
currently includes the operations of LaBranche & Co. LLC, LaBranche Structured
Products, LLC and LaBranche & Co. B.V. The execution and clearing services
segment currently includes the operations of LaBranche Financial Services, Inc.
("LFSI").
REVENUES
Our revenues consist primarily of net gain earned from principal
transactions in securities for which we act as specialist. Net gain on principal
transactions represents trading gains net of trading losses and SEC transaction
fees, and are earned by us when we act as principal buying and selling our
specialist stocks and options.
Commissions revenue consists of fees we earn when our specialists act as
agents to match buyers and sellers for limit orders executed by us on behalf of
brokers or other trading professionals after a specified period of time. We do
not earn commissions when we match market orders. In addition, commissions
revenue includes fees charged to customers for execution, clearance and direct
access floor brokerage activities by our subsidiary, LFSI.
Other revenue consists of proprietary trading gains or losses,
appreciation or depreciation of our nonmarketable investments, interest income,
and fees charged to customers for use of the front-end order execution system
developed by LFSI. For the three months ended September 30, 2002, net gain on
principal transactions represented 79.3% of our total revenues, commissions
revenue represented 20.6% of our total revenues and other revenues represented
0.1% of our total revenues. For the nine months ended September 30, 2002, net
gain on principal transactions represented 75.4% of our total revenues,
commissions revenue represented 20.0% of our total revenues and other revenues
represented 4.6% of our total revenues.
-16-
EXPENSES
Our largest operating expense is employee compensation and related
benefits, which primarily consist of salaries, wages and profitability-based
compensation. Profitability-based compensation includes compensation and
benefits paid to managing directors, trading professionals and other employees
based on our profitability.
RECENT DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for goodwill and other intangible assets
acquired in a business combination, requiring that the purchase method of
accounting be used in all business combinations initiated after June 30, 2001.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets acquired individually or with a group of assets.
Under the new standard, acquired trade name and goodwill will no longer be
amortized. Instead these assets will be tested at least annually for impairment
by applying a fair-value based test. Our acquired specialist stock lists will
continue to be amortized over their respective lives. During the second quarter
of 2002, a fair value analysis of our acquired intangible assets as of December
31, 2001 by an independent valuation firm concluded that the value of these
assets has not been impaired. As of September 30, 2002, our management further
determined that there had been no impairment of goodwill or trade name. We will
continue to perform the required impairment tests on our intangible assets to
determine if there is a need to write down their value, and it is possible that
in the future, we may incur impairment charges related to the carrying value of
our acquired goodwill and intangible assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The implementation of SFAS No. 144 has not had an impact on our condensed
consolidated financial information.
Currently, we elect to account for stock-based employee compensation
plans in accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," as permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation." In accordance with APB No. 25,
compensation expense is not recognized for stock options that have no intrinsic
value on the date of grant. In October 2002, our board of directors approved the
implementation of procedures to account for stock-based employee compensation
issued on or after January 1, 2003 in accordance with the fair-value method
prescribed by SFAS No. 123. Under this new method, compensation expense will be
recognized over the related service period based on the fair-value of stock
options on the date of grant.
-17-
CRITICAL ACCOUNTING POLICIES
All of our principal securities transactions and the related gains and
losses are recorded on a trade date basis. Customer securities transactions and
the related revenues and expenses are also recorded on a trade date basis.
Securities owned, corporate equities, options and other, and securities sold,
but not yet purchased are reflected at market value and unrealized gains and
losses are reflected in net gain on principal transactions. United States
Government obligations are valued at cost and together with related interest
receivable as reported in other assets, approximate fair value. Securities not
readily marketable have been valued at fair value as determined by management
using standard industry valuation methods. The resulting gain or loss is
included in other revenues in the accompanying statements of operations.
Our balance sheet contains significant intangible assets. These
intangible assets are comprised of the specialist stock lists, trade name and
goodwill acquired in connection with our various acquisitions and the limited
partner buyout that occurred in connection with our reorganization from
partnership to corporate form in August 1999. The specialist stock lists are
being amortized on a straight-line basis over 15 to 40 years. The allocations of
purchase price to these assets and the determinations of their respective useful
lives were based on independent appraisals for all acquisitions through March
2001. The useful lives of our acquired specialist stock lists were determined
based on an analysis of the historical turnover characteristics of the
specialist stocks comprising these lists. For acquisitions subsequent to March
2001, the allocations of purchase price to the acquired intangible assets and
the determinations of their respective useful lives were based on our
management's analysis of revenues, consideration paid, common stock listings and
other relevant data and ratios. This information was analyzed and compared to
the results of the independent appraisals conducted in connection with our
acquisitions prior to April 2001.
As discussed under "Recent Developments," with the implementation of SFAS
No. 142, we no longer amortize goodwill and intangible assets with indefinite
useful lives, which includes the trade name. During the second quarter of 2002,
a fair value analysis of our acquired intangible assets as of December 31, 2001
by an independent valuation firm concluded that the value of these assets had
not been impaired. As of September 30, 2002, our management further determined
that there had been no impairment of goodwill or trade name. We will continue to
perform periodic impairment tests on these assets to determine if there is a
need to write down their value, and it is possible that in the future, we may
incur impairment charges related to the carrying value of our acquired goodwill
and intangible assets.
REPURCHASES OF OUR PREFERRED STOCK
On January 18, 2002, we offered to repurchase up to 30,000 shares of our
outstanding Series A preferred stock for $1,000 per share, plus accrued and
unpaid dividends up to but not including the date of purchase. On February 15,
2002, the offer expired, and on February 19, 2002, we purchased all of the
approximately 28,164 shares that had been tendered for approximately $28.5
million, including accrued but unpaid dividends. As a result of the purchase, we
recorded an expense due to the acceleration of the discount accretion on the
shares purchased of approximately $1.5 million, which was included in other
expenses.
-18-
On August 7, 2002, we issued to RPM Nautical Foundation, Inc. ("RPM
Nautical"), a non-profit organization of which George E. Robb, Jr., a member of
our Board of Directors, is a founder and director, subordinated notes in the
aggregate principal amount of $8.0 million (the "Notes") in exchange for the
8,000 shares of our Series A preferred stock then held by RPM Nautical. Our
Series A preferred stock entitles the holder to cumulative preferred cash
dividends at an annual rate of 8.0% of the liquidation preference per share
until March 15, 2005, 10.0% until March 15, 2006 and 10.8% thereafter. The Notes
accrue interest at the rate of 10.0% per year until August 7, 2003 and at the
rate of 9.0% per year thereafter. The principal amount of the Notes, together
with all accrued and unpaid interest, is due on August 7, 2007. We also paid to
RPM Nautical, in cash, the amount of accrued and unpaid dividends with respect
to the shares of our Series A preferred stock held by RPM Nautical as of August
6, 2002. As a result of the exchange, we recorded an expense due to the
acceleration of the discount accretion on the shares exchanged of approximately
$0.4 million, which was included in other expenses.
TRUST DECS OFFERING
On February 8, 2002, certain managing directors of LaBranche & Co. LLC
entered into prepaid forward contracts with DECS Trust IX, a statutory business
trust, pursuant to which the trust agreed to purchase from the participating
managing directors, on a date which is expected to be February 8, 2005, an
aggregate of 3,800,000 shares of our common stock owned by these managing
directors, subject to the terms and conditions set forth in the contracts. The
trust concurrently sold 3,800,000 trust securities, known as DECS, to investors.
LaBranche did not receive, nor will it receive, any portion of the proceeds from
the sale of shares pursuant to the contracts or from the sale of the DECS. The
participating managing directors were responsible for the expenses incurred by
them in connection with this transaction.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES
Total revenues increased 32.8% to $118.3 million for the three months
ended September 30, 2002, from $89.1 million for the same period in 2001, due to
increases in net gain on principal transactions and commissions, which were
partially offset by a decrease in other revenues. Net gain on principal
transactions increased 31.6% to $93.8 million for the three months ended
September 30, 2002, from $71.3 million for the same period in 2001. This
increase was the result of increased share volumes in our specialist stocks
traded on the NYSE, which led to an increase in our principal trading share
volumes during the third quarter of 2002, as compared to the third quarter of
2001. During the third quarter of 2002, the average daily share volume on the
NYSE increased 25.0% to 1.5 billion shares, from 1.2 billion shares for the same
period in 2001. Our share volume as principal increased 40.3% to 9.4 billion
shares for the three months ended September 30, 2002, from 6.7 billion shares
for the same period in 2001.
-19-
Commissions revenue increased 64.9% to $24.4 million for the three months
ended September 30, 2002, from $14.8 million for the same period in 2001. This
increase was primarily due to an increase in commissions revenue earned by LFSI
for execution and clearing services to $11.7 million for the three months ended
September 30, 2002, from $5.2 million for the same period in 2001, as a result
of the expansion of LFSI's business. In addition, floor brokerage income from
our LaBranche & Co. LLC subsidiary increased to $12.7 million from $9.6 million
as a result of increased share volume executed by us as agent, as well as the
impact of our acquisitions in 2001, which increased the number of our specialist
stocks. The share volume executed by us as agent in our specialist stocks
increased by 85.7% to 2.6 billion shares for the three months ended September
30, 2002, from 1.4 billion shares for the same period in 2001.
Other revenue decreased 96.8% to $0.1 million for the three months ended
September 30, 2002, from $3.1 million for the same period in 2001. This decrease
was due to the decline in interest income as a result of significantly lower
interest rates for both liquidity investments and stock borrow transactions. In
addition, the decrease was the result of write-offs related to certain of our
non-marketable investments.
EXPENSES
Total expenses before provision for income taxes increased 20.3% to $77.6
million for the three months ended September 30, 2002, from $64.5 million for
the same period in 2001.
Employee compensation and related benefits expense increased 57.0% to
$36.1 million for the three months ended September 30, 2002, from $23.0 million
for the same period in 2001. This increase was primarily due to our acquisitions
since June 30, 2001 as well as due to the general expansion of our business,
which increased our average headcount by approximately 71 individuals for the
three months ended September 30, 2002 as compared to the same period in 2001.
Employee compensation and related benefits expense increased to 30.5% of total
revenues for the three months ended September 30, 2002, from 25.8% of total
revenues for the same period in 2001.
Interest expense decreased 6.0% to $12.6 million for the three months
ended September 30, 2002, from $13.4 million for the same period in 2001. The
decrease was the result of the repayment of $20.0 million principal amount of
indebtedness on its scheduled maturity date in September 2002, as well as the
early retirement of certain indebtedness assumed in our 2001 acquisitions. This
decrease was primarily offset by additional interest charges associated with the
incurrence of $16.4 million of subordinated indebtedness in connection with our
acquisition of Bocklet & Company, LLC in October 2001. Interest expense
decreased to 10.7% of total revenues for the three months ended September 30,
2002, from 15.0% of total revenues for the same period in 2001.
Exchange, clearing and brokerage fees expense increased 76.2% to $11.1
million for the three months ended September 30, 2002, from $6.3 million for the
same period in 2001. This increase was primarily due to an increase in clearing
and execution fees incurred by LFSI. In addition, there was an increase in fees
at our LaBranche & Co. LLC subsidiary as a result of increased principal trading
volumes on the NYSE during the third quarter of 2002, as compared
-20-
to the third quarter of 2001. Exchange, clearing and brokerage fees expense
increased to 9.4% of total revenues for the three months ended September 30,
2002, from 7.1% of total revenues for the same period in 2001.
Lease of exchange memberships expense increased 23.1% to $6.4 million for
the three months ended September 30, 2002, from $5.2 million for the same period
in 2001. This increase was the result of an increase of 11 in the average number
of our leased NYSE memberships during the third quarter of 2002, as compared to
the same period in 2001, due to our acquisitions during the second half of 2001
and the general expansion of our business. An increase in the average annual
leasing cost of NYSE memberships from approximately $312,000 to $330,000 per
membership also contributed to the increase. Additionally, the increase was the
result of leasing 10 additional AMEX memberships during the third quarter of
2002, as compared to the same period in 2001. These additional AMEX membership
leases arose out of our acquisition of Cranmer & Cranmer, Inc. in August 2001
and the expansion of our AMEX specialist business. The increase was partially
offset by a decrease in the average annualized seat rental cost on the AMEX from
approximately $193,000 during the third quarter of 2001 to approximately $50,000
during the third quarter of 2002. Lease of exchange memberships expense
decreased to 5.4% of total revenues for the three months ended September 30,
2002, from 5.8% of total revenues for the same period in 2001.
Depreciation and amortization of intangibles expense decreased 69.1% to
$3.4 million for the three months ended September 30, 2002, from $11.0 million
for the same period in 2001. The decrease was due to the adoption of SFAS No.
142, commencing January 1, 2002, which requires that we cease amortization of
acquired goodwill and intangible assets with indefinite useful lives.
Amortization of intangibles expense amounted to approximately $2.6 million, and
depreciation amounted to approximately $0.8 million for the third quarter of
2002. Depreciation and amortization of intangibles expense decreased to 2.9% of
total revenues for the three months ended September 30, 2002, from 12.3% of
total revenues for the same period in 2001.
Other expenses increased 44.6% to $8.1 million for the three months ended
September 30, 2002, from $5.6 million for the same period in 2001. The increase
was due to additional occupancy, communication, legal and other professional
expenses as a result of the general expansion of our business, our 2001
acquisitions and the enhanced services we provide to our listed companies and
customers.
INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes increased 65.4% to $40.7 million
for the three months ended September 30, 2002, from $24.6 million for the same
period in 2001. This increase was due to the increase in our total revenues, as
well as the decrease in amortization expense, which were partially offset by the
increase in employee compensation and related benefits expense, exchange,
clearing and brokerage fees, lease of exchange memberships expense and other
expenses.
-21-
INCOME TAXES
Provision for income taxes increased 44.0% to $19.3 million for the three
months ended September 30, 2002, from $13.4 million for the same period in 2001.
This increase was due to the increase in our profitability.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES
Total revenues increased 13.2% to $339.1 million for the nine months
ended September 30, 2002, from $299.6 million for the same period in 2001, due
to increases in net gain on principal transactions, commissions and other
revenues. Net gain on principal transactions increased 5.6% to $255.7 million
for the nine months ended September 30, 2002, from $242.1 million for the same
period in 2001. This increase was the result of a full nine months of revenues
from our 2001 acquisitions. In addition, increased share volumes in our
specialist stocks traded on the NYSE, which led to an increase in our principal
trading share volumes, contributed to the increase in revenue. During the nine
months ended September 30, 2002, the average daily share volume on the NYSE
increased 16.7% to 1.4 billion shares, from 1.2 billion shares for the same
period in 2001. Our total share volume as principal increased 40.4% to 27.1
billion shares for the nine months ended September 30, 2002, from 19.3 billion
shares for the same period in 2001.
Commissions revenue increased 55.5% to $67.8 million for the nine months
ended September 30, 2002, from $43.6 million for the same period in 2001. This
increase was primarily due to an increase in commissions revenue earned by LFSI
for execution and clearing services to $28.9 million for the nine months ended
September 30, 2002, from $13.4 million for the same period in 2001. The increase
in commissions revenue at LFSI was the result of the growth and expansion of
LFSI's business as well as having a full nine months of revenues from the
operations of the execution and clearing business which we acquired on March 15,
2001. In addition, commission income earned by our LaBranche & Co. LLC
subsidiary increased to $38.9 million from $30.2 million as a result of
increased share volume executed by us as agent, as well as the impact of our
2001 acquisitions, which increased the number of our specialist stocks. The
total share volume executed by us as agent in our specialist stocks increased by
47.7% to 6.5 billion shares for the nine months ended September 30, 2002, from
4.4 billion shares for the same period in 2001.
Other revenue increased 11.4% to $15.6 million for the nine months ended
September 30, 2002, from $14.0 million for the same period in 2001. This
increase was primarily due to the appreciation of approximately $9.4 million in
the value of our investment in Lava Trading Inc. ("Lava"), as well as a
reduction in losses from an investment in a hedge fund and the reversal of a
$1.0 million commercial paper investment loss accrual which was incurred during
the third quarter of 2001. The increase in other revenue was partially offset by
the decrease in interest income as a result of significantly lower interest
rates for our short to medium term investments
-22-
and stock-borrow transactions, as well as write-offs related to certain of our
other non-marketable investments.
EXPENSES
Total expenses before provision for income taxes increased 16.1% to
$216.6 million for the nine months ended September 30, 2002, from $186.6 million
for the same period in 2001.
Employee compensation and related benefits expense increased 31.5% to
$98.2 million for the nine months ended September 30, 2002, from $74.7 million
for the same period in 2001. This increase was due to our 2001 acquisitions and
the general expansion of our business, which increased our average number of
employees by 130 individuals for the nine months ended September 30, 2002, as
compared to the same period in 2001. Employee compensation and related benefits
expense increased to 29.0% of total revenues for the nine months ended September
30, 2002, from 24.9% of total revenues for the same period in 2001.
Interest expense decreased 1.5% to $38.2 million for the nine months
ended September 30, 2002, from $38.8 million for the same period in 2001. The
decrease was the result of the repayment of $20.0 million principal amount of
indebtedness on its scheduled maturity date in September 2002, as well as the
early retirement of certain indebtedness assumed in connection with our 2001
acquisitions. This decrease was partially offset by additional interest charges
associated with the incurrence of $16.4 million of subordinated indebtedness in
connection with the Bocklet acquisition in October 2001. Additionally, we
incurred a full nine months of interest expense on the approximately $20.1
million of indebtedness which we assumed in connection with our 2001
acquisitions. Interest expense decreased to 11.3% of total revenues for the nine
months ended September 30, 2002, from 13.0% of total revenues for the same
period in 2001.
Exchange, clearing and brokerage fees expense increased 77.8% to $28.1
million for the nine months ended September 30, 2002, from $15.8 million for the
same period in 2001. This increase was primarily due to increased clearing and
execution activity and a full nine months of fees at our LFSI subsidiary. An
increase in our principal trading share volume as a result of our 2001
acquisitions and an increase in overall share volume on the NYSE led to an
increase in fees at our LaBranche & Co. LLC subsidiary. Exchange, clearing and
brokerage fees expense increased to 8.3% of total revenues for the nine months
ended September 30, 2002, from 5.3% of total revenues for the same period in
2001.
Lease of exchange memberships expense increased 37.3% to $19.5 million
for the nine months ended September 30, 2002, from $14.2 million for the same
period in 2001. This increase was the result of an increase of 17 in the average
number of our leased NYSE memberships for the nine months ended September 30,
2002 as compared to the same period in 2001, due to our 2001 acquisitions. An
increase in the average annual leasing cost of the NYSE memberships from
approximately $312,000 to $330,000 per membership also contributed to the
increase. Additionally, the increase was the result of leasing 10 additional
AMEX memberships during the first nine months of 2002, as compared to the first
nine months of 2001. These additional AMEX membership leases arose out of our
acquisition of Cranmer & Cranmer, Inc. in August 2001 and the expansion of our
AMEX specialist business. The increase was partially offset by a decrease
-23-
in the average annualized seat rental cost on the AMEX from approximately
$251,000 during the nine months ended September 30, 2001 to approximately
$79,000 during the same period in 2002. Lease of exchange memberships expense
increased to 5.8% of total revenues for the nine months ended September 30,
2002, from 4.7% of total revenues for the same period in 2001.
Depreciation and amortization of intangibles expense decreased 64.2% to
$10.1 million for the nine months ended September 30, 2002, from $28.2 million
for the same period in 2001. The decrease was due to the adoption of SFAS No.
142 commencing January 1, 2002, which requires that we cease amortization of
acquired goodwill and intangible assets with indefinite useful lives.
Amortization of intangibles expense amounted to approximately $7.8 million, and
depreciation amounted to approximately $2.3 million during the nine months ended
September 30, 2002. Depreciation and amortization of intangibles expense
decreased to 3.0% of total revenues for the nine months ended September 30,
2002, from 9.4% of total revenues for the same period in 2001.
Other expenses increased 51.0% to $22.5 million for the nine months ended
September 30, 2002, from $14.9 million for the same period in 2001. This
increase was due to additional legal and professional expenses, a $1.9 million
charge related to the buyback and exchange of approximately 36,164 shares of our
Series A preferred stock, and additional communication and occupancy expenses as
a result of the general expansion of our business and our 2001 acquisitions.
INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes increased 8.3% to $122.4 million
for the nine months ended September 30, 2002, from $113.0 million for the same
period in 2001. This increase was due to the increase in our total revenues and
the decrease in amortization expense, which was partially offset by the increase
in employee compensation and related benefits expense, exchange, clearing and
brokerage fees, lease of exchange memberships expense and other expenses.
INCOME TAXES
Provision for income taxes decreased 5.2% to $58.5 million for the nine
months ended September 30, 2002, from $61.7 million for the same period in 2001.
This decrease was primarily due to the decrease in nondeductible amortization of
intangibles as a result of the adoption of SFAS No. 142.
LIQUIDITY
As of September 30, 2002, we had $1,949.0 million in assets, of which
$138.7 million consisted of cash, short-term investments in government
obligations with original maturities within three months, cash and securities
segregated under federal regulations and overnight repurchase agreements. We
also had $337.4 million of government obligations that had a weighted average
original term of 153 days and as of September 30, 2002, had a weighted average
days until maturity of 75 days.
-24-
In October 2002, our LaBranche & Co. LLC subsidiary entered into an
amended and restated credit agreement regarding its $200.0 million committed
line-of-credit with a U.S. commercial bank, pursuant to which the line-of-credit
was extended to October 31, 2003. The line-of-credit may be extended by
LaBranche & Co. LLC, subject to the bank's approval, for additional one-year
terms by giving written notice to the bank at least 30 days prior to the
then-current scheduled termination date. Borrowings under this U.S. commercial
bank credit facility would be secured by our inventory of specialist stocks and
would bear interest at the U.S. commercial bank's broker loan rate. To date, we
have not utilized this facility. In order to maintain the availability of funds
under this credit facility, we must comply with certain customary covenants.
As of September 30, 2002, the subordinated indebtedness of our LaBranche
& Co. LLC subsidiary aggregated $44.7 million (excluding subordinated
liabilities related to contributed exchange memberships) and consisted of the
following:
o $15.0 million of senior subordinated notes, which were privately
placed pursuant to note purchase agreements, mature on June 3,
2008 and bear interest at an annual rate of approximately 7.7%,
payable on a quarterly basis.
o $29.7 million of junior subordinated notes,
o $7.7 million of which were issued to certain of our former
limited partners, family members of former employees and
former members of Bocklet and their respective family
members. These notes mature on varying dates ranging from
the fourth quarter of 2002 to the first half of 2004 and
bear interest at an annual rate of 10.0%, payable on a
quarterly basis;
o $8.0 million in a secured demand note obligation assumed in
connection with our March 2001 acquisition of ROBB PECK
McCOOEY Financial Services, Inc. ("RPM"), which matures in
June 2003 and bears interest at an annual rate of 11% on
the amount of cash collateral and 4% on non-cash
collateral, payable monthly; and
o $14.0 million in secured demand note obligations to two
former members of Bocklet, which were incurred in
connection with our acquisition of Bocklet in October 2001,
bear interest at an annual rate of 10.0%, payable on a
quarterly basis, and matured in October 2002. As a result
of the maturity, the collateral securing these secured
demand note obligations was returned to the lenders in
October 2002.
Of the total $29.7 million of junior subordinated notes, $13.3 million
have automatic rollover provisions, which extend their respective maturities for
an additional year, unless the lender provides at least seven months' advance
notice prior to maturity. LaBranche & Co. LLC also is entitled to prepay the
junior subordinated notes and the secured demand note obligations without
penalty under the terms of the agreements relating thereto.
-25-
In September 2002, LaBranche & Co. LLC repaid, on the scheduled maturity
date, senior subordinated notes in the aggregate principal amount of $20.0
million, plus accrued and unpaid interest. These senior subordinated notes had
been privately placed pursuant to note purchase agreements and had an annual
interest rate of 8.17%. In addition, at the requests of the lenders, LaBranche &
Co. LLC repaid a secured demand note in the principal amount of $1.0 million,
plus accrued interest, and a junior subordinated note in the principal amount of
$350,000, plus accrued interest, in August and September of 2002, respectively.
The $1.0 million secured demand note had been assumed in connection with our
March 2001 acquisition of RPM and had a variable interest rate. The $350,000
junior subordinated note had been issued to a family member of a former employee
and had an annual interest rate of 8.0%. As of September 30, 2002 we do not have
any debt obligations to members of senior management or their family members.
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 was payable in three annual installments and had an annual interest
rate of 9.5%. We repaid the full aggregate principal amount of $16.0 million
plus the accrued interest of this note in August 2000, 2001 and 2002.
As of September 30, 2002, $10.0 million of our outstanding indebtedness
consisted of:
o $2.0 million assumed in connection with the RPM acquisition and
was issued to a family member of a former employee of RPM, which
matures in the first half of 2003 and bears an annual interest
rate of 12.5%, payable on a quarterly basis; and
o $8.0 million which we issued to RPM Nautical on August 7, 2002 in
exchange for the 8,000 shares of our Series A Preferred Stock then
held by RPM Nautical. This indebtedness accrues interest at the
rate of 10.0% per year until August 7, 2003 and at the rate of
9.0% per year thereafter, payable semiannually, and matures on
August 7, 2007.
During the third quarter of 2002, we prepaid, without penalty,
indebtedness in the aggregate principal amount of $10.7 million which we had
assumed in connection with the RPM acquisition. Of the total $10.7 million, $8.8
million was promissory notes issued to former RPM employees and their family
members and had annual interest rates ranging from 8.0% to 12.0%. The remaining
$1.9 million represented deferred compensation owed to former RPM employees and
had annual interest 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 to
cumulative preferred cash dividends at an annual rate of 8.0% of the liquidation
preference per share until the fourth anniversary of the closing of the merger,
10.0% until the fifth anniversary of the closing, and 10.8% thereafter.
Dividends are payable on the first day of January and the first day of July of
each year (or if such date is not a regular business day, then the next business
day thereafter). The first payment of dividends was made on July 1, 2001.
Dividends on the issued and outstanding shares of Series A preferred stock are
preferred and cumulative and accrue daily from the date on which the shares were
originally issued.
-26-
On January 18, 2002, we offered to repurchase up to 30,000 shares of our
outstanding Series A preferred stock for $1,000 per share, plus accrued and
unpaid dividends up to but not including the date of purchase. On February 15,
2002, the offer expired, and on February 19, 2002, we purchased all of the
approximately 28,164 shares that had been tendered for a purchase price of
approximately $28.5 million, including accrued but unpaid dividends.
On August 7, 2002, we issued to RPM Nautical subordinated notes in the
aggregate principal amount of $8.0 million in exchange for the 8,000 shares of
our Series A preferred stock then held by RPM Nautical. We also paid to RPM
Nautical in cash the amount of accrued and unpaid dividends with respect to the
shares of our Series A preferred stock held by RPM Nautical as of August 6,
2002. As of September 30, 2002, approximately 63,836 shares of Series A
preferred stock were outstanding.
In connection with our acquisition of RPM, we assumed its liabilities and
obligations under its deferred compensation plan. The deferred compensation plan
provides for the payment, on or before December 15, 2007, of approximately $30.2
million, plus interest at 8.0% per year, to certain former employees of RPM.
While the payment of benefits under this deferred compensation plan may be
accelerated in certain circumstances, no more than $6.0 million in deferred
compensation benefits (including interest) may be paid in any 12 consecutive
month period beginning March 15, 2001. We paid $6.0 million in deferred
compensation plan benefits in March 2002. During April 2002, the following plan
year, we paid approximately $1.2 million in deferred compensation plan benefits.
If the plan is terminated, the deferred compensation benefits (including
interest) of all participants, to the extent not previously paid, must be
distributed to the participants in one lump sum. The amounts payable under this
deferred compensation plan may be reduced to satisfy any indemnification
obligations of the plan participants to us under the agreements governing our
acquisition of RPM.
In connection with our acquisition of RPM, we also assumed its
liabilities and obligations under the Robb Peck McCooey Pension Trust. The
pension trust was amended prior to our acquisition of RPM to freeze all future
benefit accruals as of March 15, 2001. The pension trust was terminated,
effective as of August 31, 2001, and we contributed $1.2 million to the trust in
May 2002 in order to fund a deficiency in the required value of the assets of
the trust.
We also assumed RPM's liabilities and obligations under its retention
bonus pool. The retention bonus pool requires $9.0 million to be paid as bonus
compensation on March 15, 2004 to as many as 31 former employees of RPM, under
the condition they are still employed on the payment date. The portion of this
retention bonus pool payable to each of these former employees will be
determined by the majority vote of a committee consisting of Robert M. Murphy,
George E. Robb, Jr. and Michael LaBranche or their respective successors.
On August 24, 1999, we issued $100.0 million aggregate principal amount
of Senior Notes. The Senior Notes bear interest at a rate of 9.5% annually and
mature in August 2004. The indenture covering the Senior Notes includes certain
covenants that, among other things, limit our ability to borrow money, pay
dividends on our stock or purchase our stock, make investments, engage in
transactions with stockholders and affiliates, create liens on our assets,
-27-
and sell assets or engage in mergers and consolidations, except in accordance
with certain specified conditions.
On March 2, 2000, we issued $250.0 million aggregate principal amount of
Senior Subordinated Notes. These Senior Subordinated Notes bear interest at a
rate of 12.0% annually and mature in March 2007. The indenture covering the
Senior Subordinated Notes includes certain covenants that, among other things,
limit our ability to borrow money, pay dividends on our stock or purchase our
stock, make investments, engage in transactions with stockholders and
affiliates, create liens on our assets, and sell assets or engage in mergers and
consolidations, except in accordance with certain specified conditions.
The Senior Subordinated Notes also require us, within 150 days after
the end of each fiscal year, to offer to redeem from all holders of the Senior
Subordinated Notes a principal amount equal to our Excess Cash Flow during the
preceding fiscal year at a price equal to 103.0% of the principal amount being
offered for purchase plus accrued and unpaid interest, if any, to the date of
redemption. Each holder is entitled to be offered his or her pro rata share
based upon his or her ownership percentage of the outstanding Senior
Subordinated Notes. Excess Cash Flow is defined for this purpose as 40.0% of the
amount by which our consolidated EBITDA exceeds the sum of our interest expense,
tax expense, increase in net capital or net liquid asset requirements, capital
expenditures, any cash amounts related to acquisitions of NYSE specialists or
any cash payments related to our payment at maturity of the principal amount of
our existing or certain other indebtedness. In May 2001, we offered to purchase
an aggregate principal amount of approximately $9.9 million of Senior
Subordinated Notes pursuant to this Excess Cash Flow offer requirement and no
Senior Subordinated Notes were tendered. In 2002, we were not required to make
an Excess Cash Flow offer to the holders of Senior Subordinated Notes because we
did not have Excess Cash Flow as of December 31, 2001, as defined for this
purpose.
As a registered broker-dealer, LaBranche & Co. LLC is subject to
regulatory requirements intended to ensure the general financial soundness and
liquidity of broker-dealers and requiring the maintenance of minimum levels of
net capital, as defined in SEC Rule 15c3-1. LaBranche & Co. LLC is required to
maintain minimum net capital, as defined, equivalent to the greater of $100,000
or 1/15 of aggregate indebtedness, as defined. NYSE Rule 326(c) also prohibits a
broker-dealer from repaying subordinated borrowings, paying cash dividends,
making loans to any parent, affiliate or employee, or otherwise entering into
transactions which would result in a reduction of its total net capital to less
than 150.0% of its required minimum capital. Moreover, broker-dealers are
required to notify the SEC prior to repaying subordinated borrowings, paying
dividends and making loans to any parent, affiliate or employee, or otherwise
entering into transactions which, if executed, would result in a reduction of
30.0% or more of their excess net capital (net capital less amount of minimum
requirement). The SEC has the ability to prohibit or restrict such transactions
if the result is deemed detrimental to the financial integrity of the
broker-dealer.
As of September 30, 2002, LaBranche & Co. LLC's net capital, as defined
under SEC Rule 15c3-1, was $474.9 million, which exceeded its minimum
requirement by $470.8 million.
-28-
The NYSE generally requires its specialist firms to maintain a minimum
dollar regulatory capital amount in order to establish that they can meet, with
their own net liquid assets, their position requirement. As of September 30,
2002, LaBranche & Co. LLC's NYSE minimum required dollar amount of net liquid
assets, as defined, was $446.0 million, compared to actual net liquid assets, as
defined, of $469.9 million.
Failure to maintain the required net capital and net liquid assets may
subject LaBranche & Co. LLC to suspension or revocation of its SEC registration
or suspension or expulsion by the NYSE.
As a registered broker-dealer and NYSE member firm, LFSI also is subject
to SEC Rule 15c3-1, as adopted and administered by the NYSE. Under the
alternative method permitted by the rule, LFSI's minimum required net capital is
equal to the greater of $250,000 or 2% of aggregate debit items, as defined. As
of September 30, 2002, LFSI's net capital, as defined under SEC Rule 15c3-1, was
$21.2 million and exceeded its minimum requirement by $20.5 million.
As a registered broker-dealer and AMEX member firm, LSP is subject to SEC
Rule 15c3-1, as adopted and administered by the AMEX. LSP 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, 2002, LSP's
net capital as defined under SEC Rule 15c3-1 was $8.7 million and exceeded
minimum requirements by $8.6 million.
We currently anticipate that our available cash resources will be
sufficient to meet our working capital, regulatory capital and capital
expenditure requirements through the end of 2002.
CREDIT RATINGS
Our $100.0 million Senior Notes and our $250.0 million Senior
Subordinated Notes were both sold to public investors on their respective
issuance dates. The following table sets forth the credit ratings on both of
these issues as of September 30, 2002:
Moody's Investors Services Standard & Poor's
-------------------------- -----------------
Senior Notes Baa3 BB+
Senior Subordinated Notes Ba1 BB-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A majority of our specialist related revenues are derived from trading as
principal. Additionally, a high concentration of our specialist trading revenue
is generated from our ten and
-29-
twenty-five most profitable specialist stocks. The percentage of our specialist
trading revenue generated from our ten most profitable specialist stocks has
increased to 42.4% of principal trading revenue for the quarter ended September
30, 2002 from 34.5% of principal trading revenue for the same period last year.
The percentage of our specialist trading revenue generated from our twenty-five
most profitable specialist stocks has increased to 64.7% of principal trading
revenue for the quarter ended September 30, 2002 from 64.1% of principal trading
revenue for the same period last year. The percentage of our specialist trading
revenue generated from our ten most profitable specialist stocks has decreased
to 29.3% of principal trading revenue for the nine months ended September 30,
2002 from 30.4% of principal trading revenue for the same period last year. The
percentage of our specialist trading revenue generated from our twenty-five most
profitable specialist stocks has decreased to 50.0% of principal trading revenue
for the nine months ended September 30, 2002 from 55.0% of principal trading
revenue for the same period last year. We are not overly reliant on a particular
group of specialist stocks, as the composition of our ten and twenty-five most
profitable specialist stocks changes continuously.
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. We may have large position concentrations in securities of a single
issuer or issuers engaged in a specific industry. In general, because our
inventory of securities is marked to market on a daily basis, any significant
price movement in these securities could result in a reduction of our revenues
and operating profits.
We also operate a proprietary trading desk separately from our NYSE and
AMEX specialist operations. Its revenues represented (0.04%) of our total
revenues for the three months ended September 30, 2002 and (0.9%) of our total
revenues for the same period in 2001. The proprietary trading desk's revenues
represented (0.04%) of our total revenues for the nine months ended September
30, 2002 and (0.4%) of our total revenues for the same period in 2001. We may
continue to incur trading losses as a result of these trading activities. These
activities involve primarily the purchase, sale and short sale of securities for
our own account.
Both our specialist activities and the proprietary trading desk
activities are subject to a number of risks, including risks of price
fluctuations and rapid changes in the liquidity of markets. 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. We have
invested substantial capital, along with the NYSE, in real-time, on-line systems
which give management instant access to specific trading information at any time
during the trading day, including our aggregate long and short positions and our
capital and profit-and-loss information on an aggregate or per issue basis. 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.
-30-
LFSI's clearance activities involve settlement and financing of various
customer securities transactions on a cash or margin basis. These activities may
expose LFSI to off-balance sheet risk in the event a customer or other broker is
unable to fulfill its contractual obligations and LFSI has to purchase or sell
securities at a loss. For margin transactions, LFSI may be exposed to
significant off-balance sheet risk in the event margin requirements are not
sufficient to fully cover losses that customers may incur in their accounts.
LFSI seeks to control the risks associated with customer activities by
requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. LFSI monitors margin levels daily and,
pursuant to such guidelines, requires customers to deposit additional collateral
or to reduce positions when necessary.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed on the effectiveness of the design and
operation of our disclosure controls and procedures, within the 90-day period
prior to filing this report, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of our disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
-31-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and, in particular, certain of the business operations
conducted by its RPM Clearing Corporation subsidiary, now known as LFSI, have
been the target, from time to time, of various claims and lawsuits incidental to
the ordinary course of their respective businesses. While the ultimate outcome
of those claims and lawsuits which currently are pending cannot be predicted
with certainty, we believe, based on our understanding of the facts of these
proceedings, that their ultimate resolution will not, in the aggregate, have a
material adverse effect on our financial condition or results of operations.
ITEM 5. OTHER INFORMATION.
We have included in this Form 10-Q filing, and from time to time our
management may make, statements which may constitute "forward-looking
statements" within the meaning of the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. The Company's quarterly and annual
operating results are affected by a wide variety of factors that could
materially and adversely affect actual results, including: a decrease in trading
volume on the NYSE or the AMEX, excessive volatility in the equity securities
market and changes in the value of our securities positions. As a result of
these and other factors, we may experience material fluctuations in future
operating results on a quarterly or annual basis, which could materially and
adversely affect our business, financial condition, operating results, and stock
price. An investment in the Company involves various risks, including those
mentioned above and those that are detailed from time to time in our SEC
filings.
Certain statements contained in this report, including without
limitation, statements containing the words "believe," "intend," "expect,"
"anticipate" and words of similar import, also may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance, and since such statements involve risks and
uncertainties, the actual results and performance of the Company and the
specialist industry may turn out to be materially different from the results
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company also disclaims any obligation to update
its view of any such risks or uncertainties or to publicly announce the result
of any revisions to the forward-looking statements made in this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
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(b) REPORTS ON FORM 8-K.
(i) On August 14, 2002, we filed a Form 8-K, dated August 14,
2002, with respect to the certifications of our Chief Executive
Officer and our Chief Financial Officer, regarding the information
contained in our Quarterly Report on Form 10-Q for the period
ended June 30, 2002, under Item 9 of Form 8-K.
All other items of this report are inapplicable.
-33-
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 14, 2002 LABRANCHE & CO INC.
By: /s/ HARVEY S. TRAISON
---------------------
Name: Harvey S. Traison
Title: Senior Vice President and Chief
Financial Officer
-34-
CERTIFICATION
I, George M.L. LaBranche, IV, Chairman, Chief Executive Officer and
President of LaBranche & Co Inc. (the "Registrant"), hereby certify that:
1. I have reviewed the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2002, as filed with the Securities and Exchange
Commission on the date hereof (the "Report").
2. Based on my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the Report.
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in the Report.
4. Harvey S. Traison, the Registrant's Chief Financial Officer, and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended) for the Registrant, and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, has been made known to us by others
within those entities, particularly during the period in which the
Report has been prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of the Report (the "Evaluation Date"); and
(c) presented in the Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as
of the Evaluation Date.
5. Harvey S. Traison, the Registrant's Chief Financial Officer, and I
have disclosed, based on our most recent evaluation, to the Registrant's
independent auditors and the audit committee of the Registrant's board of
directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's independent auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees
-35-
who have a significant role in the Registrant's internal controls.
6. Harvey S. Traison, the Registrant's Chief Financial Officer, and I
have indicated in the Report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
November 14, 2002 LABRANCHE & CO INC.
/s/ GEORGE M.L. LABRANCHE, IV
----------------------------------------
Name: George M.L. LaBranche, IV
Title: Chairman, Chief Executive Officer
and President
-36-
CERTIFICATION
I, Harvey S. Traison, Senior Vice President and Chief Financial Officer
of LaBranche & Co Inc. (the "Registrant"), hereby certify that:
1. I have reviewed the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2002, as filed with the Securities and Exchange
Commission on the date hereof (the "Report").
2. Based on my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the Report.
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in the Report.
4. George M.L. LaBranche, IV, the Registrant's Chief Executive Officer,
and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Rule 13a-14(c) promulgated under the Securities
Exchange Act of 1934, as amended) for the Registrant, and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, has been made known to us by others
within those entities, particularly during the period in which the
Report has been prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of the Report (the "Evaluation Date"); and
(c) presented in the Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as
of the Evaluation Date.
5. George M.L. LaBranche, IV, the Registrant's Chief Executive Officer,
and I have disclosed, based on our most recent evaluation, to the Registrant's
independent auditors and the audit committee of the Registrant's board of
directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's independent auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees
-37-
who have a significant role in the Registrant's internal controls.
6. George M.L. LaBranche, IV, the Registrant's Chief Executive Officer,
and I have indicated in the Report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
November 14, 2002 LABRANCHE & CO INC.
/s/ HARVEY S. TRAISON
--------------------------------------
Name: Harvey S. Traison
Title: Senior Vice President and Chief
Financial Officer
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