<PAGE>
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 March 31, 2000
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 May 12,
2000 was 48,675,352.
<PAGE>
LABRANCHE & CO INC.
FORM 10-Q/A
PART I FINANCIAL INFORMATION 4
Item 1. Financial Statements. 4
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Financial Condition 5
Condensed Consolidated Statement of Changes in Stockholders'
Equity and Members'Capital 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 25
PART II OTHER INFORMATION 26
Item 2. Changes in Securities and Use of Proceeds. 26
Item 6. Exhibits and Reports on Form 8-K. 26
SIGNATURES 27
2
<PAGE>
EXPLANATORY NOTE
IN AUGUST 1999, LABRANCHE & CO INC. COMPLETED A REORGANIZATION IN WHICH
IT ACQUIRED ALL THE LIMITED PARTNER INTERESTS IN LABRANCHE & CO., A REGISTERED
BROKER-DEALER AND A SPECIALIST FIRM ON THE NEW YORK STOCK EXCHANGE, AND THE
ENTIRE MEMBERSHIP INTEREST IN LAB INVESTING CO. L.L.C., THE GENERAL PARTNER OF
LABRANCHE & CO. IN EXCHANGE FOR SHARES OF COMMON STOCK OF LABRANCHE & CO INC.,
CASH AND SUBORDINATED DEBT. AS A RESULT, LABRANCHE & CO INC. IS THE SOLE LIMITED
PARTNER OF LABRANCHE & CO. AND THE SOLE MEMBER OF LAB INVESTING CO. L.L.C.
CONCURRENTLY WITH THE REORGANIZATION, LABRANCHE & CO INC. COMPLETED AN
INITIAL PUBLIC OFFERING OF 10,500,000 SHARES OF ITS COMMON STOCK AND A PRIVATE
OFFERING OF $100.0 MILLION AGGREGATE PRINCIPAL AMOUNT OF 9.5% SENIOR NOTES DUE
2004.
IN ACCORDANCE WITH THE RULES OF THE SECURITIES AND EXCHANGE COMMISSION,
PART I OF THIS REPORT CONTAINS HISTORICAL FINANCIAL INFORMATION, MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
3
<PAGE>
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)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------
2000 1999
------- -------
<S> <C> <C>
REVENUES:
Net gain on principal transactions $65,391 $36,366
Commissions 9,185 8,270
Other 4,114 2,985
------- -------
Total revenues 78,690 47,621
------- -------
EXPENSES:
Employee compensation and related benefits 22,782 4,741
Interest 6,447 1,099
Depreciation and amortization of intangibles 2,754 847
Lease of exchange memberships 2,557 2,073
Exchange, clearing and brokerage fees 1,033 1,007
Other 2,684 1,328
------- -------
Total expenses before managing directors'
compensation and limited partners' interest in earnings of
subsidiary and provision for income taxes 38,257 11,095
------- -------
Income before managing directors' compensation
and limited partners' interest in earnings of subsidiary
and provision for income taxes 40,433 36,526
MANAGING DIRECTORS' COMPENSATION -- 23,100
Income before limited partners' interest in earnings
of subsidiary and provision for income taxes 40,433 13,426
LIMITED PARTNERS' INTEREST IN
EARNINGS OF SUBSIDIARY -- 10,445
Income before provision for income taxes 40,433 2,981
PROVISION FOR INCOME TAXES 19,878 1,400
------- -------
Net income $20,555 $ 1,581
======= =======
Diluted weighted average shares outstanding 46,640 35,618
Basic and diluted earnings per share $ 0.44 $ 0.04
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
4
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED)
<TABLE>
<CAPTION>
As of
-----------------------
ASSETS MARCH 31, DECEMBER 31,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 81,165 $ 83,774
CASH SEGREGATED UNDER FEDERAL REGULATIONS 6,368 --
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 59,600 25,422
RECEIVABLE FROM BROKERS AND DEALERS 119,378 37,497
RECEIVABLE FROM CUSTOMERS 1,465 --
SECURITIES OWNED, at market value:
Corporate equities 164,085 148,563
United States Government obligations 1,488 1,471
Other 4,605 2,515
EXCHANGE MEMBERSHIPS CONTRIBUTED FOR USE, at market value 20,000 20,700
EXCHANGE MEMBERSHIPS OWNED, at cost (market value of $52,000 and $9,200) 50,300 6,300
OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost, less
accumulated depreciation and amortization of $1,403 and $1,250, respectively 1,839 1,355
INTANGIBLE ASSETS, net of accumulated amortization
Specialist Stock List 189,587 92,789
Trade Name 26,174 26,340
Goodwill 185,701 51,212
OTHER ASSETS 18,799 7,187
-------- --------
Total assets $930,554 $505,125
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable to brokers and dealers $ 16,866 $ 7,726
Payable to customers 6,094 --
Securities sold, but not yet purchased, at market value 59,057 36,900
Accounts payable and other accrued expenses 35,826 17,538
Income taxes payable 79,057 7,959
-------- --------
196,900 70,123
-------- --------
LONG TERM DEBT 361,556 115,822
-------- --------
SUBORDINATED LIABILITIES
Exchange memberships, at market value 20,000 20,700
Other subordinated indebtedness 46,508 46,508
-------- --------
66,508 67,208
-------- --------
5
<PAGE>
PREFERRED STOCK, $.01 par value, 10,000,000 shares authorized;
none issued and outstanding -- --
COMMON STOCK, $.01 par value, 200,000,000 shares authorized; 48,675,352 and
45,875,368 shares issued and outstanding for March 31, 2000 and
December 31, 1999 respectively 487 459
ADDITIONAL PAID-IN-CAPITAL 261,806 228,771
RETAINED EARNINGS 43,297 22,742
-------- --------
305,590 251,972
-------- --------
Total liabilities and stockholders' equity $930,554 $505,125
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
6
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(000S OMITTED EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
------------ Additional Retained
Shares Amount Paid-in Capital Earnings Total
------ ------ --------------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 45,875,000 $ 459 $228,771 $ 22,742 $251,972
Net income - - - 20,555 20,555
Compensation related to restricted stock units - - 746 - 746
Issuance of common stock for Webco acquisition 2,799,984 28 32,285 - 32,313
Issuance of common stock to directors 368 4 4
BALANCE, MARCH 31, 2000 48,675,352 $ 487 $261,806 $ 43,297 $305,590
</TABLE>
The accompanying notes are an integral part of this condensed
consolidated statement.
7
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,555 $ 1,581
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 2,984 968
Compensation expense related to stock based compensation 750 --
Change in assets and liabilities:
Securities purchased under agreements to resell (34,178) (19,900)
Receivable from brokers and dealers (81,881) 20,995
Receivable from customers (1,465) --
Corporate equities (15,522) (22,697)
United States Government obligations (17) (19)
Other securities owned (2,090) (140)
Other assets (11,611) (1,188)
Payable to brokers and dealers 9,140 39,150
Payable to customers 6,094 --
Securities sold, but not yet purchased 22,157 (48,454)
Payable to Henderson stockholders 1,484 --
Accounts payable and other accrued expenses 16,804 19,365
Taxes payable 9,412 --
--------- --------
Net cash used in operating activities (57,384) (10,339)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received from Webco acquisition 8,370 --
Net cash paid on Henderson acquisition (192,422) --
Payments for office equipment and leasehold improvements (498) (62)
--------- --------
Net cash used in investing activities (184,555) (62)
--------- --------
8
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash received from issuance of senior subordinated debt 245,693 --
Proceeds from contributions of capital -- 10,586
Payments for distributions of capital -- (4,627)
Issuance of subordinated indebtedness -- 2,185
--------- --------
Net cash provided by financing activities 245,693 8,144
--------- --------
Increase/(Decrease) in cash and cash equivalents 3,759 (2,257)
--------- --------
CASH AND CASH EQUIVALENTS, beginning of period 83,774 4,722
CASH AND CASH EQUIVALENTS, end of the period $ 87,553 $ 2,465
--------- --------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 5,493 $ 2,959
Income taxes 13,000 2,100
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Acquisitions:
Intangibles assets 171,936 --
Other assets 33,863
Liabilities 61,774 --
Common stock issuance 32,313 --
Increase in additional paid in capital related to stock based compensation 750 --
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
9
<PAGE>
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, LaB Investing Co. L.L.C., a New York limited liability
company ("LaB Investing"), LaBranche & Co., a New York limited partnership
("LaBranche"), and Henderson Brothers Holding, Inc., a Delaware corporation
("Henderson Brothers", collectively with the Holding Company, LaB Investing
and LaBranche, the "Company"). LaB Investing is the sole general partner of
LaBranche and has a partnership interest in LaBranche & Co. of 84.1%. The
Holding Company is the sole limited partner of LaBranche and owns the
remaining partnership interest of 15.9%. The Holding Company is also the sole
member of LaB Investing, thereby providing the Holding Company with 100.0%
ownership in LaBranche. LaBranche operates primarily as a specialist in
certain equity securities listed on the New York Stock Exchange, Inc.
("NYSE").
On August 24, 1999, the Company reorganized from partnership to
corporate form and completed its initial public offering. In that offering, the
Company sold 10,500,000 shares of common stock and received net proceeds of
$134.8 million. Concurrently with the offering, the Company issued $100.0
million aggregate principal amount of Senior Notes.
2. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
INFORMATION
The unaudited interim condensed consolidated financial information as of
March 31, 2000 and for the three months ended March 31, 2000 and 1999 are
presented in the accompanying condensed consolidated financial statements. The
unaudited interim condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 March 31, 2000 should be read
in conjunction with the audited consolidated financial statements and notes
thereto as of December 31, 1999 included in the Company's Form 10-K filed with
the Securities and Exchange Commission ("SEC") on March 30, 2000, as amended.
Results of the interim periods are not necessarily indicative of results to be
obtained for a full fiscal year.
3. INCOME TAXES
Prior to its conversion to corporate form, the Company operated as a
partnership and generally was not subject to U.S. federal and state income
taxes. The earnings of the Company, however, were subject to local
unincorporated business taxes. The members of LaB Investing and the limited
partners of LaBranche were taxed on their respective proportionate shares of
LaBranche's taxable income or loss. Effective with its conversion from
partnership to corporate form on August 24, 1999, the Company became subject to
U.S. federal, state and local corporate income taxes. The Company accounts for
taxes in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes", which requires the recognition of tax
benefits or expenses on temporary
10
<PAGE>
differences between the financial reporting and tax bases of its assets and
liabilities. Deferred tax assets and liabilities relate to stock-based
compensation, amortization of intangibles and differences in the accounting and
tax basis of certain assets acquired. The Company's effective tax rate for the
three months ended March 31, 2000 differs from the federal statutory rate
primarily due to non-deductible amortization of intangibles. The components of
provision for income taxes reflected on the condensed consolidated statements of
operations are set forth below (000's omitted):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
2000 1999
------- ------
<S> <C> <C>
Current federal, state and local taxes $18,634 $ --
Deferred tax provision 144 --
Unincorporated business tax 1,100 1,400
------- ------
Total provision for income taxes $19,878 $1,400
======= ======
</TABLE>
4. REGULATORY REQUIREMENTS
LaBranche, a specialist and member of the NYSE and subsidiary of the
Holding Company, is subject to SEC Rule 15c3-1 adopted and administered by the
NYSE and the SEC. 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 March 31, 2000 and as of December 31, 1999, LaBranche's net
capital, as defined under SEC Rule 15c3-1, was $275.7 million and $161.4
million, respectively, and exceeded minimum requirements by $273.0 million
and $159.9 million, respectively. LaBranche's aggregate indebtedness to net
capital ratio was .15 to 1 and .13 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 March 31, 2000 and as of December 31, 1999, LaBranche's NYSE
minimum required dollar amount of net liquid assets, as defined, was $284.3
million and $93.6 million, respectively, compared to actual net liquid
assets, as defined, of $293.1 million and $175.9 million, respectively.
5. ACQUISITIONS DURING FIRST QUARTER 2000
Effective March 2, 2000, the Holding Company acquired all the outstanding
capital stock of Henderson Brothers, which in turn wholly owns Henderson
Brothers, Inc., a specialist on the NYSE, for an aggregate purchase price of
approximately $228.4 million. The acquisition was accounted for under the
purchase method of accounting. The results of Henderson Brothers' operations
have been included in the Company's condensed consolidated financial
statements since March 2, 2000. The excess of purchase price over fair value
of approximately $204.9 million was allocated to intangible assets with
corresponding respective lives as follows:
<TABLE>
<CAPTION>
ORIGINAL
AMOUNT LIFE
<S> <C> <C>
Specialist Stock List $87.7 million 40 years
11
<PAGE>
Goodwill 117.2 million 15 years
------
$204.9 million
======
</TABLE>
Effective March 9, 2000, the Holding Company acquired, through a merger,
Webco Securities, Inc. ("Webco"), a specialist on the NYSE, for an aggregate
purchase price of $11.0 million in cash, $3.0 million in senior promissory
notes and 2.8 million shares of the Company's common stock. The acquisition
was accounted for under the purchase method of accounting. The results of the
NYSE specialist's operations formerly conducted by Webco have been included
in the Company's condensed consolidated financial statements since March 9,
2000. The excess of purchase price over fair value of approximately $28.8
million was allocated to intangible assets with corresponding respective
lives as follows:
<TABLE>
<CAPTION>
ORIGINAL
AMOUNT LIFE
<S> <C> <C>
Specialist Stock List $9.8 million 36 years
Goodwill 19.0 million 15 years
-----
$28.8 million
=====
</TABLE>
6. COMMITMENTS
During February 2000, LaBranche increased and extended its committed line
of credit with a U.S. commercial bank from $100.0 million to $200.0 million
through February 2, 2001.
Minimum rental commitments under existing non-cancelable leases for office
space and equipment are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
-----------------------
<S> <C>
2000 1,000,756
2001 1,082,358
2002 1,026,650
2003 807,750
2004 807,750
Thereafter 3,372,000
</TABLE>
These leases contain escalation clauses providing for increased rentals
based upon maintenance and tax increases.
7. EARNINGS PER SHARE
Earnings per share ("EPS") are computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic EPS is calculated by dividing net income 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. For purposes of determining weighted average shares outstanding
for periods prior to the Company's reorganization from partnership to corporate
form, the outstanding shares were determined based on the conversion ratio of
members' capital to common stock issued to the members upon reorganization.
12
<PAGE>
The computations of basic and diluted EPS are set forth below (000's
omitted, except per share data):
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
------- -------
<S> <C> <C>
Numerator for basic and
Diluted earnings per share
- net income $20,555 $ 1,581
Denominator for basic
Earnings per share -
Weighted-average number
of common shares 46,552 35,618
Restricted stock units 88 --
------- -------
Denominator for diluted
Earnings per share -
Weighted-average number
of common shares 46,640 35,618
Basic earnings per share $ 0.44 $ 0.04
Diluted earnings per share $ 0.44 $ 0.04
</TABLE>
Under the treasury stock method of accounting, restricted stock units
representing 976,747 shares of common stock and options to purchase an aggregate
of 1,200,000 shares of common stock were not included in the calculation of
diluted earnings per share due to their antidilutive effect. In addition,
restricted stock units representing 87,908 shares of common stock were included
in the calculation of diluted earnings per share due to their dilutive effect.
8. EMPLOYEE STOCK INCENTIVE AWARDS
On August 18, 1999, restricted stock units with respect to 1,059,000
shares of common stock were granted to employees who were not managing directors
with an issue cost of $0 to the employees and a fair market value of $14 per
share. In October 1999 and March 2000, respectively, restricted stock units for
an additional 3,600 and 2,055 shares of common stock were issued to two
different employees with an issue cost of $0 to the employees and a fair market
value of $9.50 and $13.69 per share. The restricted stock units, which are
subject to continuing service with the Company and other restrictions, will
generally vest in three annual installments commencing on the third anniversary
of the grant date. Compensation expense is being recognized over the five-year
vesting period on a straight-line basis. For the three months ended March 31,
2000, the Company recorded compensation expense and a credit to additional
paid-in capital of approximately $746,000 related to these restricted stock
units.
9. ISSUANCE OF SENIOR SUBORDINATED NOTES
In connection with the acquisitions of Henderson Brothers and Webco,
the Holding Company issued $250.0 million aggregate principal amount of Senior
Subordinated Notes (the "Notes") that bear interest at a rate of 12.0% annually
and mature on March 2, 2007. The carrying value of the Notes as of March 31,
2000 was $245.7 million. The discount on the Notes is being amortized as an
adjustment to interest expense over the life of the Notes. Debt issuance costs
incurred as a result of the Note offering were approximately $6.9 million, which
are also being amortized as an adjustment to interest expense over the life of
the Notes. Interest expense incurred for the period ended March 31, 2000 was
approximately $2.5 million. The indenture covering the Notes includes certain
covenants that, among other
13
<PAGE>
things, limit the Company's ability to borrow money, pay dividends or repurchase
stock, make investments, engage in transactions with stockholders and
affiliates, create liens on assets, and sell assets or engage in mergers and
consolidations except in accordance with certain specified conditions.
The Notes also require the Company, within 150 days after the end of
each fiscal year, to offer to redeem from all holders of the Notes a principal
amount equal to the Excess Cash Flow at a price equal to 103% of the principal
amount being offered for purchase plus accrued and unpaid interest, if any, to
the date of redemption. Each holder is entitled to be offered a pro rata share
based upon his or her ownership percentage of the outstanding Notes. Excess Cash
Flow is defined for this purpose as 40% of the amount by which the Company's
consolidated EBITDA exceeds the sum of the Company's interest expense, tax
expense, increase in net capital or net liquid asset requirements, capital
expenditures, any cash payments related to acquisitions of NYSE specialists and
any cash payments related to the Company's principal payments of certain other
indebtedness.
10. PRO FORMA FINANCIAL INFORMATION
The following 1999 pro forma consolidated results give effect to the
Company's August 1999 reorganization from partnership to corporate form and
related transactions, which include the acquisition of LaBranche's limited
partnership interests, and the application of the net proceeds from the
Company's August 1999 initial public offering and Senior Note offering (the
"Reorganization Transactions") as if the Reorganization Transactions occurred as
of January 1, 1999. In addition, the 1999 pro forma consolidated results give
effect to the acquisition of all the outstanding capital stock of Henderson
Brothers, the acquisition of Webco and the issuance of the Notes as if they
occurred as of January 1, 1999. The 2000 pro forma consolidated results give
effect to the March 2000 acquisitions of Henderson Brothers and Webco and the
issuance of the Notes as if they all occurred as of January 1, 2000. The pro
forma impact on revenues, pre-tax income and earnings are as follows (000's
omitted, except per share data):
<TABLE>
<CAPTION>
PERIODS ENDED
MARCH 31,
2000 1999
---- ----
(PRO-FORMA) (PRO-FORMA)
<S> <C> <C>
Revenues $91,332 $72,891
Pre-Tax Income 34,077 27,437
Net Income 16,317 12,921
EPS $ 0.34 $ 0.34
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY," "LABRANCHE" OR "WE"
SHALL MEAN LABRANCHE & CO INC. AND ITS WHOLLY-OWNED SUBSIDIARIES.
LABRANCHE'S QUARTERLY AND ANNUAL OPERATING RESULTS ARE AFFECTED BY A WIDE
VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL RESULTS,
INCLUDING: A DECREASE IN TRADING VOLUME ON THE NEW YORK STOCK EXCHANGE,
VOLATILITY IN THE EQUITY SECURITIES MARKET AND CHANGES IN THE VALUE OF OUR
SECURITIES POSITIONS. AS A RESULT OF THESE AND OTHER FACTORS, LABRANCHE MAY
EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR
ANNUAL BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS,
FINANCIAL CONDITION, OPERATING RESULTS, AND STOCK PRICE. AN INVESTMENT IN
LABRANCHE INVOLVES VARIOUS RISKS, INCLUDING THOSE MENTIONED ABOVE AND THOSE THAT
ARE DETAILED FROM TIME TO TIME IN LABRANCHE'S SEC FILINGS.
CERTAIN STATEMENTS CONTAINED IN THIS REPORT, INCLUDING WITHOUT LIMITATION,
STATEMENTS CONTAINING THE WORDS "BELIEVES", "INTENDS", "EXPECTS", "ANTICIPATES"
AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. READERS ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE, AND SINCE SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THE
ACTUAL RESULTS AND PERFORMANCE OF LABRANCHE AND THE SPECIALIST INDUSTRY MAY TURN
OUT TO BE MATERIALLY DIFFERENT FROM THE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. LABRANCHE ALSO
DISCLAIMS ANY OBLIGATION TO UPDATE ITS VIEW OF ANY SUCH RISKS OR UNCERTAINTIES
OR TO PUBLICLY ANNOUNCE THE RESULT OF ANY REVISIONS TO THE FORWARD-LOOKING
STATEMENTS MADE IN THIS REPORT.
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH LABRANCHE'S CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED IN THIS
REPORT.
REVENUES
Our revenues consist primarily of net gains earned from principal
transactions in securities for which we act as specialist, and commissions
revenue earned from specialist activities. Net gain on principal transactions
represents trading gains net of trading losses and transaction fees, and are
earned by us when we act as principal buying and selling our specialist stocks.
Commissions revenue consists of commissions we earn when acting as agent to
match buyers and sellers for limit orders executed by us on behalf of brokers
after a specified period of time; we do not earn commissions when we match
market orders. Other revenue consists of proprietary trading revenue, an
investment in a hedge fund and interest income earned on short-term investments.
For the three months ended March 31, 2000, net gain on principal transactions
represented 83.1% of our total revenues, commissions revenue represented 11.7%
of our total revenues, and other revenues represented 5.2% of our total
revenues.
EXPENSES
Our largest operating expense is compensation and benefits. Employee
compensation and benefits primarily consist of salaries and wages and
profitability-based compensation. Profitability-based compensation includes
compensation and benefits paid to managing directors, trading professionals and
other employees based on our profitability and each employee's overall
performance.
Prior to our reorganization from partnership to corporate form, a large
portion of the compensation payments to
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our managing directors had not been presented as part of operating expenses. The
aggregate amount of these compensation payments generally approximated LaB
Investing Co. L.L.C.'s interest in the income of LaBranche & Co., before
managing directors' compensation. Generally, these payments of compensation were
allocated among our managing directors based on their respective percentage
interests in the profits of LaB Investing Co. L.L.C. Subsequent to the
reorganization transactions, we include payments to managing directors in
employee compensation and benefits expense. Therefore, historical income before
managing directors' compensation, limited partnership interest in earnings of
subsidiary and provision for income taxes understates our operating costs.
INCOME TAXES
As a partnership, we generally were not subject to U.S. federal, state
and local income taxes, apart from the 4% New York City unincorporated business
tax. As a result of our restructuring to a corporation, we are subject to U.S.
federal, state and local income taxes.
ACQUISITIONS DURING THE THREE MONTHS ENDED MARCH 31, 2000
On March 2, 2000, we completed the acquisition of all the outstanding
capital stock of Henderson Brothers for approximately $228.4 million in cash. In
addition, on March 9, 2000, we acquired Webco through a merger for 2.8 million
shares of our common stock, $11.0 million in cash and senior promissory notes in
the aggregate principal amount of $3.0 million bearing interest of 10.0% per
annum. These acquisitions were accounted for under the purchase method and the
excess of cost over estimated fair value of the net assets acquired of $204.9
million for Henderson Brothers and $28.8 million for Webco was allocated to
intangible assets. The results of the specialist operations of each of these
acquired companies are included in our consolidated financial statements
beginning on the date of completion of its acquisition.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES
Total revenues increased 65.3% to $78.7 million for the three months ended
March 31, 2000, from $47.6 million for the same period in 1999, principally due
to the increase in revenue from net gain on principal transactions. Net gain on
principal transactions increased 79.7% to $65.4 million for the three months
ended March 31, 2000, from $36.4 million for the same period in 1999. This
increase was primarily due to an increase in share volume of our specialist
stocks traded on the NYSE. In addition, this increase was due to the Henderson
Brothers and Webco acquisitions on March 2, 2000 and March 9, 2000,
respectively, as a result of which we became the specialist for 147 additional
common stock listings, as well as increased share volume in principal trading in
our existing specialist stocks traded on the NYSE. Our share volume as principal
increased 100.0% to 4.2 billion shares for the three months ended March 31,
2000, from 2.1 billion shares for the same period in 1999.
Commissions revenue increased 10.8% to $9.2 million for the three months
ended March 31, 2000, from $8.3 million for the same period in 1999. This
increase was primarily due to an increase in share volume in which we acted as
agent. In addition, this increase was due to the increase in the number of our
common stock listings as a result of the Henderson Brothers and Webco
acquisitions on March 2, 2000 and March 9, 2000, respectively, and to increased
share
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volume in our existing specialist stocks traded on the NYSE. The share volume
executed by us as agent in our specialist stocks increased 22.2% to 1.1 billion
shares for the three months ended March 31, 2000, from .9 billion shares for the
same period in 1999.
Other revenue increased 36.7% to $4.1 million for the three months ended
March 31, 2000, from $3.0 million for the same period in 1999. This increase was
primarily due to an increase in our short-term interest income.
EXPENSES
Total expenses before managing directors' compensation and limited
partners' interest in earnings of subsidiary and provision for income taxes
increased 245.0% to $38.3 million for the three months ended March 31, 2000 from
$11.1 million for the same period in 1999.
Employee compensation and related benefits increased 385.1% to $22.8
million for the three months ended March 31, 2000, from $4.7 million for the
same period in 1999. This increase was primarily due to the inclusion of
managing director salary, incentive-based compensation and related benefits in
employee compensation subsequent to our reorganization, and due to the Henderson
Brothers and Webco acquisitions that resulted in our employment of 97 additional
individuals as of the respective acquisition dates. As a percentage of total
revenues, employee compensation increased to 29.0% of total revenues for the
three months ended March 31, 2000, from 9.9% of total revenues for the same
period in 1999.
Lease of exchange memberships expense increased 23.8% to $2.6 million for
the three months ended March 31, 2000, from $2.1 million for the same period in
1999. This increase was due to the increase in the number of leased memberships
from 43 to 46, and was also due to an increase in the average annual leasing
cost of the memberships from approximately $192,000 to $276,000 per membership.
As a percentage of total revenues, lease of exchange memberships expense
decreased to 3.3% for the three months ended March 31, 2000, from 4.4% for the
same period in 1999.
Interest expense increased 481.8% to $6.4 million for the three months
ended March 31, 2000, from $1.1 million for the same period in 1999. This
increase was primarily due to the issuance of $116.4 million of indebtedness
that began accruing interest from the date of our reorganization. In addition,
the increase was due to the issuance, in connection with the Henderson Brothers
acquisition, of $250.0 million of indebtedness that began accruing interest on
March 2, 2000.
Exchange, clearing and brokerage fees consist primarily of fees paid by us
as a specialist to the NYSE and to clearing houses. Fees paid by us to the NYSE
primarily include fees based on the volume of transactions executed as principal
and as agent, as well as a flat annual fee. Exchange, clearing and brokerage
fees expense increased 2.6% or $26,000, for the three months ended March 31,
2000, from the same period in 1999. This increase was relatively flat due to the
increase in volume for the period ended March 31, 2000 being offset by large
computer programming costs for the same period in 1999.
Amortization of intangibles expense increased 250.0% to $2.8 million for
the three months ended March 31, 2000, from $.8 million for the same period in
1999. Amortization of intangibles increased as a result of the $127.4 of
intangible assets recorded as a result of our acquisition of all the limited
partner interests in LaBranche & Co. in connection with our reorganization
transactions. In addition, the increase was due to the $233.7 million of
intangible
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assets recorded as a result of our acquisition of Henderson Brothers and Webco
on March 2, 2000 and March 9, 2000, respectively.
Other expenses increased 107.7% to $2.7 million for the three months ended
March 31, 2000, from $1.3 million for the same period in 1999. This increase was
primarily the result of additional fees incurred in connection with the increase
and extension of our line-of-credit with a U.S. commercial bank as well as an
increase in advertising and promotional costs.
INCOME BEFORE MANAGING DIRECTORS' COMPENSATION, LIMITED PARTNERS' EARNINGS IN
INTEREST OF SUBSIDIARY AND PROVISION FOR INCOME TAXES
Income before managing directors' compensation and limited partners'
interest in earnings of subsidiary and before provision for income taxes
increased 10.7% to $40.4 million for the three months ended March 31, 2000, from
$36.5 million for the same period in 1999. This increase was primarily due to
the increase in our total revenues which is offset by the inclusion of managing
director's salary and incentive based compensation in the employee compensation
and related benefits from the date of our reorganization on August 24, 1999.
INCOME TAXES
Provision for income taxes increased 1,321.4% to $19.9 million for the
three months ended March 31, 2000, from $1.4 million for the same period in
1999, as a result of the federal, state and local income taxes to which we are
subject as a result of our reorganization from partnership to corporate form as
well as our increased profitability.
LIQUIDITY
Prior to our initial public offering of common stock and our 9-1/2 %
Senior Notes offering, we had financed our business primarily through members'
capital and the issuance of subordinated indebtedness. As of March 31, 2000, we
had $930.6 million in assets, of which $87.5 million consisted of cash and
short-term investments, which primarily consist of commercial paper maturing
within thirty days.
In February 2000, we increased and extended our line-of-credit with a
U.S. commercial bank to $200.0 million from $100.0 million. Amounts outstanding
under the U.S. commercial bank credit facility are secured by our inventory of
specialist stocks and bear interest at U.S. commercial bank's broker loan rate.
To date, we have not utilized this facility. The credit facility matures on
February 2, 2001.
As of March 31, 2000, the subordinated debt of LaBranche & Co. totaled
$46.5 million (excluding subordinated liabilities related to contributed
exchange memberships). Of this amount, $35.0 million represented senior
subordinated debt privately placed pursuant to several note purchase agreements.
Of this $35.0 million, $20.0 million matures on September 15, 2002 and bears
interest at an annual rate of 8.17%, payable on a quarterly basis, and $15.0
million matures on June 3, 2008 and bears interest at an annual rate of 7.69%,
payable on a quarterly basis. These notes are senior to all other subordinated
notes of LaBranche & Co. subordinated debt totaling $11.5 million represents
junior subordinated debt of LaBranche & Co. placed with former limited partners
and members of LaB Investing Co. L.L.C., their family members and current
employees. This debt has maturities ranging from the second half of 2000 through
the first half of 2001, and bears interest at an annual rate between 8.0% and
10.0%, payable on a quarterly basis. The agreements relating to the junior
subordinated debt generally have automatic rollover provisions that extend the
maturities for an additional year, unless the lender provides notice at least
seven months prior to maturity.
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Concurrently with the initial public offering of our common stock and
our 9-1/2 % Senior Notes offering and as part of our reorganization from
partnership to corporate form, we acquired all the limited partnership interests
in LaBranche & Co. and the entire membership interest in LaB Investing Co.
L.L.C. for shares of our common stock, cash in the aggregate amount of $149.2
million and subordinated debt.
On August 24, 1999 we issued $100.0 million aggregate principal amount
of Senior Notes. The Senior Notes bear interest at a rate of 9-1/2 % 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 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.
At approximately the same time as our 9-1/2 % Senior Notes offering and
the initial public offering of our common stock, we issued a $16.0 million
senior note as partial payment for the acquisition of a certain limited
partnership interest in LaBranche & Co. The note is payable in three
installments of $6.0 million on the first anniversary of issuance, $5.0 million
on the second anniversary of issuance and $5.0 million on the third anniversary
of issuance, and bears interest at the annual rate of 9-1/2 %. LaBranche & Co.
also entered into a $350,000 cash subordinated loan agreement, bearing interest
at an annual rate of 8.0%, in connection with the acquisition of a certain
limited partner interest.
On March 2, 2000, we issued $250.0 million aggregate principal amount
of Senior Subordinated Notes. These notes bear interest at a rate of 12%
annually and mature in March 2007. The indenture covering these notes includes
certain covenants that, among other things, limit our ability to borrow money,
pay dividends or purchase our stock, make investments, engage in transactions
with stockholders and affiliates, create liens on our assets, and sell assets or
engage in mergers and consolidations.
The Senior Subordinated Notes also require the Company, within 150 days
after the end of each fiscal year, to offer to redeem from all holders of the
Notes a principal amount equal to the Excess Cash Flow at a price equal to 103%
of the principal amount being offered for purchase plus accrued and unpaid
interest, if any, to the date of redemption. Each holder is entitled to be
offered his pro rata share based upon his ownership percentage of the
outstanding Notes. Excess Cash Flow is defined for this purpose as 40% of the
amount by which our consolidated EBITDA exceeds the sum of our interest expense,
tax expense, increase in net capital or net liquid asset requirements, capital
expenditures, any cash amounts related to acquisitions of NYSE specialists or
any cash payments related to our payment at maturity of the principal amount of
our existing or certain other indebtedness.
In connection with the Webco acquisition, we issued unsecured senior
promissory notes in the aggregate principal amount of $3.0 million to the
stockholders of Webco. These notes bear interest at an annual rate of 10%. Of
the aggregate principal amount, $500,000 has already been repaid. The remaining
$2.5 million is due September 9, 2001 and is subject to set-off for any amounts
for which the former stockholders of Webco may be obligated to indemnify us for
any breaches of their or Webco's representations, warranties and covenants under
the merger agreement between the Company and Webco.
As a broker-dealer, LaBranche & Co. 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. 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
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from repaying subordinated borrowings, paying cash dividends, making loans to
any parent, affiliates or employees, or otherwise entering into transactions
which would result in a reduction of its total net capital to less than 150% of
its required minimum capital.
At March 31, 2000, LaBranche & Co. had net capital of $275.7 million,
which was $273.0 million in excess of its required net capital of $2.7 million.
The NYSE generally requires members registered as specialists to
maintain a minimum dollar regulatory capital amount in order to establish that
they can meet, with their own net liquid assets, their position requirement. As
a result of our acquisitions of Henderson Brothers and Webco, our net liquid
asset requirement is $284.3 million, which represents the previous combined net
liquid assets of the three firms as separate entities. As of March 31, 2000, our
actual net liquid assets were approximately $293.1 million.
Failure to maintain the required net capital and net liquid assets may
subject us to suspension or revocation of SEC registration or suspension or
expulsion by the NYSE.
During the quarter ended March 31, 2000, we contributed additional
capital to LaBranche & Co. in a net aggregate amount of approximately $306.0
million. Of this amount $267.5 million represented net assets of Henderson
Brothers and Webco which we contributed to LaBranche & Co. immediately upon our
acquisitions of those firms.
We currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our anticipated working capital,
regulatory capital and capital expenditure requirements through the end of 2000.
Following our acquisition of Henderson Brothers, the clearing
operations of Henderson Brothers are operated as a separate subsidiary. As a
clearing broker, pursuant to SEC Rule 15c3-1, Henderson Brothers is required to
maintain a minimum net capital of $250,000. As of March 31, 2000, Henderson
Brothers had net capital of $4.0 million, which was $3.8 million in excess of
its required minimum net capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A majority of our specialist related revenues are derived from trading as
principal. We also operate a proprietary trading desk separately from our NYSE
specialist operations, which represented 1.8% of our total revenues in the three
months ended March 31, 2000 and 3.6% of our total revenues in the same period in
1999. These activities involve primarily the purchase, sale or short sale of
securities for our own account. These activities are subject to a number of
risks, including risks of price fluctuations and rapid changes in the liquidity
of markets. In any period, we may incur trading losses in our specialist stocks
for a variety of reasons, including price declines of our specialist stocks,
lack of trading volume in our specialist stocks and the performance of our
specialist obligations. From time to time, we have large position concentrations
in securities of a single issuer or issuers engaged in a specific industry. In
general, because our inventory of securities is marked to market on a daily
basis, any downward price movement in these securities will result in a
reduction of our revenues and operating profits.
We have developed a risk management process that is intended to balance
our ability to profit from our specialist activities with our exposure to
potential losses. In addition, we have trading limits relating to our
proprietary trading activities.
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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.
21
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Stock Purchase Agreement, dated as of December 23,
1999, among the Registrant, Henderson Brothers
Holdings, Inc. and the stockholders listed on
Schedule A thereto (1)
10.2 Amendment to Stock Purchase Agreement, dated as of
February 1, 2000, by and among the Registrant,
Henderson Brothers Holdings, Inc., and the authorized
representatives of the previous listed on Schedule A
thereto (1)
27 Financial Data Schedule.
----------
(1) Previously filed as an exhibit to the company's Report on
Form 8-K dated March 2, 2000.
(b) REPORTS ON FORM 8-K.
(i) On February 8, 2000, we filed a Form 8-K, dated
February 4, 2000, with respect to the extension of
our line of credit with a U.S. commercial bank, under
Item 5 of Form 8-K.
(ii) On March 17, 2000, we filed a Form 8-K, dated March
2, 2000, with respect to our acquisition of Henderson
Brothers, under Item 2 of Form 8-K.
All other items of this report are inapplicable.
22
<PAGE>
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.
May 15, 2000 LABRANCHE & CO INC.
By: /s/ GEORGE M.L. LABRANCHE, IV
Name: George M.L. LaBranche, IV
Title: Chief Executive Officer and
President
23
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