<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 2000
REGISTRATION NO. 333-35922
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LABRANCHE & CO INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 6211 13-4064735
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
------------------------------
ONE EXCHANGE PLAZA
NEW YORK, NEW YORK 10006-3008
(212) 425-1144
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------------
GEORGE M.L. LABRANCHE, IV
LABRANCHE & CO INC.
ONE EXCHANGE PLAZA
NEW YORK, NEW YORK 10006-3008
(212) 425-1144
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------
WITH COPIES TO:
Jeffrey M. Marks, Esq.
Warren J. Nimetz, Esq.
Fulbright & Jaworski L.L.P.
666 Fifth Avenue
New York, New York 10103
Tel: (212) 318-3000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
------------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
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--------------------------------------------------------------------------------
[LOGO]
EXCHANGE OFFER FOR
$250,000,000
12% EXCHANGE NOTES DUE 2007
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TERMS OF EXCHANGE OFFER:
- We are offering to exchange the notes that we sold in a private offering
for new registered exchange notes.
- The exchange offer expires 5:00 p.m., New York City time, July 17, 2000,
unless extended.
- Tenders of outstanding notes may be withdrawn any time prior to the
expiration of the exchange offer.
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
- We believe that the exchange of notes will not be a taxable exchange for
U.S. federal income tax purposes.
- We will not receive any proceeds from the exchange offer.
- The terms of the exchange notes to be issued are identical to the
outstanding notes, except for the transfer restrictions and registration
rights relating to the outstanding notes. We are not making an offer to
exchange notes in any jurisdiction where the offer is not permitted.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 14.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES TO BE DISTRIBUTED IN THE
EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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JUNE 16, 2000
<PAGE>
TABLE OF CONTENTS
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PAGE
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Summary..................................................... 1
Risk Factors................................................ 14
Forward-Looking Statements.................................. 24
The Exchange Offer.......................................... 25
Use of Proceeds............................................. 34
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 36
Business.................................................... 47
Management.................................................. 63
Employment Agreements and Noncompetition Agreements......... 66
Incentive Awards to Our Employees........................... 68
Principal Stockholders...................................... 71
Certain Transactions........................................ 72
Description of Exchange Notes............................... 75
Description of Other Indebtedness........................... 116
United States Income Tax Considerations..................... 119
Plan of Distribution........................................ 119
Legal Matters............................................... 120
Experts..................................................... 120
Where You Can Find Additional Information................... 120
Index to Financial Statements............................... F-1
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i
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SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. THIS
PROSPECTUS INCLUDES SPECIFIC TERMS OF THE NOTES WE ARE OFFERING, AS WELL AS
INFORMATION REGARDING OUR BUSINESS AND DETAILED FINANCIAL DATA. WE ENCOURAGE YOU
TO READ THIS PROSPECTUS IN ITS ENTIRETY.
THE EXCHANGE OFFER
On March 2, 2000, we issued $250,000,000 aggregate principal amount of 12%
senior subordinated notes due 2007 to Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Smith Barney Inc. and ABN AMRO Incorporated in a private
offering. These initial purchasers placed the notes with institutional investors
in transactions exempt from the registration requirements of the Securities Act
of 1933 pursuant to Section 4(2) of, and Regulation S under, the Securities Act
and applicable state securities laws.
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
When we issued the initial notes, we entered into a Registration Rights
Agreement in which we agreed to file a registration statement of which this
prospectus is a part with the Securities and Exchange Commission relating to the
exchange offer for the initial notes on or prior to May 1, 2000 and to use our
best efforts to cause such registration statement to become effective as early
as possible, but not later than June 30, 2000.
THE EXCHANGE OFFER
Under the terms of the exchange offer, you are entitled to exchange the
initial notes for registered exchange notes with substantially identical terms.
You should read the discussion under the heading "Description of the Exchange
Notes" for further information regarding the exchange notes. As of this date,
there are $250.0 million aggregate principal amount of the initial notes
outstanding. The initial notes may be tendered only in integral multiples of
$1,000.
RESALE OF EXCHANGE NOTES
We believe that the exchange notes issued in the exchange offer may be
offered for resale, resold or otherwise transferred by you without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that:
- you are acquiring the exchange notes in the ordinary course of your
business;
- you are not participating, do not intend to participate, and have no
arrangement or understanding with any person to participate, in the
distribution of the exchange notes; and
- you are not an "affiliate" of ours.
If any of the foregoing is not true and you transfer any exchange note
without delivering a prospectus meeting the requirements of the Securities Act
or without an exemption from the registration requirements of the Securities
Act, you may incur liability under the Securities Act. We do not assume or
indemnify you against that liability.
If you are a broker-dealer and receive exchange notes for your own account
in exchange for initial notes that you acquired as a result of market making or
other trading activities, you must acknowledge that you will deliver a
prospectus meeting the requirements of the Securities Act upon any resale of the
exchange notes. A broker-dealer may use this prospectus in connection with an
offer to resell, resale or other transfer of the exchange notes. We will take
steps to ensure that the issuance of the exchange notes will comply with state
securities or "blue sky" laws.
1
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CONSEQUENCES OF FAILURE TO EXCHANGE INITIAL NOTES
If you do not exchange your initial notes for exchange notes, subject to
some exceptions, you will no longer be able to require us to register the
initial notes under the Securities Act. In addition, you will not be able to
offer or sell the initial notes unless:
- they are registered under the Securities Act (and we will have no
obligation to register them, except for some limited exceptions), or
- you offer or sell them under an exemption from the requirements of, or in
a transaction not subject to, the Securities Act.
EXPIRATION DATE
The exchange offer will expire at 5:00 p.m., New York City time, on
July 17, 2000 unless we decide to extend the expiration date.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will accrue interest at 12% per year, beginning on the
last date we paid interest on the initial notes exchanged. We will pay interest
on the exchange notes on March 1 and September 1 of each year.
CONDITIONS TO THE EXCHANGE OFFER
We will proceed with the exchange offer, so long as:
- the exchange offer does not violate any applicable law or applicable
interpretation of law of the staff of the Securities and Exchange
Commission;
- no litigation materially impairs our ability to proceed with the exchange
offer; and
- we obtain all governmental approvals we deem necessary for the exchange
offer.
PROCEDURES FOR TENDERING INITIAL NOTES
If you wish to accept the exchange offer, you must:
- complete, sign and date the letter of transmittal, or a facsimile of it,
and
- send the letter of transmittal and all other documents required by it,
including the initial notes to be exchanged, to Firstar Bank, N.A., as
exchange agent, at the address set forth on the cover page of the letter
of transmittal. Alternatively, you can tender your initial notes by
following the procedures for book-entry transfer, as described in this
document.
GUARANTEED DELIVERY PROCEDURE
If you wish to tender your initial notes and you cannot get your required
documents to the exchange agent by the expiration date, you may tender your
initial notes according to the guaranteed delivery procedure described under the
heading "The Exchange Offer--Guaranteed Delivery Procedure."
WITHDRAWAL RIGHTS
You may withdraw the tender of your initial notes at any time prior to
5:00 p.m., New York City time, on the expiration date of the exchange offer. To
withdraw, you must send a written or facsimile transmission notice of withdrawal
to the exchange agent at its address set forth herein under "The Exchange
Offer--Exchange Agent" by 5:00 p.m., New York City time, on the expiration date.
2
<PAGE>
ACCEPTANCE OF INITIAL NOTES AND DELIVERY OF EXCHANGE NOTES
If all the conditions to the exchange offer are satisfied or waived, we will
accept any and all initial notes that are properly tendered in the exchange
offer prior to 5:00 p.m., New York City time, on the expiration date. We will
deliver the exchange notes promptly after the expiration date.
TAX CONSIDERATIONS
We believe that the exchange of initial notes for exchange notes will not be
a taxable exchange for federal income tax purposes. You should consult your tax
adviser about the tax consequences of the exchange as they apply to your
individual circumstances.
EXCHANGE AGENT
Firstar Bank, N.A. is serving as exchange agent for the exchange offer.
FEES AND EXPENSES
We will bear all expenses related to consummating the exchange offer and
complying with the Registration Rights Agreement.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes. We used the proceeds from the sale of the initial notes to fully fund our
acquisition of Henderson Brothers Holdings, Inc. and to partially fund our
acquisition of Webco Securities, Inc., each a NYSE specialist firm, and to pay
fees and expenses related to both acquisitions.
LABRANCHE & CO INC.
Founded in 1924, our specialist LaBranche & Co. is one of the oldest and
largest specialist firms on the New York Stock Exchange. In 1999, the stocks for
which we acted as specialist accounted for approximately 14.5% of the dollar
volume of common stock traded on the NYSE, constituting one of the largest
market shares among specialist firms. As of December 31, 1999, we acted as
specialist in 271 common stock listings, including 47 of the S&P 500 and five of
the 30 companies comprising the Dow Jones Industrial Average. Our five Dow
stocks are AT&T, ExxonMobil, Merck, Minnesota Mining & Manufacturing and SBC
Communications.
All trading of securities on the NYSE is conducted through an auction
process managed by the specialist for each security. The specialist is a
broker-dealer who is granted the franchise by the NYSE to conduct the auction in
particular stocks and is assigned the role to maintain a fair and orderly market
in its specialist stocks. As of December 31, 1999, there were 25 specialist
units as compared with 36 at December 31, 1995. The substantial majority of
trades in NYSE-listed stocks takes place on the floor of the NYSE and is handled
by specialist firms. Specialist firms generate revenues by earning commissions
on trades they execute as agent and by profiting in trades they execute as
principal, in each case in their specialist stocks.
Our business has grown considerably during the past five years. The total
annual share volume on the NYSE of stocks for which we act as specialist has
increased from approximately 4.0 billion in 1995 to nearly 25.7 billion in 1999,
representing a compound annual growth rate of 59.2%. During the same period, our
annual revenues increased from $37.1 million to $201.0 million, representing a
compound annual growth rate of 52.6%. We have accomplished our growth both
internally and through selective acquisitions. Since the March 1997
implementation of a new NYSE allocation process which allows listing companies
to make the final selection of their specialist, we have become the specialist
for 53 new common stock listings. Of this number, eleven were added since the
completion of the initial
3
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public offering of our common stock in August 1999. In addition, we acquired
three specialist operations from 1997 through 1999, which added 131 new common
stock listings to our firm. The acquisitions of Henderson Brothers and Webco,
which we completed in March 2000, are described below. See "--Recent
Acquisitions"
Our revenues are driven primarily by the volume of trading on the NYSE. The
NYSE is currently the largest securities market in the world. The market
capitalization of all U.S. shares listed on the NYSE at December 31, 1999 was
approximately $10.8 trillion, representing approximately 71.5% of the market
capitalization of all shares publicly traded on U.S. national markets. The
NYSE's average daily trading volume increased from approximately 346.1 million
shares in 1995 to approximately 809.2 million shares in 1999, representing a
compound annual growth rate of 23.7%. We believe that this increase in NYSE
trading volume is due to a number of factors including:
- an increase in the amount of funds invested in equity securities;
- an increase in the number of NYSE-listed stocks; and
- an increase in the use of computerized trading strategies.
The NYSE has announced that it will be prepared to trade in decimals by
June 2000. We believe that this development, together with other changes under
consideration by the NYSE, including longer trading days, will likely contribute
to additional growth in NYSE trading volume.
We believe our success is due to our:
- leading position in the specialist market;
- diverse and high quality specialist stocks;
- strong market-making skills;
- innovative customer-oriented services; and
- completed acquisitions.
Our strategies for growing our revenues and profits are to:
- aggressively pursue new listings; and
- capitalize on pending and future acquisitions.
RECENT ACQUISITIONS
HENDERSON BROTHERS
On March 2, 2000, we acquired Henderson Brothers Holdings, Inc., referred to
as Henderson Brothers, which owns Henderson Brothers, Inc., a specialist firm on
the NYSE, and Henderson Brothers Futures Corporation, an inactive subsidiary.
Under the terms of the agreement, we acquired all the outstanding capital stock
of Henderson Brothers for approximately $228.4 million in cash. The proceeds of
our offering and issuance of the initial notes were used to fully fund the
acquisition of Henderson Brothers, to partially fund the acquisition of Webco
and to pay fees and expenses related to both acquisitions. As part of the
Henderson Brothers acquisition, we entered into employment agreements with 14
specialists and an administrative officer formerly employed by Henderson
Brothers. We also entered into consulting agreements with two former Henderson
Brothers stockholders pursuant to which we are paying an aggregate of
$5.0 million over five years.
In connection with the Henderson Brothers acquisition, we:
- acquired an additional 19 NYSE memberships, all of which are owned by
individual specialists but had been financed by Henderson Brothers;
4
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- hired an additional 84 employees, 19 of whom are specialists, 41 of whom
are specialist trading assistants and 24 of whom are other administrative,
financial and operational personnel; and
- acquired an additional 8,650 feet of office space, which had a $216,726
annual lease payment in 1999.
In addition, as part of the acquisition, we also acquired and are continuing
the clearing operations of Henderson Brothers. As a clearing broker, we are
responsible for the clearance and settlement of transactions effected by us or
the introducing broker. We only clear and settle transactions executed by the
introducing brokers; we do not execute these transactions.
Established in 1861, Henderson Brothers first registered as a NYSE
specialist in 1948 and was the eighth largest specialist firm on the NYSE in
terms of common stock listings at year end 1999. Henderson Brothers acted as
specialist in 113 common stock listings, including 26 of the S&P 500 and two
companies included in the Dow Jones Industrial Average. These listings include
American Express Company, Ford Motor Company, J.P. Morgan & Co., Lehman Brothers
Holdings, Inc., Morgan Stanley Dean Witter & Co. and Schering-Plough
Corporation. Henderson Brothers had $82.1 million of revenues and $29.1 million
of EBITDA in 1999.
WEBCO
On March 9, 2000, we acquired, through a merger, Webco Securities, Inc.,
referred to as Webco, another specialist firm on the NYSE, for approximately
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, each bearing
an interest rate of 10.0% per annum. As part of the acquisition, we entered into
employment agreements with three specialists employed by Webco.
In connection with the Webco acquisition, we:
- acquired an additional 3 NYSE memberships, each of which is owned by an
individual specialist but had been financed by Webco;
- hired an additional 13 employees, 5 of whom are specialists, 8 of whom are
specialist trading assistants; and
- acquired an additional 2,057 feet of office space, which had a $51,425
annual lease payment in 1999.
Established in 1981, Webco was a specialist in 34 common stock listings,
including First Union Corporation, Manor Care, Inc. and Nokia Corporation. Webco
had $13.7 million of revenues and $4.2 million of EBITDA for the year ended
October 31, 1999.
Simultaneously with the acquisition of each of Henderson Brothers and Webco,
we transferred its specialist operations to our subsidiary LaBranche & Co. The
clearing operations of Henderson Brothers are operated by us as a separate
subsidiary.
Following the completion of the acquisitions of Henderson Brothers and
Webco, we are the largest specialist firm on the NYSE in terms of annual dollar
and share volume traded. As of May 31, 2000, we were the specialist for 404
common stock listings, including 71 of the S&P 500 and seven companies included
in the Dow Jones Industrial Average.
------------------------
On a pro forma basis, we would have generated $296.9 million of revenues and
$162.4 million of EBITDA in 1999 after giving effect to:
- our reorganization transactions in August 1999 (more fully described
below); and
- our acquisitions of Henderson Brothers and Webco.
5
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This compares to pro forma revenues of $137.9 million and pro forma EBITDA
of $81.3 million in 1998 after giving effect to:
- our reorganization transactions in August 1999; and
- our acquisition of Fowler Rosenau & Geary LLC in July 1998.
OUR REORGANIZATION TRANSACTIONS
In August 1999 we reorganized from partnership to corporate form.
Simultaneously with the reorganization, we consummated the following related
transactions:
- we issued (1) $100.0 million of 9 1/2% Senior Notes due 2004 and
(2) 10,500,000 shares of our common stock at an initial public offering
price of $14.00 per share.
- we issued (1) $16.0 million of 9 1/2% senior unsecured indebtedness and
(2) $350,000 of 8.0% subordinated indebtedness in connection with the
redemption of limited partnership interests of LaBranche & Co.
- we granted (1) options to purchase an aggregate of 1,200,000 shares of our
common stock to our executive officers and (2) restricted stock units for
1,059,000 shares of our common stock to employees who were not managing
directors at that time, in each case, under our Equity Incentive Plan.
Our reorganization from partnership to corporate form, together with these
related transactions, are referred to as the Reorganization Transactions.
6
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DESCRIPTION OF EXCHANGE NOTES
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Issuer....................................... LaBranche & Co Inc., a company incorporated
in the State of Delaware.
Securities Offered........................... $250,000,000 principal amount of 12% exchange
notes due 2007.
Maturity..................................... March 2, 2007.
Interest Payment Dates....................... March 1 and September 1 commencing on
September 1, 2000; provided, however, that
the final interest payment date will be the
maturity date instead of March 1, 2007.
Sinking Fund................................. None.
Redemption................................... The exchange notes are not redeemable prior
to maturity.
Ranking...................................... The exchange notes will be senior
subordinated unsecured general obligations of
LaBranche & Co Inc. and will rank junior in
right of payment to:
- all existing and future senior debt of
LaBranche & Co Inc., including the 9 1/2%
Senior Notes we issued in August 1999 and
other senior indebtedness; and
- all existing and future indebtedness of any
and all of our subsidiaries, including the
credit facility and subordinated
indebtedness of our subsidiary, LaBranche &
Co.
Subject to some limitations, we may issue
additional indebtedness which may be senior
to the exchange notes. As of March 31, 2000,
our total consolidated indebtedness was
$415.5 million, excluding subordinated
liabilities relating to contributed exchange
memberships. For more details, see
"Description of Exchange Notes."
Excess Cash Flow Offer....................... If we have Excess Cash Flow for any fiscal
year commencing with fiscal year 2000, we
will be required, subject to the restricted
payments covenants contained in the indenture
governing the Senior Notes and the note
purchase agreements relating to LaBranche &
Co.'s existing senior subordinated
indebtedness and certain other exceptions and
limitations, to make an offer to purchase the
exchange notes in an aggregate principal
amount equal to the Excess Cash Flow at a
price equal to 103% of the principal amount
plus accrued and unpaid interest, if any, to
the
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date of purchase. See "Description of
Exchange Notes--Excess Cash Flow Offer."
Change of Control............................ If we sell substantially all our assets or
experience specific kinds of changes of
control, we must offer to repurchase the
exchange notes at a price in cash equal to
101% of their principal amount, plus accrued
and unpaid interest, if any, to the date of
purchase.
Basic Covenants of the Indenture............. The exchange notes will be issued under an
Indenture (the "Indenture") with Firstar
Bank, N.A. The Indenture will contain certain
covenants that, among other things, will
limit our ability to:
- borrow money;
- pay dividends on our stock or purchase our
stock;
- make investments in certain subsidiaries;
- engage in transactions with stockholders
and affiliates;
- create liens on our assets; and
- sell assets or engage in mergers and
consolidations.
Use of Proceeds.............................. For more details, see "Description of
Exchange Notes--Certain Covenants." We will
not receive any proceeds from the issuance of
the exchange notes. We used the proceeds from
the sale of the initial notes to fully fund
our acquisition of Henderson Brothers and to
partially fund our acquisition of Webco and
to pay fees and expenses related to both
acquisitions.
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ABOUT RISK FACTORS
For a discussion of some risk factors that should be considered by
prospective investors in connection with an investment in the exchange notes,
see "Risk Factors."
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data set forth below for the
three months ended March 31, 1999 and 2000 are unaudited. The summary historical
consolidated financial data set forth below for the years ended December 31,
1997, 1998 and 1999 have been derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The summary
historical consolidated financial data set forth below for the years ended
December 31, 1995 and 1996 have been derived from our consolidated financial
statements, audited by Arthur Andersen LLP, independent public accountants,
which are not included elsewhere in this prospectus. The summary historical
consolidated financial data set forth below should be read in conjunction with
the consolidated financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere in this prospectus.
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<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT OTHER DATA) (IN THOUSANDS, EXCEPT
OTHER DATA)
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Statement of Operations
Data:
Revenues:
Net gain on principal
transactions........... $26,290 $37,113 $47,817 $ 95,048 $150,971 $36,366 $65,391
Commissions.............. 7,736 10,180 15,186 26,576 37,222 8,270 9,185
Other.................... 3,147 2,643 4,637 4,787 12,844 2,985 4,114
------- ------- ------- -------- -------- ------- -------
Total revenues....... $37,173 $49,936 $67,640 $126,411 $201,037 $47,621 $78,690
======= ======= ======= ======== ======== ======= =======
Income before managing
directors' compensation,
limited partners'
interest in earnings of
subsidiary and provision
for income taxes......... $26,254 $32,783 $47,732 $ 91,635 $134,468 $36,526 $40,433
======= ======= ======= ======== ======== ======= =======
Other Data:
Number of our common stock
listings................. 125 132 202 284 271 278 411
Total share volume on the
NYSE of our specialist
stocks (in billions)..... 4.0 5.6 10.9 20.0 25.7 6.2 14.3
Total dollar volume on the
NYSE of our specialist
stocks (in billions)..... $ 133.3 $ 201.4 $ 476.7 $ 950.4 $1,209.3 $ 330.5 $ 666.7
NYSE average daily trading
share volume (in
millions)................ 346.1 412.0 526.9 673.6 809.2 799.8 1,088.6
Ratio of earnings to fixed
charges (A).............. 32.8x 20.0x 10.7x 9.0x 10.0x 3.6x 7.0x
</TABLE>
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(A) For purposes of this ratio, earnings represent pre-tax income plus limited
partners' interest in earnings of subsidiary and fixed charges. Fixed
charges represent interest expensed and capitalized, as well as amortized
premiums, discounts and capitalized expenses related to indebtedness.
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Prior to August 24, 1999, we operated as a partnership and generally
distributed all our income after unincorporated business taxes to our managing
directors as compensation and to our partners. As of August 24, 1999, we
reorganized our firm from partnership to corporate form and redeemed limited
partnership and membership interests. As a corporation, we include payments to
managing directors as part of compensation and benefits. Therefore, historical
income before managing directors' compensation, limited partners' interest in
earnings of subsidiary and unincorporated business taxes understates our
expected operating costs after August 24, 1999. See "--Certain Transactions" and
"--Summary Pro Forma Consolidated Financial Data." As a partnership, we
generally were not subject to U.S. federal, state and local income taxes, apart
from unincorporated business taxes. As a consequence of our reorganization to a
corporation, we are subject to U.S. federal, state and local income taxes.
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SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
Set forth below are consolidated statements of operations data for the year
ended December 31, 1999 and for the period ended March 31, 2000:
(1) on a historical basis;
(2) on a pro forma basis to give effect to the reorganization transactions
as if they had occurred on January 1, 1999;
(3) on a pro forma basis to give effect to the following transactions as if
they had occurred on January 1, 1999:
- the reorganization transactions and
- our acquisitions of Henderson Brothers and Webco, including (x) the
application of the proceeds of our issuance of the initial notes to the
payment of the purchase price for the Henderson Brothers acquisition and a
portion of the cash purchase price of the Webco acquisition and (y) the
issuance of senior promissory notes and common stock and the payment of
the remaining cash portion of the purchase price in connection with the
acquisition of Webco (these acquisitions and related transactions are
referred to as the acquisition transactions); and
(4)on a pro forma basis to give effect to our acquisitions of Henderson
Brothers and Webco as if they had occurrred on January 1, 2000,
- including (x) the application of the proceeds of our issuance of the
initial notes to the payment of the purchase price for the Henderson
Brothers acquisition and a portion of the cash purchase price of the Webco
acquisition and (y) the issuance of senior promissory notes and common
stock and the payment of the remaining cash portion of the purchase price
in connection with the acquisition of Webco (these acquisitions and
related transactions are referred to as the acquisition transactions);
The pro forma consolidated financial information has been prepared by our
management and is not necessarily indicative of the results that would have been
achieved had the above-described transactions occurred on the dates indicated or
that may be achieved in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999 PRO FORMA
----------------- FOR THE
PRO FORMA REORGANIZATION
FOR THE TRANSACTIONS
REORGANIZATION AND ACQUISITION
HISTORICAL TRANSACTIONS TRANSACTIONS
---------- ----------------- ---------------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Net gain on principal transactions...... $150,971 $150,971 $210,915
Commissions............................. 37,222 37,222 66,599
Other................................... 12,844 12,844 19,355
-------- -------- --------
Total revenues.................... 201,037 201,037 296,869
-------- -------- --------
Expenses:
Employee compensation and benefits...... 34,268 59,482(A) 104,460(A)(F)
Lease of exchange memberships........... 8,416 8,416 8,808
Interest................................ 8,286 15,144(B) 46,712(B)(G)(H)
Amortization of intangibles............. 4,623 6,866(C) 18,513(C)(I)
Exchange, clearing and brokerage fees... 3,709 3,709 6,083
Other operating expenses.................. 7,267 7,267 16,138
-------- -------- --------
</TABLE>
11
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999 PRO FORMA
----------------- FOR THE
PRO FORMA REORGANIZATION
FOR THE TRANSACTIONS
REORGANIZATION AND ACQUISITION
HISTORICAL TRANSACTIONS TRANSACTIONS
---------- ----------------- ---------------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C>
Total operating expenses.................. 66,569 100,884 200,714
-------- -------- --------
Income before managing directors'
compensation, limited partners interest
in earnings of subsidiary and provision
for income taxes........................ 134,468 100,153 96,155
Managing directors' compensation.......... 56,191 --(D) --(D)
-------- -------- --------
Income before limited partners' interest
in earnings of subsidiary and provision
for income taxes........................ 78,277 100,153 96,155
Limited partners' interest in earnings of
subsidiary.............................. 25,344 --(E) --(E)
-------- -------- --------
Income before provision for income
taxes................................... 52,933 100,153 96,155
-------- -------- --------
Provision for income taxes................ 23,899 46,165(J) 52,258(J)
-------- -------- --------
Net income................................ $ 29,034 $ 53,988 $ 43,897
======== ======== ========
EBITDA(K)................................. $ 91,911 $122,888 $162,361
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 2000
--------------
PRO FORMA
FOR THE
ACQUISITION
HISTORICAL TRANSACTIONS
---------- --------------
(IN THOUSANDS, EXCEPT OTHER
DATA)
<S> <C> <C>
Statement of Operations Data:
Revenues:
Net gain on principal transactions........................ 65,391 74,541
Commissions............................................... 9,185 12,807
Other..................................................... 4,114 3,984
------- --------
Total revenues...................................... 78,690 91,332
------- --------
Expenses:
Employee compensation and benefits........................ 22,782 32,594(F)
Lease of exchange memberships............................. 2,557 2,557
Interest.................................................. 6,447 11,611(G)(H)
Amortization of intangibles............................... 2,754 4,750(I)
Exchange, clearing and brokerage fees..................... 1,033 1,478
Other operating expenses.................................... 2,684 4,267
------- --------
Total operating expenses.................................... 38,257 57,256
------- --------
Income before managing directors' compensation, limited
partners interest in earnings of subsidiary and provision
for income taxes.......................................... 40,433 34,077
Managing directors' compensation............................ -- --
------- --------
Income before limited partners' interest in earnings of
subsidiary and provision for income taxes................. 40,433 34,077
</TABLE>
12
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 2000
--------------
PRO FORMA
FOR THE
ACQUISITION
HISTORICAL TRANSACTIONS
---------- --------------
(IN THOUSANDS, EXCEPT OTHER
DATA)
<S> <C> <C>
Limited partners' interest in earnings of subsidiary........ -- --
------- --------
Income before provision for income taxes.................... 40,433 34,077
------- --------
Provision for income taxes.................................. 19,878 17,760
------- --------
Net income.................................................. 20,555 16,317
======= ========
EBITDA(K)................................................... 49,634 50,438
======= ========
</TABLE>
------------------------
(A) Employee compensation and benefits was adjusted to reflect managing
directors' compensation based on the compensation policies which were
implemented at the time of the reorganization transactions.
(B) Reflects pro forma repayment of $5.0 million of subordinated liabilities
owed to a limited partner and reverses the related interest expense.
Reflects the issuance of 9 1/2% Senior Notes of $100.0 million, the issuance
of a $16.0 million note and $350,000 of subordinated indebtedness and the
related interest expense.
(C) Reflects amortization of intangibles related to redemption of limited
partners' interests.
(D) Managing directors' compensation was adjusted to reverse the actual amounts
previously recorded.
(E) Reflects reversal of limited partners' interest in earnings of subsidiary.
(F) Employee compensation and benefits was adjusted to reflect the compensation
arrangements made with Henderson Brothers and Webco based upon the new
employment contracts which were effective upon completion of the
acquisitions.
(G) Reflects the issuance of $250.0 million of principal amount of initial notes
net of a discount of approximately $4.3 million, $3.0 million aggregate
principal amount of senior promissory notes issued to Webco stockholders,
assuming the repayment of $500,000 aggregate principal amount of such senior
promissory notes, and the related interest expense.
(H) Reflects reversal of the interest expense related to the repayment of
subordinated notes of Henderson Brothers.
(I) Reflects amortization of intangibles related to the acquisitions of
Henderson Brothers and Webco.
(J) Reflects federal, state and local income taxes at an estimated tax rate of
approximately 46%.
(K) EBITDA means net income (loss) before interest expense, taxes, depreciation
and amortization. EBITDA is not a generally accepted accounting principles
measure and may not be comparable to similarly titled items of other
companies. You should not consider EBITDA as an alternative to net income
(loss) or any other generally accepted accounting principles measure of
performance as an indicator of our operating performance or as a measure of
liquidity. EBITDA does not represent funds available for management's
discretionary use because certain future cash expenditures are not reflected
in the EBITDA presentation. Some investors use these data as an indicator of
a company's ability to service debt.
13
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide to make
an investment in the exchange notes. The risks and uncertainties described below
are some of the material risks that our company faces.
IF YOU DO NOT PARTICIPATE IN THE EXCHANGE OFFER, YOU WILL CONTINUE TO BE SUBJECT
TO TRANSFER RESTRICTIONS.
If you do not exchange your initial notes for exchange notes pursuant to the
exchange offer, you will continue to be subject to the restrictions on transfer
of your initial notes. We do not intend to register the initial notes under the
Securities Act. To the extent initial notes are tendered and accepted in the
exchange offer, the trading market, if any, for the initial notes would be
adversely affected. See "The Exchange Offer."
A LIQUID TRADING MARKET FOR THE EXCHANGE NOTES MAY NOT DEVELOP.
There has not been an established trading market for the exchange notes. The
initial notes were offered and sold only to qualified institutional buyers and
to persons outside the United States and are subject to restrictions on
transfer.
The initial notes were designated as eligible for trading in The Portal
Market. However, we did not apply for listing of the initial notes and do not
intend to apply for listing of the exchange notes, on any securities exchange or
for quotation through the National Association of Securities Dealers Automated
Quotation System.
The liquidity of any market for the exchange notes will depend upon the
number of holders of the exchange notes, our performance, the market for similar
securities, the interest of securities dealers in making a market in the
exchange notes and other factors. A liquid trading market may not develop for
the exchange notes.
WE HAVE SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS.
We have significantly increased our debt as a result of the sale of the
initial notes. As of April 27, 2000, we had approximately $415.5 million of
consolidated aggregate principal amount of outstanding debt. These calculations
of debt exclude subordinated liabilities related to contributed exchange
memberships. LaBranche & Co. also has the ability to borrow $200.0 million under
a revolving credit facility with The Bank of New York which was originally
entered into in June of 1998 and increased and extended in both June 1999 and
February 2000. We may also need to incur additional debt in the future for
working capital or to complete acquisitions, even though our principal credit
facility imposes some limits on our ability to do so. We are highly leveraged
and our high level of indebtedness could have important consequences to you,
which include the following:
- our ability to obtain additional financing to fund our growth strategy,
working capital, capital expenditures, debt service requirements or other
purposes may be impaired;
- our ability to use operating cash flow in other areas of our business will
be limited because we must dedicate a substantial portion of these funds
to make principal and interest payments;
- we may not be able to compete with others who are not as highly leveraged;
and
- our substantial degree of leverage may limit our flexibility to adjust to
changing market conditions, changes in our industry and economic
downturns.
Our ability to satisfy our debt obligations will depend upon our future
operating performance and our ability to obtain additional debt or equity
financing. Prevailing economic conditions and financial, business and other
factors, many of which are beyond our control, will affect our ability to make
these payments. If in the future we cannot generate sufficient cash from
operations to meet our debt obligations, we will need to refinance our debt
obligations, obtain additional financing or sell assets. We
14
<PAGE>
cannot assure you that our business will generate cash flow or that we will be
able to obtain funding sufficient to satisfy our debt service requirements.
Further, LaBranche & Co. is a broker-dealer and a specialist regulated by
the SEC and the NYSE. Such regulations include strict rules regarding capital
requirements and approval requirements for withdrawals of capital from, and in
some cases, other distributions by, the broker-dealer. These regulations could
prevent us from obtaining funds necessary to satisfy our obligations to pay
interest on or repay our indebtedness.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE EXCHANGE NOTES WILL BE JUNIOR TO OUR
OUTSTANDING SENIOR DEBT AND EFFECTIVELY SUBORDINATED TO THE DEBT OF OUR
SUBSIDIARIES.
The exchange notes will be subordinated in right of payment to the 9 1/2%
Senior Notes we issued in August 1999 and other senior debt of LaBranche &
Co Inc., including the senior promissory notes issued as part of the Webco
acquisition and our existing and future secured indebtedness to the extent of
the assets securing such indebtedness. In addition, because we, LaBranche &
Co Inc., are a holding company with no operations of our own, we are dependent
on distributions from LaBranche & Co. and LaB Investing Co. L.L.C. to pay
interest and principal on our debt. The notes will be effectively subordinated
to all the indebtedness of LaBranche & Co. and LaB Investing Co. L.L.C.,
including subordinated debt. This structural subordination may adversely affect
our ability to service our debt and could result in insolvency or other
circumstances that could adversely affect our ability to satisfy our payment
obligations with respect to the notes.
Further, LaBranche & Co. is a broker-dealer and a specialist regulated by
the Securities and Exchange Commission and the NYSE. Such regulations include
strict rules regarding capital requirements and approval requirements for
withdrawals of capital from, and in some cases, other distributions by, the
broker-dealer. These regulations could prevent us from obtaining funds necessary
to satisfy our obligations to pay interest on or repay our indebtedness,
including the notes. See "--We are subject to net capital requirements" and
"Business--Operations--Regulatory Matters" for a discussion of our net capital
requirements.
OUR ABILITY TO TAKE ACTIONS MAY BE RESTRICTED BY THE TERMS OF OUR INDEBTEDNESS.
The covenants in our existing debt agreements, including our Credit
Agreement, the note purchase agreements relating to LaBranche & Co.'s existing
senior subordinated indebtedness, the indenture governing our senior notes and
the indenture governing our exchange notes and any future financing agreements,
may adversely affect our ability to finance future operations or capital needs
or to engage in other business activities. These covenants limit or restrict our
ability and the ability of our subsidiaries to:
- incur additional debt;
- pay dividends and make distributions;
- repurchase our securities;
- make certain investments;
- create liens on our assets;
- transfer or sell assets;
- enter into transactions with affiliates;
- issue or sell stock of subsidiaries; or
- merge or consolidate.
In addition, the credit agreement and the note purchase agreements also
require LaBranche & Co. to comply with certain financial ratios. LaBranche &
Co.'s ability to comply with these ratios may be affected by events beyond our
or its control. If any of the covenants in our credit agreement, the note
15
<PAGE>
purchase agreements, the indenture relating to our senior notes or the indenture
relating to our exchange notes is breached, or if LaBranche & Co. is unable to
comply with required financial ratios, it may be in default under the Credit
Agreement or the note purchase agreements and we may be in default under the
indenture relating to our senior notes or the indenture relating to the exchange
notes. A significant portion of our indebtedness then may become immediately due
and payable. We are not certain whether we would have, or be able to obtain,
sufficient funds to make these accelerated payments. Compliance with the
covenants is also a condition to borrowings under the credit agreement.
THE EXCHANGE NOTES MAY BE SUBJECT TO FRAUDULENT TRANSFER STATUTES.
Under federal or state fraudulent transfer laws, a court could avoid all or
a portion of our obligations to the holders of the exchange notes, subordinate
our obligations to the holders of the exchange notes to our other existing and
future indebtedness, and take other action detrimental to the holders of the
exchange notes, including invalidating the exchange notes if it were to find
that,
- we issued the initial notes in order to damage or defraud current or
future creditors; or
- we received less than fair consideration or reasonably equivalent value
for incurring the indebtedness represented by the initial notes; and
- we (1) were insolvent or were rendered insolvent by reason of the issuance
of the initial notes, (2) were engaged, or about to engage, in a business
or transaction for which our assets were unreasonably small or
(3) intended to incur, or believed (or should have believed) we would
incur, debts beyond our ability to pay as the debts mature.
We cannot assure you that, in that event, any repayment on the exchange
notes would ever be recovered by the holders of the exchange notes.
Based upon financial and other information currently available to us, our
management believes that the indebtedness evidenced by the initial notes has
been incurred for proper purposes and in good faith and that we were solvent and
continue to be solvent after issuing the initial notes, will continue to have
sufficient capital for carrying on our business and be able to pay our debts as
they mature. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity."
WE ARE REQUIRED TO TAKE ACTIONS UPON THE OCCURRENCE OF A CHANGE OF CONTROL.
Upon the occurrence of a change of control, we will be required to offer to
repurchase all outstanding senior notes and exchange notes at a price equal to
101% of their principal amount, together with accrued and unpaid interest, if
any, to the date of repurchase. Certain important corporate events, such as
leveraged recapitalizations that would increase our level of indebtedness, would
not constitute a change of control. If a change of control were to occur, it is
possible that we would not have sufficient funds to repurchase exchange notes
owned by holders seeking to accept our offer or that restrictions in the credit
agreement, the note purchase agreements relating to LaBranche & Co.'s existing
senior subordinated indebtedness or the indenture governing our senior notes
will not allow such repurchases. Furthermore, a change of control will most
likely trigger a default under the Credit Agreement, the note purchase
agreements relating to LaBranche & Co.'s existing senior subordinated
indebtedness and the indenture governing our senior notes. To the extent we do
not have sufficient funds to meet our repurchase obligations and any other
obligations in respect of the Credit Agreement, the note purchase agreements and
the indenture relating to our senior notes, we would necessarily seek
third-party financing. However, it is possible that we will not be able to
obtain such financing.
WE MAY HAVE INSUFFICIENT CAPITAL IN THE FUTURE AND MAY BE UNABLE TO SECURE
ADDITIONAL FINANCING WHEN WE NEED IT.
Our business depends on the availability of adequate capital. We cannot be
sure that we will have sufficient capital in the future or that additional
financing will be available on a timely basis, or on
16
<PAGE>
terms favorable to us. Historically, we have satisfied these needs with
internally generated funds, our bank credit facilities and the issuance of
subordinated debt by our operating subsidiaries and the issuance by us of our
senior notes and our common stock. The proceeds of the sale of our initial notes
were used to fully fund our acquisition of Henderson Brothers and to partially
fund our acquisition of Webco and to pay fees and expenses related to both
acquisitions. 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.
We may, however, need to raise additional funds to:
- increase the capital available to us for our inventory positions;
- support more rapid expansion;
- acquire complementary businesses; or
- respond to unanticipated capital requirements.
We may be required to obtain this additional financing on short notice as a
result of rapid, unanticipated developments, such as a steep market decline.
OUR REVENUES MAY DECREASE DUE TO CHANGES AFFECTING THE ECONOMY, SUCH AS
INCREASES IN INTEREST RATES OR INFLATION, OR CHANGES AFFECTING THE SECURITIES
MARKETS, SUCH AS DECREASED VOLUME OR LIQUIDITY.
We recently experienced a substantial increase in the revenues we earn from
our specialist activities. An adverse change affecting the economy or the
securities markets could result in a decline in market volume or liquidity. This
would result in lower revenues from our specialist activities. Our recent
increase in revenues was caused primarily by significant increases in the volume
of trading on the NYSE and favorable conditions in the securities markets. The
current favorable business environment may not continue indefinitely.
SUSTAINED DECLINES IN PRICE LEVELS OF SECURITIES COULD CAUSE US TO INCUR LOSSES.
Adverse changes in the economy and the securities markets could lead to
lower price levels of securities. Sustained declines in these price levels may
result in:
losses from declines in the market value of securities held in our
inventory;
the failure of buyers and sellers of securities to fulfill their settlement
obligations; and
increases in claims and litigation.
TRADING THROUGH NYSE SPECIALISTS COULD BE REPLACED BY ALTERNATIVE TRADING
SYSTEMS WHICH COULD REDUCE OUR REVENUE.
Alternative trading systems could reduce the levels of trading of
NYSE-listed stocks executed through specialists. This, in turn, could have an
adverse effect on our revenues. Over the past few years, a number of alternative
trading systems have developed or emerged which may compete with specialists by
increasing trading in NYSE-listed stocks off the NYSE trading floor in
over-the-counter markets. In the future, similar new systems may continue to be
developed and placed in operation.
17
<PAGE>
NEW AND PROPOSED NYSE INITIATIVES MAY LOWER THE REVENUES WE EARN ON TRADES
EXECUTED IN SHARES OF OUR COMMON STOCK LISTINGS.
The NYSE recently approved the repeal of Rule 390, which generally
prohibited member firms from trading stocks listed before April 26, 1979 other
than on a national exchange. Any stocks for which we act as specialist listed
before April 26, 1979 will now be freely tradable in over-the-counter markets.
We will not receive commissions on trades executed in over-the-counter markets
and will not participate in those trades as principal. Additionally, on
December 28, 1999, the NYSE implemented a new initiative which increased from
two minutes to five minutes the window for providing commission-free
transactions on orders. Therefore, any order we execute as agent within five
minutes of placement of the order will not generate any commissions revenue for
us. This new initiative has adversely affected commissions revenue.
COMPETITION FROM NASDAQ FOR NEW LISTINGS COULD ADVERSELY AFFECT NYSE TRADING
VOLUME AND, IN TURN, REDUCE OUR REVENUES.
Nasdaq continues to grow and gain in popularity, attracting companies which
might otherwise have listed on the NYSE. If more companies decide to be quoted
on Nasdaq as opposed to listing their stocks on the NYSE, or if companies choose
to delist using recently relaxed delisting procedures, trading volume on the
NYSE could be adversely affected. This, in turn, could adversely affect our
trading revenue. In recent years, many high technology companies have opted to
be quoted on Nasdaq, even though many of them would have qualified for NYSE
listing. In addition, the SEC recently approved a revision to NYSE Rule 500
which makes it easier for a company to delist its shares from the NYSE. The
original rule required supermajority shareholder approval before a listed
company could delist from the NYSE. Under the recently approved amendment of
Rule 500, a company can delist from the NYSE if it obtains the approval of a
majority of the company's board of directors and the company's audit committee.
The company would then provide its 35 largest shareholders with written notice
of the proposed delisting and allow a 20-40 day waiting period to elapse.
OUR QUARTERLY RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our revenues may fluctuate significantly based on factors relating to the
securities markets. These factors include:
- a decrease in trading volume on the NYSE;
- volatility in the equity securities markets; and
- changes in the value of our securities positions.
Many elements of our cost structure do not decline if we experience
quarterly reductions in our revenues. As a result, if market conditions cause
our revenues to decline, we may be unable to adjust our cost structure on a
timely basis and we could suffer losses.
RISKS ASSOCIATED WITH OUR TRADING TRANSACTIONS COULD RESULT IN TRADING LOSSES.
A majority of our specialist-related revenues are derived from trading by us
as principal. We may incur trading losses relating to these activities since
each primarily involves the purchase, sale or short sale of securities for our
own account. In any period, we may incur trading losses in a significant number
of 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
required 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
also operate a proprietary trading desk separately from our NYSE specialist
operations, which represented 3.3% of our total revenues in 1999. We may incur
trading losses as a result of these trading activities.
18
<PAGE>
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.
NYSE SPECIALIST RULES MAY REQUIRE US TO MAKE UNPROFITABLE TRADES OR TO REFRAIN
FROM MAKING PROFITABLE TRADES.
When we trade as principal, we attempt to derive a profit from the
difference between the prices at which we buy and sell securities. Our role as a
specialist, at times, requires us to make trades that adversely affect our
profitability. In addition, as a specialist, we are at times required to refrain
from trading for our own account in circumstances in which it may be to our
advantage to trade. For example, we may be obligated to act as a principal when
buyers or sellers outnumber each other. In those instances, we may take a
position counter to the market, buying or selling shares to support an orderly
market in the affected stocks. In order to perform these obligations, we hold
varying amounts of securities in inventory. In addition, specialists generally
may not trade for their own account when public buyers are meeting public
sellers in an orderly fashion and may not compete with public orders at the same
price. By having to support an orderly market, maintain inventory positions and
refrain from trading under some favorable conditions, we are subjected to a high
degree of risk. Additionally, the NYSE periodically amends its rules and may
make the rules governing our activities as a specialist more stringent or may
implement changes which could adversely affect our trading revenues.
WE MAY HAVE DIFFICULTY SUCCESSFULLY MANAGING OUR GROWTH.
Since 1994, we have experienced significant growth in our business
activities and the number of our employees. We cannot assure you that we will be
able to manage our growth successfully. Our inability to do so could have an
adverse effect on our business, financial condition and/or operating results.
The growth of our business has increased the demands upon our management and
operations and we expect it to continue to do so in the future. This growth has
required, and will continue to require, us to increase our investment in
management personnel, financial and management systems and controls, and
facilities. The scope of procedures for assuring compliance with applicable
rules and regulations has changed as the size and complexity of our business has
increased. In response, we have implemented formal compliance procedures which
are regularly updated. Our future operating results will depend on our ability
to continue:
- to improve our systems for operations, financial control, and
communication and information management;
- to refine our compliance procedures and enhance our compliance oversight;
and
- to recruit, train, manage and retain our employees.
WE MAY FAIL TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITIONS.
We cannot assure you that we will be able to successfully integrate the
businesses of Henderson Brothers or Webco with our existing business. The
acquisitions may result in unforeseen operating difficulties and expenditures.
They may also require significant management attention that would otherwise be
available for ongoing development of our business. Moreover, we cannot assure
you that the anticipated benefits of these acquisitions will be realized. As a
result of the acquisitions, we will incur amortization expenses related to
goodwill and other intangible assets. In addition, we may incur contingent
liabilities of which we are not aware.
As part of our acquisition of Henderson Brothers, we acquired its clearing
operations. We previously had no experience operating a clearing business and
may not be familiar with all of the risks associated with the clearing business.
We cannot assure you that we will successfully operate and manage this business.
19
<PAGE>
OUR SUCCESS DEPENDS ON OUR ABILITY TO ACCURATELY PROCESS AND RECORD OUR
TRANSACTIONS, AND ANY FAILURE TO DO SO COULD SUBJECT US TO LOSSES.
Our specialist activities require us to accurately record and process a very
large number of transactions on a daily basis. Any failure or delay in recording
or processing transactions could cause substantial losses for brokers, their
customers and/or us and could subject us to claims for losses. We rely on our
staff to operate and maintain our information and communications systems
properly, and we depend on the integrity and performance of those systems. Our
recording and processing of trades is subject to human and processing errors.
Moreover, extraordinary trading volume or other events could cause our
information and communications systems to operate at an unacceptably low speed
or even fail. Any significant degradation or failure of our information systems
or any other systems in the trading process could cause us to fail to complete
transactions or could cause brokers who place trades through us to suffer delays
in trading.
OUR MANAGEMENT INFORMATION SYSTEMS MAY FAIL AND INTERRUPT OUR BUSINESS.
Any information or communication systems failure or decrease in information
or communications systems performance that causes interruptions in our
operations could have an adverse effect on our business, financial condition
and/or operating results. Our systems may fail as a result of:
- hardware or software failure; or
- power or telecommunications failure.
Although we have established a back-up disaster recovery center in Hoboken,
New Jersey, it may not be effective in preventing an interruption of our
business.
WE DEPEND ON THE NYSE AND CLEARING AND DEPOSITORY INSTITUTIONS TO EFFECT TRADES,
AND THEIR FAILURE TO PERFORM COULD SUBJECT US TO LOSSES.
We are dependent on the proper and timely function of complex information
and communications systems maintained and operated by or for the NYSE and
clearing and depository institutions. Failures or inadequate or slow performance
of any of those systems could adversely affect our ability to operate and
complete trades. The failure to complete trades on a timely basis could subject
us to losses and claims for losses of brokers and their customers.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO UPGRADE OUR INFORMATION AND
COMMUNICATIONS SYSTEMS, AND ANY FAILURE TO DO SO COULD HARM OUR BUSINESS AND
PROFITABILITY.
The development of complex communications and new technologies, including
Internet-based technologies, may render our existing information and
communications systems outdated. In addition, our information and communications
systems must be compatible with those of the NYSE. As a result, if the NYSE
upgrades its systems, we will need to make corresponding upgrades. Our future
success will depend on our ability to respond to changing technologies on a
timely and cost-effective basis. We cannot be sure that we will be successful in
upgrading our information and communications systems on a timely or
cost-effective basis. Our failure to do so could have an adverse effect on our
business, financial condition and/or operating results.
The NYSE's ability to develop information and communications systems and
complex computer and other technology systems has been instrumental in its
recent growth and success. We are dependent on the continuing development of
technological advances by the NYSE, a process over which we have no control. If
the NYSE for any reason is unable to continue its recent history of
computer-related and other technological developments and advances, it could
have an adverse effect on the success of the NYSE, including its ability to
grow, to manage its trading volumes or to attract new listings. Any such
20
<PAGE>
developments can be expected to adversely affect our operations, financial
condition and operating results.
IF WE LOSE THE SERVICES OF OUR KEY PERSONNEL OR CANNOT HIRE ADDITIONAL QUALIFIED
PERSONNEL, OUR BUSINESS WILL BE HARMED.
Our future success depends on the continued service of key employees,
particularly George M.L. LaBranche, IV (Michael LaBranche), our Chairman, Chief
Executive Officer and President. The loss of the services of any of our key
personnel or the inability to identify, hire, train and retain other qualified
personnel in the future could have an adverse effect on our business, financial
condition and/or operating results. We have employment agreements with
Mr. LaBranche and other key employees. We also maintain "key person" life
insurance policies on Mr. LaBranche and other key employees. Competition for key
personnel and other highly qualified management, trading, compliance and
technical personnel is intense. We cannot assure you that we will be able to
attract new or retain currently employed highly qualified personnel in the
future.
In connection with our reorganization transactions, our managing directors
received substantial amounts of our common stock in exchange for their interests
in LaB Investing Co. L.L.C. Because the shares of common stock were received in
exchange for membership interests, ownership of the shares is not dependent upon
the continued employment of those managing directors. In addition, employees who
are not managing directors received grants of stock options and restricted stock
units. The steps we have taken to encourage the continued service of these
individuals, who include key senior personnel in our specialist activities, may
not be effective.
WE DEPEND SIGNIFICANTLY ON REVENUES FROM OUR SPECIALIST ACTIVITIES FOR A SMALL
GROUP OF LISTED COMPANIES, AND THE LOSS OF ANY OF THEM COULD REDUCE OUR
REVENUES.
Historically, a small number of listed companies have accounted for a
significant portion of our revenues from our specialist trading activities. The
loss of any of these listed companies could have an adverse effect on our
revenues. For the years ended December 31, 1998 and 1999, transactions in our 10
most actively traded specialist stocks accounted for approximately 39.0% and
44.2% of our total revenues, respectively. We cannot assure you that we will be
able to retain these or other listed companies. We can lose these listed
companies if they cease to be traded on the NYSE as a result of being acquired
or otherwise delisted. In addition, if the NYSE were to determine that we have
failed to fulfill our obligations as specialist for a listed company, our
registration as a specialist for that listed company could be cancelled or
suspended.
WE DEPEND ALMOST ENTIRELY ON OUR SPECIALIST ACTIVITIES, AND IF THEY FAIL TO GROW
AS ANTICIPATED, IT WOULD HARM OUR REVENUES.
We derive substantially all of our revenues from specialist activities. If
demand for our specialist services fails to grow, grows more slowly than we
currently anticipate, or declines, our revenues would be adversely affected. We
expect our specialist activities to continue to account for substantially all of
our revenues for the foreseeable future. Our future success will depend on:
- continued growth in the volume of trading and the number of listings on
the NYSE;
- our ability to be chosen as specialist for additional listing companies;
- our ability to respond to regulatory and technological changes; and
- our ability to respond to changing demands in the marketplace.
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WE ARE SUBJECT TO INTENSE COMPETITION FOR NEW LISTINGS, AND OUR PROFITABILITY
WILL SUFFER IF WE DO NOT COMPETE EFFECTIVELY.
We cannot be sure that we will be able to compete effectively with current
or future competitors. Our failure to compete effectively would have an adverse
effect on our profitability. We obtain all of our new listings on the NYSE by
going through an allocation process. Under this process either a committee of
the NYSE or the listing company chooses the specialist. The competition for
obtaining new listing companies is intense. We expect competition to continue
and to intensify in the future. Some of our competitors may have significantly
greater financial and other resources than we have and may have greater name
recognition. These competitors may be able to respond more quickly to new or
evolving opportunities and listing company requirements. They may also be able
to undertake more extensive promotional activities to attract new listing
companies. In addition, the specialist industry has recently been consolidating.
The combined companies resulting from this consolidation may have a stronger
capital base. This trend has intensified the competition in our industry.
Finally, the NYSE retains the ability to name new specialist firms.
THE FAILURE BY US OR OUR EMPLOYEES TO COMPLY WITH APPLICABLE LAWS AND
REGULATIONS COULD RESULT IN SUBSTANTIAL FINES AND OTHER PENALTIES.
The securities industry is subject to extensive regulation under both
federal and state laws. In addition, the SEC, the NYSE, other self-regulatory
organizations, commonly referred to as SROs, and state securities commissions
require strict compliance with their respective rules and regulations. Failure
to comply with any of these laws, rules or regulations could result in serious
adverse consequences. We and our officers and employees may be subject in the
future to claims arising from acts in contravention of these laws, rules and
regulations. An adverse ruling against us and/or our officers and other
employees as a result of any of these claims could result in us and/or our
officers and other employees being required to pay a substantial fine or
settlement. It could also result in the suspension or revocation of our
registration with the SEC as a broker-dealer or our suspension or expulsion as a
member of the NYSE. If this occurred, we would be unable to operate our
business. In connection with our acquisitions of Henderson Brothers and Webco,
we employed an additional 98 employees. As a result of the increased number of
employees and our lack of experience working with these employees, the risk that
we will not detect or deter employee misconduct will increase. In
November 1999, Henderson Brothers and one of its specialist were censured and
fined $110,000, in the aggregate, for failure to fulfill certain specialist
obligations.
THE REGULATORY ENVIRONMENT IN WHICH WE OPERATE MAY CHANGE, MAKING IT DIFFICULT
FOR US TO REMAIN IN COMPLIANCE.
The regulatory environment in which we operate is subject to change which we
cannot predict. It may be difficult for us to comply with new or revised
legislation or regulations imposed by the SEC, other U.S. or foreign
governmental regulatory authorities and SROs, including the NYSE. Failure to
comply would have an adverse effect on our business, financial condition and/or
operating results. Changes in the interpretation or enforcement of existing laws
and rules by the SEC, these governmental authorities, SROs and the NYSE could
also have an adverse effect on our business, financial condition and/or
operating results.
WE CANNOT PREDICT THE EFFECT A PROPOSED PUBLIC OFFERING BY THE NYSE WOULD HAVE
ON OUR BUSINESS.
The NYSE has announced that it intends to offer shares of its capital stock
to the public. We are unable to predict what effect, if any, such an offering
would have on our business and the specialist industry.
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FAILURE TO COMPLY WITH NET CAPITAL AND NET LIQUID ASSET REQUIREMENTS MAY RESULT
IN THE REVOCATION OF OUR REGISTRATION WITH THE SEC OR OUR EXPULSION FROM THE
NYSE.
The SEC, the NYSE and various other regulatory agencies have stringent rules
with respect to the maintenance of minimum levels of capital and net liquid
assets by securities brokers-dealers as well as specialist firms. Subject to SEC
approval, the NYSE recently increased its minimum net liquid asset requirements.
Currently, we are required to maintain minimum net liquid assets of
$284.3 million. Failure to maintain compliance with these required minimum
levels may subject us to suspension or revocation of registration by the SEC and
suspension or expulsion as a member of the NYSE and other regulatory bodies. If
this occurred, we would be unable to operate our business. In addition, a change
in these rules, the imposition of new rules or any unusually large requirement
or charge against our regulatory capital could limit any of our operations that
require the intensive use of capital. These rules could also restrict our
ability to withdraw capital from LaBranche & Co. Any limitation on our ability
to withdraw capital from LaBranche & Co. could limit our ability to receive
distributions from LaBranche & Co. and LaB Investing Co. L.L.C., which, in turn,
could limit our ability to pay cash dividends, repay debt and repurchase shares
of our outstanding stock. A substantial market decline, a significant operating
loss or any unusually large requirement or charge against regulatory capital
could adversely affect our ability to expand or even maintain our present levels
of business, which could have an adverse effect on our business, financial
condition and/or operating results.
EMPLOYEE MISCONDUCT IS DIFFICULT TO DETECT AND DETER AND COULD RESULT IN LOSSES.
There have been a number of highly publicized cases involving fraud, stock
manipulation or other misconduct by employees in the financial services industry
in recent years, and we run the risk that employee misconduct could occur.
Misconduct by employees could include binding us to transactions that exceed
authorized limits or present unacceptable risks, or hiding from us unauthorized
or unsuccessful activities, which, in either case, may result in unknown and
unmanaged risks or losses. Employee misconduct could also involve the improper
use or disclosure of confidential information, which could result in regulatory
sanctions and serious reputational or financial harm. It is not always possible
to deter employee misconduct and the precautions we take to prevent and detect
this activity may not be effective in all cases.
In connection with our recent acquisitions of Henderson Brothers and Webco,
we have employed nearly 100 additional employees. As a result of the increased
number of employees and our lack of experience working with these employees, the
risk that we will not detect or deter employee misconduct will increase.
WE ARE SUBJECT TO RISK RELATING TO LITIGATION AND POTENTIAL SECURITIES LAWS
LIABILITY.
Many aspects of our business involve substantial risks of liability. A
specialist is exposed to substantial risks of liability under federal and state
securities laws, other federal and state laws and court decisions, as well as
rules and regulations promulgated by the SEC and the NYSE. We are also subject
to the risk of litigation and claims that may be without merit. We could incur
significant legal expenses in defending ourselves against such lawsuits or
claims. An adverse resolution of any future lawsuits or claims against us could
have an adverse effect on our business, financial condition and/or operating
results.
COUNTERPARTIES MAY FAIL TO PAY US.
As a specialist of listed stocks, the majority of our securities
transactions are conducted as principal with broker-dealer counterparties
located in the United States. The NYSE and the clearing houses monitor the
credit standing of the counterparties with which we conduct business. However,
we
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cannot assure you that any of these counterparties will not default on their
obligations. If any do, our business, financial condition and/or operating
results could be adversely affected.
SOME OF OUR EXECUTIVE OFFICERS ARE IN A POSITION TO CONTROL MATTERS REQUIRING A
STOCKHOLDER VOTE.
Our managing directors currently own approximately 71.3% of our outstanding
common stock. These stockholders have entered into a stockholders' agreement
under which they have agreed, among other things, that their shares of our
common stock will be voted, for as long as they own their shares, as directed by
a majority vote of Michael LaBranche, our Chairman, Chief Executive Officer and
President, James G. Gallagher and Alfred O. Hayward, Jr., each an executive
officer and director. Accordingly, these individuals have the ability to control
all matters requiring approval by our stockholders. These matters include the
election and removal of directors and the approval of any merger, consolidation
or sale of all or substantially all of our assets. In addition, they are able to
dictate the management of our business and affairs. This concentration of
ownership could have the effect of delaying, deferring or preventing a change in
control, a merger or consolidation, a takeover or another business combination.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about our company and our
industry. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors described in "Risk
Factors" and elsewhere in this prospectus. We undertake no obligation to update
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
In connection with the issuance of the initial notes pursuant to a purchase
agreement dated as of February 24, 2000 by and among us and the initial
purchasers, the initial purchasers and their respective assignees became
entitled to the benefits of the Registration Rights Agreement dated as of
March 2, 2000 by and among us and the initial purchasers.
The Registration Rights Agreement requires us to file the registration
statement of which this prospectus is a part for a registered exchange offer
relating to an issue of new notes identical in all material respects to the
initial notes but containing no restrictive legend. Under the Registration
Rights Agreement, we are required to:
- file the registration statement not later than May 1, 2000;
- use our best efforts to cause the registration statement to be declared
effective by the SEC not later than June 30, 2000;
- keep the exchange offer open for not less than 20 business days (or longer
if required by applicable law);
- use our best efforts to consummate the exchange offer not later than
30 days after the registration statement relating to the exchange offer
becomes effective; and
- deliver to each holder of record entitled to participate in the exchange
offer as many copies of the prospectus forming part of the exchange
registration statement, and any amendment or supplement thereto, as such
persons may reasonably request.
The exchange offer being made hereby, if commenced and consummated within
the time periods described in this paragraph, will satisfy those requirements
under the Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, all initial notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the expiration date will be
accepted for exchange. Exchange notes of the same class will be issued in
exchange for an equal principal amount of outstanding initial notes accepted in
the exchange offer. Initial notes may be tendered only in integral multiples of
$1,000. This prospectus, together with the letter of transmittal, is being sent
to all record holders of initial notes as of June 16, 2000. The exchange offer
is not conditioned upon any minimum principal amount of initial notes being
tendered in exchange. However, our obligation to accept initial notes for
exchange is subject to certain conditions as set forth herein under
"--Conditions."
Initial notes will be deemed accepted when, as and if the Trustee has given
oral or written notice to the exchange agent. The exchange agent will act as
agent for the tendering holders of initial notes for the purposes of receiving
the exchange notes and delivering them to the holders.
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to other issuers, we believe that the exchange notes issued in
the exchange offer may be offered for resale, resold or otherwise transferred by
each holder without compliance with the registration and prospectus delivery
provisions of the Securities Act of 1933, as amended, provided that:
- the holder is not a broker-dealer who acquires the exchange notes directly
from us for resale pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act;
- the holder is not our "affiliate", as that term is defined in Rule 405
under the Securities Act; and
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- the exchange notes are acquired in the ordinary course of the holder's
business and the holder is not engaged in, and does not intend to engage
in, a distribution of the exchange notes and has no arrangement or
understanding with any person to participate in a distribution of the
exchange notes.
By tendering the initial notes in exchange for exchange notes, each holder,
other than a broker-dealer, will represent to us that:
- any exchange notes to be received by it will be acquired in the ordinary
course of its business;
- it is not engaged in, and does not intend to engage in, a distribution of
the exchange notes and has no arrangement or understanding to participate
in a distribution, within the meaning of the Securities Act, of the
exchange notes; and
- it is not our affiliate, as defined in Rule 405 under the Securities Act,
or if it is our affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act, to the extent
applicable.
If a holder of initial notes is engaged in or intends to engage in a
distribution of the exchange notes or has any arrangement or understanding with
respect to the distribution of the exchange notes to be acquired pursuant to the
exchange offer, the holder may not rely on the applicable interpretations of the
staff of the SEC and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Each broker-dealer that receives exchange notes for its own account
in the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such exchange notes. The letter of transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
This prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer to satisfy its prospectus delivery obligations under
the Securities Act in connection with resales of exchange notes for its own
account. We have agreed that we will keep the registration statement of which
this prospectus is a part effective for a period of up to six months or such
earlier date as each participating broker-dealer shall have notified us in
writing that it has resold all exchange notes acquired in the exchange offer.
See "Plan of Distribution."
As soon as practicable after the close of the exchange offer, we will:
- accept for exchange all registrable notes validly tendered and not validly
withdrawn as part of the exchange offer; and
- deliver to the Trustee for cancellation all registrable notes so accepted
for exchange and cause the Trustee to authenticate and deliver promptly to
each holder of registrable notes, exchange notes equal in principal amount
to the securities of such holder so accepted for exchange.
We will file with the SEC a shelf registration statement to register for
public resale the transfer restricted securities held by any such holder who
provides us with certain information for inclusion in a shelf registration
statement if:
(1) the exchange offer is not permitted by applicable law or SEC policy, or
(2) any holder of initial notes which are transfer restricted securities
notifies us prior to the 20th business day following the consummation of
the exchange offer that
(a) it is prohibited by law or SEC policy from participating in the
exchange offer,
(b) it may not resell the exchange notes acquired by it in the exchange
offer to the public without delivering a prospectus, and the
prospectus contained in the registration statement is not appropriate
or available for such resales by it, or
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(c) it is a broker-dealer and holds initial notes acquired directly from
us or any of our affiliates.
We will, in the event that a shelf registration statement is filed, provide
to each holder of the initial notes copies of the prospectus that is a part of
the shelf registration statement, notify each holder when the shelf registration
statement has become effective and take certain other actions as are required to
permit unrestricted resales of the exchange notes. A holder that sells initial
notes pursuant to the shelf registration statement will be required to be named
as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with its sales and will be
bound by the provisions of the Registration Rights Agreement that are applicable
to that holder including certain indemnification rights and obligations.
The term "transfer restricted securities" means each initial note or
exchange note, until the earliest of the date which:
- the initial note is exchanged in the exchange offer for a new note in the
exchange offer which can be publicly resold by the holder without
complying with prospectus delivery requirements of the Securities Act of
1933;
- the resale of the initial note is effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement;
- the initial note is publicly distributed under Rule 144; or
- the exchange note is disposed of by a broker-dealer pursuant to the "Plan
of Distribution."
The following events are considered registration defaults. We will pay
liquidated damages if:
(1) we fail to file the exchange offer registration statement, of which this
prospectus is a part, by May 1, 2000;
(2) the exchange offer registration statement is not declared effective by
the SEC by June 30, 2000;
(3) we fail to consummate the exchange offer by the 30th day after the
registration statement relating to the exchange offer becomes effective;
(4) we are obligated to file the shelf registration statement and we fail to
file it with the SEC on or before the 60(th) day after our filing
obligation arises;
(5) we are obligated to file the shelf registration statement and it is not
declared effective on or before the 120(th) day after our filing
obligation arises; or
(6) the exchange offer registration statement or the shelf registration
statement, as the case may be, is declared effective but thereafter
ceases to be effective or usable for its intended purpose, without being
succeeded immediately by a post-effective amendment to the registration
statement that cures this failure and is declared effective immediately.
If a registration default occurs, we will be obligated to pay as liquidated
damages to each holder of transfer restricted securities an amount equal to $.05
per week per $1,000 in principal amount of transfer restricted securities held
by each holder for each week or portion of a week that the registration default
continues for the first 90 day period immediately following the occurrence of
the registration default. The amount of liquidated damages will increase by an
additional $.05 per week per $1,000 in principal amount of transfer restricted
securities with respect to each subsequent 90-day period until all registration
defaults have been cured, up to a maximum of liquidated damages of $.50 per week
per $1,000 in principal amount of transfer restricted securities. We shall not
be required to
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pay liquidated damages for more than one registration default at any given time.
Liquidated damages will cease to accrue upon the cure of registration defaults.
Upon completion of the exchange offer, subject to certain exceptions,
holders of initial notes who do not exchange their initial notes for exchange
notes in the exchange offer will no longer be entitled to registration rights
and will not be able to offer or sell their initial notes, unless the initial
notes are subsequently registered under the Securities Act (which, subject to
certain limited exceptions, we will have no obligation to do), except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors--If you do not participate
in the exchange offer, you will continue to be subject to transfer
restrictions."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The term "expiration date" shall mean July 17, 2000 which is 20 business
days following the commencement of the exchange offer, unless the exchange offer
is extended if and as required by applicable law, in which case the term
"expiration date" shall mean the latest date to which the exchange offer is
extended.
In order to extend the expiration date, we will notify the exchange agent of
any extension by oral or written notice and may notify the holders of the
initial notes by mailing an announcement or by means of a press release or other
public announcement prior to 9:00 A.M., New York City time, on the next business
day after the previously scheduled expiration date.
We reserve the right to delay acceptance of any initial notes, to extend the
exchange offer or to terminate the exchange offer and not permit acceptance of
initial notes not previously accepted if any of the conditions set forth herein
under "--Conditions" shall have occurred and shall not have been waived by us if
permitted to be waived, by giving oral or written notice of such delay,
extension or termination to the exchange agent. We also reserve the right to
amend the terms of the exchange offer in any manner deemed by us to be
advantageous to the holders of the initial notes. If any material change is made
to terms of the exchange offer, the exchange offer shall remain open for a
minimum of an additional five business days, if the exchange offer would
otherwise expire during such period. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice of the delay to the exchange agent. If the exchange offer is
amended in a manner determined by us to constitute a material change, we will
promptly disclose the amendment in a manner reasonably calculated to inform the
holders of the initial notes of the amendment including providing public
announcement, or giving oral or written notice to the holders of the initial
notes. A material change in the terms of the exchange offer could include, among
other things, a change in the timing of the exchange offer, a change in the
exchange agent, and other similar changes in the terms of the exchange offer.
Without limiting the manner in which we may choose to make a public
announcement of any delay, extension, amendment or termination of the exchange
offer, we will have no obligation to publish, advertise, or otherwise
communicate any such public announcement.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will accrue interest payable in cash at 12% per annum,
from the later of:
- the last interest payment date on which interest was paid on the initial
notes surrendered in exchange therefor; or
- if the initial notes are surrendered for exchange on a date subsequent to
the record date for an interest payment date to occur on or after the date
of such exchange and as to which interest will be paid, the date of such
interest payment.
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PROCEDURES FOR TENDERING
To tender in the exchange offer, a holder of initial notes must complete,
sign and date the letter of transmittal, and mail or otherwise deliver the
letter of transmittal or facsimile, or an agent's message, together with the
initial notes and any other required documents, to the exchange agent prior to
5:00 p.m., New York City time, on the expiration date. In addition:
- certificates for the initial notes must be received by the exchange agent
along with the letter of transmittal;
- a timely confirmation of a book-entry transfer of the initial notes, if
such procedure is available, into the exchange agent's account at The
Depository Trust Company, or DTC, pursuant to the procedure for book-entry
transfer described below, must be received by the exchange agent prior to
the expiration date; or
- the holder must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF INITIAL NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR
HAND-DELIVERY SERVICE. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
LETTERS OF TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO US.
Delivery of all documents must be made to the exchange agent at its address
set forth below. Holders of initial notes may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to tender
initial notes for them.
The term "agent's message" means a message, transmitted by the DTC to, and
received by, the exchange agent and forming a part of a book-entry confirmation,
which states that the DTC has received an express acknowledgment from the
participant in the DTC tendering initial notes that are the subject of the
book-entry confirmation that the participant has received and agrees to be bound
by the terms of the letter of transmittal, and that we may enforce this
agreement against the participant.
The tender by a holder of initial notes will constitute an agreement between
such holder and us in accordance with the terms and subject to the conditions
set forth herein and in the letter of transmittal.
Only a holder of initial notes may tender the initial notes in the exchange
offer. The term "holder" for this purpose means any person in whose name initial
notes are registered on our books or any other person who has obtained a
properly completed bond power from the registered holder.
Any beneficial owner whose initial notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on his or her behalf. If the beneficial owner wishes
to tender on his or her own behalf, such beneficial owner must, prior to
completing and executing the letter of transmittal and delivering his or her
initial notes, either make appropriate arrangements to register ownership of the
initial notes in such owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an eligible institution, unless the initial notes
tendered pursuant thereto are tendered:
- by a registered holder or by a participant in DTC whose name appears on a
security position listing as the owner who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal and the exchange notes are
being issued directly to such registered holder or deposited into the
participant's account at DTC; or
- for the account of an eligible institution.
Member firms of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bankers or trust companies
having an office or correspondent in
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the United States or an "eligible guarantor" institution within the meaning of
Rule 17Ad-15 under the Exchange Act qualify as eligible institutions.
If the letter of transmittal is signed by the recordholder(s) of the initial
notes tendered thereby, the signature must correspond with the name(s) written
on the face of the initial notes without alteration, enlargement or any change
whatsoever. If the letter of transmittal is signed by a participant in DTC, the
signature must correspond with the name as it appears on the security position
listing as the holder of the initial notes.
If the letter of transmittal is signed by a person other than the registered
holder of any initial notes listed therein, those initial notes must be endorsed
or accompanied by bond powers and a proxy that authorize such person to tender
the initial notes on behalf of the registered holder, in each case as the name
of the registered holder or holders appear on the initial notes.
If the letter of transmittal or any initial notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed letter of transmittal accompanied by initial
notes, or a timely confirmation received of a book-entry transfer of initial
notes into the exchange agent's account at DTC with an agent's message, or a
notice of guaranteed delivery from an eligible institution is received by the
exchange agent. Issuances of exchange notes in exchange for initial notes
tendered pursuant to a notice of guaranteed delivery by an eligible institution
will be made only against delivery of the letter of transmittal and any other
required documents, and the tendered initial notes or a timely confirmation
received of a book-entry transfer of initial notes into the exchange agent's
account at DTC with the exchange agent.
All questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of the tendered initial notes will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all initial notes not properly
tendered or any initial notes which, if accepted, would, in our opinion or that
of our counsel, be unlawful. We also reserve the absolute right to waive any
conditions of the exchange offer or irregularities or defects in tender as to
particular initial notes. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of initial notes must be cured within such time as we
will determine. None of us, the exchange agent and any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of initial notes, and none of them shall incur any liability for failure
to give such notification. Tenders of initial notes will not be deemed to have
been made until such irregularities have been cured or waived. Any initial notes
received by the exchange agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
without cost by the exchange agent to the tendering holders of such initial
notes, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
In addition, we reserve the right in our sole discretion, subject to the
provision of the Indenture, to:
- purchase or make offers for any initial notes that remain outstanding
subsequent to the expiration date or, as set forth under "--Expiration
Date; Extensions; Amendments; Termination," to terminate the exchange
offer in accordance with the terms of the Registration Rights Agreement;
and
- to the extent permitted by applicable law, purchase initial notes in the
open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
exchange offer.
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<PAGE>
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
all initial notes properly tendered will be accepted, promptly after the
expiration date, and the exchange notes will be issued promptly after acceptance
of the initial notes. See "--Conditions" below. For purposes of the exchange
offer, initial notes shall be deemed to have been accepted as validly tendered
for exchange when, as and if we have given oral or written notice thereof to the
exchange agent.
In all cases, issuance of exchange notes for initial notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of certificates for such initial notes or a timely
book-entry confirmation of such initial notes into the exchange agent's account
at the DTC, a properly completed and duly executed letter of transmittal and all
other required documents. If any tendered initial notes are not accepted for any
reason set forth in the terms and conditions of the exchange offer or if initial
notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged initial notes will be returned
without expense to the tendering holder as promptly as practicable after the
expiration or termination of the exchange offer. In the case of initial notes
tendered by the book-entry transfer procedures described below, the
non-exchanged initial notes will be credited to an account maintained with the
DTC.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the initial notes at the DTC for purposes of the exchange offer within two
business days after the date of this prospectus. Any financial institution that
is a participant in the DTC's systems may make book-entry delivery of initial
notes by causing the DTC to transfer such initial notes into the exchange
agent's account at the DTC in accordance with such DTC's procedures for
transfer. However, although delivery of initial notes may be effected through
book-entry transfer into the exchange agent's account at the DTC, an agent's
message or the letter of transmittal or facsimile thereof with any required
signature guarantees and any other required documents must, in any case, be
transmitted to and received by the exchange agent at one of the addresses set
forth below under "--Exchange Agent" on or prior to the expiration date or the
guaranteed delivery procedures described below must be complied with. DELIVERY
OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All
references in the prospectus to deposit of initial notes shall be deemed to
include the DTC's book-entry delivery method.
GUARANTEED DELIVERY PROCEDURE
If a registered holder of the initial notes desires to tender the notes, and
the notes are not immediately available, or time will not permit the holder's
initial notes or other required documents to reach the exchange agent before the
expiration date, or the procedures for book-entry transfer cannot be completed
on a timely basis and an agent's message delivered, a tender may be effected if:
1. the tender is made through an eligible institution;
2. prior to the expiration date, the exchange agent receives from such
eligible institution a properly completed and duly executed letter of
transmittal or facsimile thereof and notice of guaranteed delivery,
substantially in the form provided by us, by facsimile transmission, mail
or hand delivery, setting forth the name and address of the holder of the
initial notes and the amount of initial notes tendered, stating that the
tender is being made thereby and guaranteeing that within five business
days after the expiration date, the certificates for all physically
tendered initial notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, and any other documents required by the
letter of transmittal will be deposited by the eligible institution with
the exchange agent; and
3. the certificates for all physically tendered initial notes, in proper
form for transfer, or a book-entry confirmation, as the case may be, and
all other documents required by the letter of transmittal are received by
the exchange agent within five business days after the expiration date.
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<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of initial notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent prior to 5:00 p.m., New York City time on the
business day prior to the expiration date at the address set forth below under
"--Exchange Agent" and prior to acceptance for exchange thereof by us. Any such
notice of withdrawal must:
1. specify the name of the person having tendered or depositing the initial
notes to be withdrawn;
2. identify the initial notes to be withdrawn, including, if applicable,
the registration number or numbers and total principal amount of such
initial notes;
3. be signed by the depositor in the same manner as the original signature
on the letter of transmittal by which such initial notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer sufficient to permit the Trustee with respect to
the initial notes to register the transfer of such initial notes into the
name of the depositor withdrawing the tender;
4. specify the name in which any such initial notes are to be registered,
if different from that of the depositor; and
5. if the initial notes have been tendered pursuant to the book-entry
procedures, specify the name and number of the participant's account at
DTC to be credited, if different than that of the depositor.
All questions as to the validity, form and eligibility, time of receipt of
such notices will be determined by us, whose determination shall be final and
binding on all parties. Any initial notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the exchange offer. Any
initial notes that have been tendered for exchange and that are not exchanged
for any reason will be returned to the holder thereof without cost to such
holder (or, in the case of initial notes tendered by book-entry transfer, such
initial notes will be credited to an account maintained with the Book-Entry
Transfer Facility for the initial notes) as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn initial notes may be re-tendered by following one of the procedures
described under "--Procedures for Tendering" and "--Book-Entry Transfer" above
at any time on or prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, initial notes will not
be required to be accepted for exchange, nor will exchange notes be issued in
exchange for any initial notes, and we may terminate or amend the exchange offer
as provided herein before the acceptance of such initial notes if:
1. because of any change in law, or applicable interpretations thereof by
the SEC, we determine that we are not permitted to effect the exchange
offer;
2. an action or proceeding is commenced or threatened that would materially
impair our ability to proceed with the exchange offer; or
3. not all government approvals that we deem necessary for the consummation
of the exchange offer have been received.
We have no obligation to, and will not knowingly, permit acceptance of
tenders of initial notes:
- from our affiliates within the meaning of Rule 405 under the Securities
Act;
- from any other holder or holders who are not eligible to participate in
the exchange offer under applicable law or interpretations by the SEC; or
- if the exchange notes to be received by such holder or holders of initial
notes in the exchange offer, upon receipt, will not be tradable by such
holder without restriction under the Securities
32
<PAGE>
Act and the Exchange Act, and without material restrictions under the
"blue sky" or securities laws of substantially all the states of the
United States.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
initial notes, as reflected in our accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by us. The costs of the exchange offer and the unamortized expenses
related to the issuance of the initial notes will be amortized over the term of
the exchange notes.
EXCHANGE AGENT
Firstar Bank, N.A. has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance and requests for additional copies
of this prospectus or of the letter of transmittal should be directed to the
exchange agent addressed as follows:
By Mail, Overnight Mail or Courier:
Firstar Bank, N.A.
425 Walnut Street,
Corporate Trust Services, 6(th) Floor
Cincinnati, OH 45202
ATTN: Keith Maurmeier
Facsimile Transmission: (513) 632-5511
Confirm by Telephone: (513) 632-4843
FEES AND EXPENSES
We will pay the expenses of soliciting tenders under the exchange offer. The
principal solicitation for tenders pursuant to the exchange offer is being made
by mail; however, additional solicitations may be made by telegraph, telephone,
telecopy or in person by our officers and regular employees.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. We, however, will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection
therewith. We may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of the prospectus, letters of transmittal and related documents to the
beneficial owners of the initial notes, and in handling or forwarding tenders
for exchange.
The expenses to be incurred in connection with the exchange offer will be
paid by us, including fees and expenses of the exchange agent and Trustee and
accounting, legal, printing and related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of
initial notes pursuant to the exchange offer. If, however:
- certificates representing exchange notes or initial notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or
are to be registered or issued in the name of, any person other than the
registered holder of the initial notes tendered; or
- if tendered initial notes are registered in the name of any person other
than the person signing the letter of transmittal; or
- if a transfer tax is imposed for any reason other than the exchange of
initial notes pursuant to the exchange offer,
then the amount of any such transfer taxes, whether imposed on the registered
holder or any other persons, will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of the transfer taxes will
be billed directly to the tendering holder.
33
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds payable to us from the issuance of the
exchange notes under the exchange offer. In consideration for issuing the
exchange notes as contemplated in this prospectus, we will receive initial notes
in like principal amount, the terms of which are identical in all material
respects to the exchange notes. The initial notes surrendered in exchange for
the exchange notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the exchange notes will not result in any increase
in our indebtedness. We used the proceeds from the sale of the initial notes to
fully fund our acquisition of Henderson Brothers and to partially fund our
acquisition of Webco, each an NYSE specialist firm, and to pay fees and expenses
related to both acquisitions.
34
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data set forth below for the
three months ended March 31, 1999 and 2000 are unaudited. The selected
consolidated financial data set forth below for the years ended December 31,
1997, 1998 and 1999 and as of December 31, 1998 and 1999 have been derived from
our consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, and are included elsewhere in this
prospectus. The selected consolidated financial data set forth below for the
years ended December 31, 1995 and 1996 and as of December 31, 1995, 1996 and
1997 have been derived from our consolidated financial statements, audited by
Arthur Andersen LLP, independent public accountants, which are not included
elsewhere in this prospectus. The selected consolidated financial data set forth
below should be read in conjunction with the consolidated financial statements
and related notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------------------------- --------------------
1999 1998 1997 1996 1995 2000 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Net gain on principal transactions............. $150,971 $ 95,048 $47,817 $37,113 $26,290 $ 65,391 $ 36,366
Commissions.................................... 37,222 26,576 15,186 10,180 7,736 9,185 8,270
Other.......................................... 12,844 4,787 4,637 2,643 3,147 4,114 2,985
-------- -------- ------- ------- ------- -------- --------
Total revenues............................. 201,037 126,411 67,640 49,936 37,173 78,690 47,621
-------- -------- ------- ------- ------- -------- --------
EXPENSES:
Employee compensation and benefits............. 34,268 13,921 8,408 11,098 5,817 22,782 4,741
Lease of exchange memberships.................. 8,416 6,568 3,727 2,468 2,113 2,557 2,073
Interest....................................... 8,286 3,577 1,566 331 116 6,447 1,099
Amortization of intangibles.................... 4,623 2,526 737 -- -- 2,754 847
Exchange, clearing and brokerage fees.......... 3,709 2,898 2,042 1,514 1,557 1,033 1,007
Legal and professional fees.................... 1,622 916 620 170 194 361 75
Occupancy...................................... 1,411 1,121 465 435 156 260 393
Communications................................. 1,193 964 709 495 367 355 257
Other.......................................... 3,041 2,285 1,634 642 599 1,708 603
-------- -------- ------- ------- ------- -------- --------
Total expenses before managing directors'
compensation, limited partners' interest in
earnings of subsidiary and provision for
income taxes................................. 66,569 34,776 19,908 17,153 10,919 38,257 11,095
-------- -------- ------- ------- ------- -------- --------
Income before managing directors' compensation,
limited partners' interest in earnings of
subsidiary and provision for income taxes.... 134,468 91,635 47,732 32,783 26,254 40,433 36,526
Managing directors' compensation............... 56,191 58,783 30,008 23,235 16,895 -- 23,100
-------- -------- ------- ------- ------- -------- --------
Income before limited partners' interest in
earnings of subsidiary and provision for
income taxes................................. 78,277 32,852 17,724 9,548 9,359 40,433 13,426
Limited partners' interest in earnings of
subsidiary................................... 25,344 26,292 14,354 9,638 7,046 -- 10,445
-------- -------- ------- ------- ------- -------- --------
Income (loss) before provision for income
taxes........................................ 52,933 6,560 3,370 (90) 2,313 40,433 2,981
Provision for income taxes..................... 23,899 3,900 1,881 1,602 1,179 19,878 1,400
-------- -------- ------- ------- ------- -------- --------
Net income (loss).............................. $ 29,034 $ 2,660 $ 1,489 $(1,692) $ 1,134 $ 20,555 $ 1,581
======== ======== ======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AS OF DECEMBER 31, MARCH 31,
---------------------------------------------------- --------------------
1999 1998 1997 1996 1995 2000 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short term investments.................... $109,196 $ 25,822 $17,989 $16,479 $ 8,971 $147,133 $ 43,465
Working capital.................................... 229,119 104,250 62,562 27,694 32,855 243,067 113,693
Total assets....................................... 505,125 272,201 157,754 78,918 65,177 930,554 299,338
Total long-term indebtedness (1)................... 162,330 48,073 31,423 2,919 1,150 408,064 --
Members' capital/stockholders' equity.............. 251,972 77,093 37,658 13,735 18,270 305,590 120,908
</TABLE>
------------------------------
(1) Excludes subordinated liabilities related to contributed exchange
memberships.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE FINANCIAL STATEMENTS AND THE NOTES TO
SUCH STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS,
ESTIMATES AND PROJECTIONS ABOUT US AND OUR INDUSTRY. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THE "RISK FACTORS" SECTION
AND ELSEWHERE IN THIS PROSPECTUS. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY
ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES
AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
OVERVIEW
Founded in 1924, our specialist LaBranche & Co. is one of the oldest and
largest specialist firms on the New York Stock Exchange, Inc. Our business has
grown considerably during the past five years. We have accomplished this growth
both internally and through selective acquisitions. Our revenues increased from
$37.2 million in 1995 to $201.0 million in 1999, representing a compound annual
growth rate of 52.6%. During the same period, we increased the number of our
common stock listings from 125 to 271.
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.
These revenues are primarily affected by changes in share volume and
fluctuations in price in our specialist stocks. Share volume for our specialist
stocks has historically been driven by general trends in NYSE trading volume, as
well as factors particularly affecting our listed companies, including increased
merger and acquisition activity, stock splits, greater frequency of company news
releases (i.e., earnings guidance and reports), heightened research analyst
coverage and investor sentiment. 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. Commissions revenue is primarily
affected by share volume of the trades executed by us as agent. Other revenue
consists of proprietary trading revenue, income from 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. In 1999, net gain on
principal transactions represented 75.1% of our total revenues, commissions
revenue represented 18.5% of our total revenues, and other revenue represented
6.4% 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 the employee's overall
performance.
Prior to our reorganization from partnership to corporate form, a large
portion of the compensation payments to our managing directors had not been
presented as part of operating expenses. The aggregate amount of these
compensation payments generally approximated LaB
36
<PAGE>
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.
REORGANIZATION TRANSACTIONS
On August 24, 1999, we reorganized from partnership to corporate form. Prior
to the reorganization, we operated as LaBranche & Co., a limited partnership and
LaB Investing Co. L.L.C., a limited liability company and the general partner of
LaBranche & Co. As part of the reorganization, we redeemed limited partnership
interests in LaBranche & Co. and redeemed or purchased all membership interests
in LaB Investing Co. L.L.C. in exchange for a combination of cash, indebtedness
and common stock of LaBranche & Co Inc. The redemption of the limited
partnership interests was accounted for as a step acquisition under the purchase
method of accounting. The excess of purchase price over the limited partners'
capital accounts of $127.4 million was allocated to intangible assets. Following
the reorganization, LaBranche & Co Inc. is a holding corporation whose assets
consist primarily of our ownership interests in LaBranche & Co. and LaB
Investing Co. L.L.C.
Simultaneously with the reorganization, we completed an initial public
offering of 10,500,000 shares of our common stock at a price of $14.00 per
share. In addition, we incurred indebtedness of approximately $100.0 million
through our Senior Note offering and $16.0 million through the issuance of other
senior indebtedness. In addition, LaBranche & Co. incurred $350,000 of
subordinated indebtedness. As a result of this increased indebtedness, our
interest expense following the reorganization transactions has been higher than
historical levels.
INCOME TAXES
As a partnership, we were generally not subject to U.S. federal, state and
local income taxes, apart from the 4% New York City unincorporated business tax.
As part of our restructuring to a corporation, we are subject to U.S. federal,
state and local income taxes.
COMPLETED ACQUISITIONS
In the third quarter of 1998, we acquired substantially all the assets of
Fowler, Rosenau & Geary, LLC (or "Fowler, Rosenau"). The acquisition was
accounted for under the purchase method and the excess of cost over estimated
fair value of the net assets acquired, totaling $25.8 million, was allocated to
goodwill. The results of the specialist operations formerly conducted by Fowler,
Rosenau have been included in our consolidated financial statements since
July 1, 1998.
In August 1997, we admitted Ernst & Company (or "Ernst") as a limited
partner in connection with our acquisition of the joint specialist operations of
Ernst, Homans & Co. (or "Homans") and Ware & Keelips, Inc. (or "Ware &
Keelips"). In connection with these transactions, we also hired as specialists
and admitted as members of LaB Investing Co. L.L.C. several individuals who had
previously worked as specialists for Ernst, Homans and Ware & Keelips. These
transactions were accounted for under the purchase method and the excess of cost
over estimated fair value of the net assets acquired, totaling $17.2 million,
was allocated to goodwill. The results of these specialist operations have been
included in our consolidated financial statements since August 1, 1997.
In July 1997, Thomas Shanley, James Stack and Mark Soltz, formerly
specialists on behalf of Stern Bros., LLC (or "Stern"), were admitted as members
of LaB Investing Co. L.L.C. In connection with their admission,
Messrs. Shanley, Stack and Soltz contributed capital to LaB Investing Co. L.L.C.
which
37
<PAGE>
was, in turn, contributed to LaBranche & Co. This transaction was accounted for
under the purchase method and the excess of cost over estimated fair value of
the net assets acquired, totaling $7.8 million, was allocated to goodwill. The
results of these specialist operations have been included in our consolidated
financial statements since July 1, 1997.
ACQUISITIONS SUBSEQUENT TO YEAR END
On March 2, 2000, we completed the acquisition of all of the outstanding
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, each bearing an interest rate of
10% 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 specialist operations of each of these
acquired companies are included in our consolidated financial statements
beginning on the date of completion of its acquisition.
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 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
38
<PAGE>
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 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 and Webco
acquisitions, 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 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.
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues increased 59.0% to $201.0 million for 1999, from
$126.4 million for 1998, principally due to the increase in revenue from net
gain on principal transactions. Net gain on principal transactions increased
58.9% to $151.0 million for 1999, from $95.0 million for 1998. This increase was
primarily due to an increase in share volume for our specialist stocks traded on
the NYSE. This increase, in turn, was primarily due to the Fowler, Rosenau
acquisition on July 1, 1998 under which we became the specialist for 76
additional common stock listings, and to increased share volume as principal in
our existing specialist stocks traded on the NYSE. Our share volume as principal
increased 62.7% to 9.6 billion shares for 1999, from 5.9 billion shares for
1998.
Commissions revenue increased 39.8% to $37.2 million for 1999 from
$26.6 million for 1998. This increase was due to an increase in share volume in
which we acted as agent. This increase, in turn, was primarily due to the
increase in the number of our common stock listings as a result of the Fowler,
Rosenau acquisition on July 1, 1998 and to increased share volume in our
existing specialist stocks traded on the NYSE. The share volume executed by us
as agent in our specialist stocks increased 41.4% to 4.1 billion shares for
1999, from 2.9 billion shares for 1998.
Other revenue increased 166.7% to $12.8 million for 1999, from $4.8 million
for 1998. This increase was primarily due to net gains in proprietary trading of
non-specialist securities and realized gains from a limited partnership
investment in a hedge fund.
EXPENSES
Total expenses before managing directors' compensation and limited partners'
interest in earnings of subsidiary and provision for income taxes increased
91.4% to $66.6 million for 1999, from $34.8 million for 1998.
Employee compensation and related benefits increased 146.8% to
$34.3 million for 1999, from $13.9 million for 1998. This increase was due to
the Fowler, Rosenau acquisition on July 1, 1998, which resulted in our
employment of 36 additional individuals, and to the inclusion of managing
director salary, incentive-based bonus and related benefits in employee
compensation from the date of our reorganization in August 1999. As a percentage
of total revenues, employee compensation increased to 17.0% of total revenues
for 1999, from 11.0% of total revenues for 1998.
Lease of exchange memberships expense increased 27.3% to $8.4 million for
1999, from $6.6 million for 1998. This increase was due to the increase in the
number of leased memberships from 44 to 48, primarily as a result of the hiring
of additional specialists and to an increase in the average annual leasing cost
of the memberships from approximately $180,000 to $192,000 per membership. As a
percentage of total revenues, lease of exchange memberships expense decreased to
4.2% for 1999, from 5.2% for 1998.
Interest expense increased 130.6% to $8.3 million for 1999, from
$3.6 million for 1998. This increase was primarily due to the issuance of
$116.4 million of indebtedness which began accruing interest from August 24,
1999.
Amortization of intangibles increased 84.0% to $4.6 million for 1999, from
$2.5 million for 1998. Amortization of intangibles increased as a result of the
Fowler, Rosenau acquisition, as well as the $127.4 million of intangible assets
recorded as a result of our acquisition of all of the limited partnership
interests in LaBranche & Co. in connection with our reorganization transactions.
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
include primarily fees based on the volume of transactions executed as principal
and as agent, as well as a flat annual fee. Exchange, clearing and
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<PAGE>
brokerage fees expense increased 27.6% to $3.7 million for 1999, from
$2.9 million for 1998. This increase was primarily attributable to an increase
in share volume.
Legal and professional fees increased 74.7% to $1.6 million for 1999, from
$916,000 for 1998. This increase was primarily the result of increased legal and
accounting fees due to our reorganization transactions.
Occupancy expense increased 27.3% to $1.4 million for 1999, from
$1.1 million for 1998. This increase was primarily the result of the leasing of
additional office space.
Communications expense increased 20.0% to $1.2 million for 1999, from
$1.0 million for 1998. This increase was primarily the result of additional
telephone, data retrieval and informational services utilized due to the growth
of our business.
Other expenses increased 30.4% to $3.0 million for 1999, from $2.3 million
for 1998. The increase was primarily due to an increase in advertising and
promotional expenses.
Income before managing directors' compensation and limited partners'
interest in earnings of subsidiary and provision for income taxes increased
46.8% to $134.5 million for 1999, from $91.6 million for 1998.
Managing directors' compensation decreased 4.4% to $56.2 million for 1999,
from $58.8 million for 1998 as a result of the inclusion of managing director
salary, incentive-based bonus and related benefits in employee compensation from
the date of our reorganization transactions.
Limited partners' interest in earnings of subsidiary decreased 3.8% to
$25.3 million for 1999, from $26.3 million for 1998 as a result of our
reorganization, at which time we acquired all of the limited partnership
interests in LaBranche & Co.
Provision for income taxes increased 512.8% to $23.9 million for 1999, from
$3.9 million for 1998 as a result of an increase in our profitability and the
federal, state and local income taxes to which we are subject as a result of our
reorganization from partnership to corporate form.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased 87.0% to $126.4 million for 1998 from
$67.6 million for 1997, due primarily to the increase in revenue from net gain
on principal transactions. Net gain on principal transactions increased 98.8% to
$95.0 million for 1998, from $47.8 million for 1997. This increase was primarily
due to an increase in share volume. This increase in share volume, in turn, was
primarily due to increased share volume as principal in our existing specialist
stocks traded on the NYSE, and was also due to the increase in the number of our
common stock listing due to the Fowler, Rosenau acquisition. Our share volume as
principal increased 136.0% to 5.9 billion shares for 1998, from 2.5 billion
shares for 1997.
Commissions revenue increased 75.0% to $26.6 million for 1998 from
$15.2 million for 1997. This increase was due to an increase in share volume in
which we acted as agent. This increase, in turn, was primarily due to increased
share volume in our existing specialist stocks traded on the NYSE, and was also
due to the increase in the number of our common stock listings due to the
Fowler, Rosenau acquisition. The share volume executed by us as agent in our
specialist stocks increased 70.6% to 2.9 billion shares for 1998, from
1.7 billion shares for 1997.
Other revenue increased 4.3% to $4.8 million for the twelve months ended
December 31, 1998, from $4.6 million for the same period in 1997. This increase
was primarily due to net gains in proprietary trading of non-specialist
securities.
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<PAGE>
EXPENSES
Total expenses before managing directors' compensation, limited partners'
interest in earnings of subsidiary and unincorporated business taxes increased
74.9% to $34.8 million for 1998, from $19.9 million for 1997.
Employee compensation and related expenses increased 71.6% to $13.9 million
for 1998, from $8.1 million for 1997. Our number of employees increased to 152
as of December 31, 1998, from 95 as of December 31, 1997, primarily due to the
Fowler, Rosenau acquisition. As a percentage of total revenues, employee
compensation decreased to 11.0% of total revenues for 1998, from 12.4% of total
revenues for 1997.
Lease of exchange membership expense increased 78.4% to $6.6 million for
1998, from $3.7 million for 1997. This increase was due to the increase in the
number of leased memberships from 32 to 44, resulting from the Fowler, Rosenau
acquisition, and due to an increase in the average annual leasing cost of the
memberships from approximately $150,000 to $180,000 per membership. As a
percentage of total revenues, lease of exchange memberships expense decreased to
5.2% for 1998, from 5.5% for 1997.
Interest expense increased 125.0% to $3.6 million for 1998, from
$1.6 million for 1997. This increase was primarily due to an increase in
outstanding subordinated indebtedness to $48.1 million at December 31, 1998 from
$31.4 million at December 31, 1997.
Amortization of intangibles increased 239.2% to $2.5 million for 1998, from
$737,000 for 1997. Amortization of intangibles increased due to the Fowler,
Rosenau acquisition. In addition, amortization of intangibles arising from the
Ernst and Stern acquisitions was incurred for the full year of 1998 and was only
incurred during the second half of 1997.
Exchange, clearing and brokerage fees expense increased 45.0% to
$2.9 million for 1998, from $2.0 million for 1997. This increase was primarily
attributable to an increase in share volume.
Legal and professional fees increased 47.7% to $916,000 for 1998, from
$620,000 for 1997. This increase was primarily the result of increased legal and
accounting fees due to the Fowler, Rosenau acquisition and consulting services
we obtained to comply with data processing testing required by the NYSE in
anticipation of the acquisition.
Occupancy expense increased 136.6% to $1.1 million for 1998, from $465,000
for 1997. This increase was primarily the result of the leasing of additional
office space.
Communications expense increased 36.0% to $964,000 for 1998, from $709,000
for 1997. This increase was the result of additional telephone, data retrieval
and informational services utilized due to the growth of our business.
Other expenses increased 43.8% to $2.3 million for 1998, from $1.6 million
for 1997. This was the result of payments made to Fowler, Rosenau in 1998 under
a profit sharing arrangement for trading in a specialist stock. This contractual
arrangement was terminated when we acquired Fowler, Rosenau in July 1998.
Income before managing directors' compensation, limited partners' interest
in earnings of subsidiary and unincorporated business taxes increased 92.0% to
$91.6 million for 1998, from $47.7 million for 1997.
Managing directors' compensation increased 96.0% to $58.8 million for 1998,
from $30.0 million for 1997 as a result of the increased profitability of the
firm.
Unincorporated business tax expense increased 105.3% to $3.9 million in
1998, from $1.9 million for 1997 as a result of the increased profitability of
the firm.
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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 primarily in commercial paper maturing within thirty
days. As of December 31, 1999, we had $505.1 million in assets, $109.2 million
of which consisted of cash and short-term investments, which primarily consist
of commercial paper maturing within seven days. As of December 31, 1998, we had
$272.2 million in assets, $25.8 million of which consisted of cash and
short-term investments.
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 the U.S. commercial bank's loan rate. To
date, we have not utilized this facility. The credit facility matures on
February 2, 2001.
As of each of March 31, 2000 and December 31, 1999, 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, their family members and our 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 which extend the maturities for an
additional year, unless the lender provides notice at least seven months prior
to maturity.
Concurrently with the initial public offering of our common stock and our
9 1/2% Senior Notes offering and as part of the reorganization of our firm 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 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.
At approximately the same time as our 9 1/2% Senior Note 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. In addition, on September 30, 1999, we repaid $1.1 million in
indebtedness owed in connection with our retirement plans, which amount had been
reflected in our historical consolidated statement of financial condition.
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On March 2, 2000, we issued $250.0 million aggregate principal amount of
Senior Subordinated Notes. These notes, which are the same notes which we refer
to throughout the prospectus as the "initial 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 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.
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 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 $3.0 million in
aggregate principal amount of unsecured senior promissory notes to former
stockholders of Webco. The senior promissory 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 will be due September 9, 2001 and will be
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 acquisition agreement.
Additionally, approximately $100,000, as an adjustment to the purchase price
based upon the working capital of Webco at the closing of the transaction, was
paid to former Webco stockholders on April 27, 2000.
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 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. Moreover, broker-dealers are required
to notify the SEC prior to repaying subordinated borrowings, paying dividends
and making loans to any parent, affiliates or employees, or otherwise entering
into transactions which, if executed, would result in a reduction of 30% or more
of their excess net capital (net capital less minimum requirement). The SEC has
the ability to prohibit or restrict such transactions if the result is
detrimental to the financial integrity of the broker-dealer.
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. At
December 31, 1999, LaBranche & Co. had net capital of $161.4 million, which was
$159.9 million in excess of its required net capital of $1.4 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. During
November 1999, subject to SEC approval, the NYSE approved changes to Rule 104,
its minimum net liquid asset requirements. These changes require specialist
units that currently exceed five percent in any of the NYSE's four concentration
measures to maintain minimum net liquid assets based upon the securities for
which they act as the specialist. The requirements state that the net liquid
assets must be equivalent to $4.0 million for each stock in the
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Dow Jones Industrial Average, $2.0 million for each stock in the S&P 100 Stock
Price Index, excluding stocks included in the previous classification,
$1.0 million for each stock in the S&P 500 Stock Price Index, excluding stock
included in the previous classifications, $500,000 for each common stock,
excluding bond funds and stocks included in the previous classifications, and
$100,000 for each stock, not included in any of the above classifications. In
addition, the NYSE has proposed to require any new specialist entities that
result from a merger, acquisition, consolidation or other combination of
specialist assets, to maintain net liquid assets equivalent to the greater of
either: (1) the aggregate net liquid assets of the specialist entities prior to
their combination or (2) the new capital requirements prescribed under
Rule 104. Subsequent to the completion of our acquisitions of Henderson and
Webco, the net liquid asset requirement for the combined entity is
$284.3 million, which represents the previous combined net liquid assets of the
three firms as separate entities. "Net liquid assets" for a specialist who also
engages in transactions other than specialist activities is based upon its
excess net capital as determined in accordance with SEC Rule 15c3-1. As of March
31, 2000, our actual net liquid assets were approximately $293.1 million. As of
December 31, 1999, our NYSE minimum required dollar amount of net liquid assets
was $93.6 million compared to actual net liquid assets of approximately
$175.9 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. During the fourth quarter of 1999, we contributed additional
capital to LaBranche & Co. in a net aggregate amount of approximately
$30.1 million.
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 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.
MARKET RISK
A majority of our specialist related revenues are derived from trading by us
as principal. We also operate a proprietary trading desk separately from our
NYSE specialist operations, which generated 1.7% 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 and which generated 3.3% of our total revenues for the year ended
December 31, 1999. We may incur trading losses as a result of these trading
activities. These activities involve primarily the purchase, sale or short sale
of securities for our own account. These activities are subject to a number of
risks, including risks of price fluctuations and rapid changes in the liquidity
of markets. In any period, we may incur trading losses in our specialist stocks
for a variety of reasons, including price 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.
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We have developed a risk management process which is intended to balance our
ability to profit from our specialist activities with our exposure to potential
losses. In addition, we have trading limits relating to our proprietary trading
desk. For a full description of our risk management procedures and the limits
placed on our proprietary trading desk, please see "Business--Risk Management"
and "--Our Proprietary Trading."
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.
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BUSINESS
THE FOLLOWING DESCRIPTION OF OUR BUSINESS CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR RESULTS COULD DIFFER
MATERIALLY FOR THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT
OF SOME FACTORS. SEE "RISK FACTORS."
OVERVIEW
Founded in 1924, our specialist LaBranche & Co. is one of the oldest and
largest specialist firms on the New York Stock Exchange, or the NYSE ("NYSE").
As a NYSE specialist, our role is to maintain, as far as practicable, a fair and
orderly market in our specialist stocks. In doing so, we provide a service to
our listed companies, and to the brokers, traders and their respective customers
who trade in our specialist stocks. We believe that, as a result of our
commitment to providing high quality specialist services, we have developed a
strong reputation among our constituencies, including investors, members of the
Wall Street community and our listed companies.
Our business has grown considerably during the past five years. Our revenues
increased from approximately $37.1 million in 1995 to $201.0 million in 1999,
representing a compound annual growth rate of 52.6%. We have accomplished our
growth both internally and through selective acquisitions. For example, since
the NYSE implemented its new specialist allocation process in March 1997, as
described in "Industry Background-The Specialist", we were selected by 53 new
listed companies, resulting from 83 listing interviews. In addition we have
acquired five specialist operations from 1997 through March, 2000, adding 278
new common stock listings to our firm. During the past five years, we have also
increased the scope of our business, as illustrated by the following data
obtained from the NYSE:
- the annual dollar volume on the NYSE of stocks for which we acted as
specialist increased to $1.2 trillion in 1999, as compared to
$133.3 billion in 1995. Based on these dollar volumes, we were the second
largest specialist firm in 1999 as compared to the eighth largest in 1995;
- the annual share volume on the NYSE of stocks for which we act as
specialist increased to 25.7 billion in 1999, as compared to 4.0 billion
in 1995. Based on these share volumes, we were the second largest
specialist firm in 1999 as compared to the sixth largest in 1995; and
- the total number of our common stock listings increased to 271 as of
December 31, 1999, as compared to 125 as of December 31, 1995. Based on
the number of our common stock listings, we were the third largest
specialist firm as of December 31, 1999 as compared to the fifth largest
as of December 31, 1995. In addition, we acted as specialist for 89 other
listed securities.
On March 2, 2000 we completed our acquisition of Henderson Brothers, a
specialist on the NYSE. Established in 1861, Henderson Brothers first registered
as a NYSE specialist in 1948 and was the eighth largest specialist firm on the
NYSE in terms of common stock listings at year end 1999. Henderson Brothers
acted as specialist in 113 common stock listings, including 26 companies in the
S&P 500 and two companies included in the Dow Jones Industrial Average. These
listings include American Express Company, Ford Motor Company, J.P. Morgan &
Co., Lehman Brothers Holdings, Inc., Morgan Stanley Dean Witter & Co. and
Schering-Plough Corporation. Henderson Brothers had $82.1 million of revenues
and $29.1 million of EBITDA for the year ended 1999.
On March 9, 2000 we acquired Webco, another specialist firm on the NYSE,
through a merger. Established in 1981, Webco acted as specialist in 34 common
stock listings, including First Union Corporation, Manor Care, Inc. and Nokia
Corporation. Webco had $13.7 million of revenues and $4.2 million of EBITDA for
the year ended October 31, 1999.
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As of May 31, 2000, our listed companies included:
- 71 of the S&P 500 companies; and
- seven of the 30 companies comprising the Dow Jones Industrial Average. Our
seven Dow stocks are American Express, AT&T, ExxonMobil, JP Morgan, Merck,
Minnesota Mining & Manufacturing and SBC Communications.
INDUSTRY BACKGROUND
THE NYSE
The NYSE is currently the largest securities market in the world. The market
capitalization of all U.S. shares listed on the NYSE increased from
approximately $6.0 trillion at December 31, 1995 to approximately $10.1 trillion
at December 31, 1999, representing a compound annual growth rate of 13.9%. The
number of companies listed on the NYSE increased from 2,675 at the end of 1995
to 3,025 at the end of 1999.
The NYSE's average daily trading volume increased from 91.2 million shares
in 1984 to 809.2 million shares in 1999, as illustrated by the following graph:
NYSE AVERAGE DAILY TRADING VOLUME FROM 1984 TO 1999
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
(Share volume in millions)
<TABLE>
<CAPTION>
1984 92.2
<S> <C>
1985 109.2
1986 141
1987 188.9
1988 161.5
1989 165.5
1990 156.8
1991 178.9
1992 202.3
1993 264.5
1994 291.4
1995 346.1
1996 412
1997 526.9
1998 673.6
1999 809.2
</TABLE>
CAGR=15.7%
Trading on the NYSE takes place through open bids to buy and open offers to
sell made by NYSE members, acting as principal or as agent for institutions or
individual investors. Buy and sell orders meet directly on the trading floor
through an auction process, and prices are determined by the interplay of supply
and demand in that auction. In order to buy and sell securities on the NYSE, a
person must first be accepted for membership in the NYSE. The number of
memberships, or seats, is presently limited to 1,366, and the price of a
membership depends on supply and demand. Based on recent transfers of
memberships, the market price of a membership on the NYSE is approximately
$2.0 million. To become a member, each prospective applicant must also pass an
examination covering NYSE rules and regulations.
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NYSE members are generally categorized based upon the activities in which
they engage on the trading floor, such as specialists or brokers. The largest
single membership group is floor brokers, which consists of both commission
brokers and independent brokers. Commission brokers are employed by
broker-dealer firms that are members of the NYSE and earn salaries and
commission. Independent floor brokers are brokers who independently handle
orders for other broker-dealers and financial institutions.
THE SPECIALIST
All trading of securities on the NYSE is conducted through an auction
process. The auction process for each security is managed by the specialist for
that security. The specialist is a broker-dealer who applies for and, if
accepted, is assigned the role to maintain a fair and orderly market in its
specialist stocks. The number of specialist units on the NYSE, many of which are
organized as private partnerships, has decreased from 36 at December 31, 1995 to
25 at December 31, 1999. Of these, the three largest specialist units as ranked
by their number of specialist stocks were responsible for approximately 47.4% of
the average daily trading volume in 1999, as measured by dollar volume.
A specialist firm is granted the franchise by the NYSE in a particular stock
to conduct the auction in that security. Specialist firms conduct their auctions
at specific trading posts located on the floor of the NYSE. Because the
specialist firm runs the auction in its specialist stocks, it knows of all bids
and offers in those stocks and gathers orders to price its stocks appropriately.
Specialist firms compete for the original listing of stocks through an
allocation process organized by the NYSE. As part of this allocation process,
companies seeking a listing may select a specialist firm in one of two ways.
Under the first method, the NYSE's allocation committee selects the specialist
firm based on specific criteria. Under the second method, available since
March 1997, the listing company requests that the allocation committee select
three to five potential specialist firms suitable for the stock, based on
criteria specified by the listing company. The listing company then has the
opportunity to meet with each specialist firm identified by the allocation
committee. Within one week after meeting the competing specialist firms, the
listing company must select a specialist firm. Currently, substantially all of
the companies seeking a listing on the NYSE are opting to make the final choice
of their own specialist firm under the second allocation method.
When assigned a particular stock, the specialist firm agrees to specific
obligations. The specialist firm's role is to maintain, as far as practicable,
trading in the stock that will be fair and orderly. This implies that the
trading will have reasonable depth and price continuity, so that, under normal
circumstances, a customer may buy or sell stock in a manner consistent with
market conditions. A specialist firm helps market participants achieve price
improvement in their trades because the best bids and offers are discovered
through the auction process. In performing its obligations, the specialist firm
is exposed to all transactions that occur in each of its specialist stocks on
the NYSE floor. In any given transaction, the specialist firm may act as:
- an auctioneer by setting opening prices for its specialist stocks and by
matching the highest bids with the lowest offers, permitting buyers and
sellers to trade directly;
- a facilitator bringing together buyers and sellers who do not know of each
other in order to execute a trade which would not otherwise occur;
- an agent for broker-dealers who wish to execute transactions as instructed
by their customers. Typically, these orders are limit orders entrusted to
the specialist at prices above or below the current market price; or
- a principal using its own capital to buy or sell stocks for its own
account.
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The specialist firm's decision to buy or sell shares of its specialist
stocks as principal for its own account may be based on obligation or
inclination. For example, the specialist firm may be obligated to buy or sell
its specialist stock to counter short-term imbalances in the prevailing market,
thus helping to maintain a fair and orderly market in that stock. At other
times, the specialist firm may be inclined to buy or sell the stock as principal
based on attractive opportunities. The specialist firm may trade at its election
so long as the trade will contribute to a fair and orderly market. In
actively-traded stocks, the specialist firm continually buys and sells its
specialist stocks at varying prices throughout each trading day. The specialist
firm's goal and expectation is to profit from differences between the prices at
which it buys and sells these stocks. In fulfilling its specialist obligations,
however, the specialist firm may, at times, be obligated to trade against the
market, adversely impacting the profitability of the trade. In addition, the
specialist firm's trading practices are subject to a number of restrictions, as
described in "Operations--NYSE Rules Governing Our Specialist Activities."
RECENT TRENDS IN NYSE TRADING AND THE SPECIALIST'S ROLE
- Specialist firms generate revenues by executing trades, either as agent or
principal, in their specialist stocks. Accordingly, the specialist firms'
revenues are primarily driven by the volume of trading on the NYSE. This
volume has increased significantly in recent years. The increase in
trading volume has resulted from a number of factors, including:
- an increase in the number of households investing in stocks;
- an increase in the amount of assets managed through retirement plans,
mutual funds, annuity and insurance products, index funds and other
institutional investment vehicles;
- the increased popularity and use of computerized trading, hedging and
other derivative strategies;
- an increase in NYSE-listed stocks due to:
- IPOs and spin-offs;
- transfers from Nasdaq and the American Stock Exchange; and
- an increase in listings of foreign companies;
- higher equity portfolio turnover by individuals and institutional
investors as a result of lower commission rates and other transaction
costs;
- an increase in on-line trading;
- trading in smaller price increments;
- an increase in the market capitalization of growth stocks; and
- an increase in the amount of shares traded due to stock splits and stock
dividends.
These factors have, in turn, been influenced by a strong U.S. economy, low
interest rates and low levels of inflation.
The NYSE has announced that it will implement a pilot program for trading in
decimals in the latter half of 2000 and has increased the window for providing
commission-free execution of a trade to five minutes from the current two
minutes. The NYSE is also considering the following additional changes:
- longer trading days; and
- trading of foreign stocks in ordinary form side by side with their
American depository receipts.
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These additional changes are being considered for implementation within the
next 18 months. We believe that trading in decimals and, if instituted, these
additional changes will likely contribute to additional growth in NYSE trading
volume.
The majority of trades in NYSE-listed stocks take place through NYSE
specialist firms. In 1999, specialist firms handled approximately 82.5% of
trades in NYSE-listed stocks. Trades in NYSE-listed stocks are also generally
effected as follows:
- some stocks are listed on multiple exchanges, such as regional exchanges,
and trades take place on those exchanges;
- NYSE members may trade NYSE-listed stocks off the NYSE in the
over-the-counter market; and
- non-NYSE members may trade NYSE-listed stocks off the NYSE in
over-the-counter markets.
Technological advances have contributed to the increased trading through
alternative trading systems, ATSs, such as electronic communications networks,
ECNs, and crossing systems. While the first ECN was created in 1969, most of the
others currently in operation were started in the past few years. These systems
electronically facilitate the matching of buy and sell orders that are entered
by their network members. If a match does not occur, some ATSs will forward
unfilled orders to other ATSs or to exchanges such as the NYSE. Some of these
networks also allow limited negotiation between members to facilitate a match.
These ATSs generally limit trades over their systems to their members, who are
typically large financial institutions, well-capitalized traders or brokerage
firms. Additionally, some ATSs are being developed to facilitate trading by
retail investors. In April 1999, the SEC ruled that these networks are allowed,
and in specified cases are required, to register and become subject to
regulation as stock exchanges.
The percentage of annual trading of NYSE listed stocks on the NYSE has
ranged from 82.1% to 84.1% for the past five years. It is unclear, however, how
the alternative trading methods and new technologies just described or that may
be developed will affect the percentage of trading in listed stocks conducted on
the NYSE. The NYSE has indicated that it is studying the possibility of
embracing electronic communications network technology to expand trading. ATSs
may be developed, organized and operated by large brokerage houses and
investment banks with greater capital, better access to technology and direct
access to investors. As a result, these parties may be well positioned to direct
trading to these networks. These alternative trading methods may account for a
growing percentage of the trading volume of NYSE-listed stocks.
The accelerating growth of trading volume and the increase in stock prices
on the NYSE in the 1990s has increased the demands upon specialists. In order to
fulfill their obligations, specialists are required to execute a greater number
of trades in a shorter period of time with greater price volatility. In
addition, specialists are called upon to take larger positions in their
specialist stocks. These factors have led to a consolidation of specialist units
in the past five years. We believe that the specialist market is becoming
increasingly dominated by a number of large, better-capitalized specialist firms
which are able to provide an enhanced level of service.
LABRANCHE'S COMPETITIVE POSITION
We are committed to providing the highest quality service to our various
constituencies. We believe our success is based on the following factors:
- LEADING POSITION IN THE SPECIALIST MARKET. We have a long-standing
reputation as one of the leading specialist firms on the NYSE. We have
successfully grown our business and improved our services through widely
varying market conditions. As of December 31, 1999 trading in the stocks
for which we acted as specialist during 1999 accounted for 14.5% of the
dollar volume on
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the NYSE and 13.5% of the share volume. Based on these percentages, we
were the second largest specialist firm on the NYSE. We are continuing to
develop our relationships with ATSs and to embrace new technologies in
trading platforms.
- DIVERSE AND HIGH QUALITY SPECIALIST STOCKS. Our listed companies operate
in a variety of industries including financial services, media, oil and
gas, retail, technology and telecommunications. Many of our listed
companies are leaders in their respective fields. We believe that acting
as specialist in the stocks of industry leaders will benefit us as these
leading companies continue to expand their businesses through internal
growth and acquisitions.
- STRONG MARKET-MAKING SKILLS. We utilize our strong market-making skills to
actively trade as principal in our specialist stocks. We believe that we
significantly improve liquidity in our specialist stocks, particularly
during periods of market volatility. In 1999, approximately 32.0% of our
trades were as principal as compared to an average of approximately 26.4%
for all NYSE specialists.
- INNOVATIVE CUSTOMER-ORIENTED SERVICES. We are committed to providing our
listed companies with a high level of service, in addition to our
specialist functions on the trading floor. We provide our listed companies
with detailed reports on the trading activity of their stocks. We also
maintain frequent contact with a majority of our listed companies to
discuss the trading in their stock. In addition, we were the first
specialist firm to:
- host an annual listed company conference;
- publish a company newsletter; and
- commission customer satisfaction surveys from our listed companies.
- COMPLETED ACQUISITIONS. Since 1997, we have acquired the following five
specialist operations, solidifying our position as one of the leading NYSE
specialist firms:
- a portion of the specialist operations of Stern Bros., LLC (July 1997);
- Ernst, Homans, Ware & Keelips (August 1997);
- Fowler, Rosenau & Geary, LLC (July 1998);
- Henderson Brothers, Inc. (March 2000); and
- Webco Securities, Inc. (March 2000).
Through 1999, we effectively employed our capital resources and skilled
personnel to maximize the synergies created through consolidation. We believe
this experience will assist us in integrating the businesses of our recent
acquisitions, Henderson Brothers and Webco.
Our objective is to continue the growth in our revenues and profits by
pursuing the following strategies:
- AGGRESSIVELY PURSUE NEW LISTINGS. We have been and will continue to be
aggressive in positioning ourselves in the NYSE allocation process.
Between March 1997, when the NYSE adopted the new allocation procedure,
and December 31, 1999, we participated in 80 selection pools for listed
companies and were chosen by management of the listed companies in 50 of
them. We were recently selected as specialist by Qwest Communications
International when it transferred its listing from Nasdaq to the NYSE.
This transfer constituted one of the largest transfers to the NYSE as
measured by market capitalization. We were also selected as specialist by
Agilent Technologies, Inc., which was spun-off from Hewlett-Packard into a
separate, fully independent company. In addition, Viacom chose us as
specialist in 1999 when it transferred its listing to the NYSE, the
largest transfer to the NYSE measured by market capitalization.
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- CAPITALIZE ON PENDING AND FUTURE ACQUISITIONS. We used the proceeds of the
offering and issuance of the initial notes to fully fund the acquisition
of Henderson Brothers, to partially fund the acquisition of Webco and to
pay fees and expenses related to both acquisitions. In connection with the
acquisitions of Henderson Brothers and Webco, we added 147 additional
common stock listings, 28 of which are included in the S&P 500 and two of
which are included in the Dow Jones Industrial Average. As a result of
these acquisitions, we are the largest specialist on the NYSE based on
annual dollar and share volume traded. As of May 31, 2000, we were the
specialist for 404 listed companies, including 71 of the S&P 500 and seven
of the companies included in the Dow Jones Industrial Average. We
currently are focusing management attention and resources to integrating
the businesses of Henderson Brothers and Webco. We also intend to continue
to take advantage of the consolidation trend in the specialist industry by
selectively pursuing acquisitions of other specialist operations.
RECENT ACQUISITIONS
HENDERSON BROTHERS
On March 2, 2000, we acquired Henderson Brothers, which owns Henderson
Brothers, Inc., a specialist firm on the NYSE, and Henderson Brothers Futures
Corporation, an inactive subsidiary. Under the terms of the agreement, we
acquired all the outstanding capital stock of Henderson Brothers for
approximately $228.4 million in cash. The proceeds of our initial note offering
were used to fully fund the acquisition of Henderson Brothers, to partially fund
the acquisition of Webco and to pay fees and expenses related to both
acquisitions. As part of the Henderson Brothers acquisition, we entered into
employment agreements with 14 specialists and an additional employee formerly
employed by Henderson Brothers. We also entered into consulting agreements with
two former Henderson Brothers stockholders pursuant to which we are paying an
aggregate of $5.0 million over five years.
In connection with the Henderson Brothers acquisition, we:
- acquired an additional 19 NYSE memberships, all of which are owned by the
individual specialists but are financed by LaBranche & Co.;
- hired an additional 84 employees, 19 of which are specialists, 41 of which
are specialist trading assistants and 24 of which are other
administrative, financial and operational personnel; and
- acquired an additional 8,650 feet of office space, which had a $216,726
annual lease payment in 1999.
In addition, as part of the acquisition, we also acquired and are continuing
the clearing operations of Henderson Brothers. As a clearing broker, we are
responsible for the clearance and settlement of transactions effected by us or
the introducing broker. We only clear and settle transactions executed by the
introducing brokers; we do not execute these transactions.
WEBCO
On March 9, 2000, we acquired, through a merger, Webco, another specialist
firm on the NYSE, for approximately 2.8 million shares of our common stock,
$10.9 million in cash and senior promissory notes in the aggregate principal
amount of $3.0 million, each bearing an interest rate of 10.0% per annum. As
part of the acquisition, we entered into employment agreements with three
specialists employed by Webco.
In connection with the Webco acquisition, we:
- acquired an additional 3 NYSE memberships;
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- hired an additional 13 employees, 5 of which are specialists and 8 of
which are specialist trading assistants; and
- acquired an additional 2,057 feet of office space, which had a $51,425
annual lease payment in 1999.
Following the completion of the acquisitions of Henderson Brothers and
Webco, we are the largest specialist firm on the NYSE in terms of the annual
dollar and share volume traded. As of May 31, 2000, we were the specialist for
404 common stock listings, including 71 of the S&P 500 and seven companies
included in the Dow Jones Industrial Average.
Simultaneously with the acquisitions of Henderson Brothers and Webco, we
transferred the specialist operations of each of Henderson Brothers and Webco to
our subsidiary LaBranche & Co. The clearing operations of Henderson Brothers are
operated by us as a separate subsidiary.
OPERATIONS
NYSE RULES GOVERNING OUR SPECIALIST ACTIVITIES
Under the NYSE rules, a specialist has a duty to maintain, as far as
practicable, a fair and orderly market in its specialist stocks. In order to
fulfill its obligations, the specialist must at times trade for its own account,
even when it may adversely affect the specialist's profitability. In addition,
under some circumstances, the specialist is prohibited from making trades as
principal in its specialist stocks. The specialist's obligations are briefly
described below.
REQUIREMENT TO TRADE AS PRINCIPAL. A specialist must buy and sell securities
as principal when necessary to minimize an actual or reasonably anticipated
short-term imbalance between supply and demand in the auction market. The
specialist must effect these transactions when their absence could result in an
unreasonable lack of continuity and/or depth in their specialist stocks. The
specialist is not expected to act as a barrier in a rising market or a support
in a falling market, but must use its own judgment to try to keep such price
increases and declines equitable and consistent with market conditions.
A specialist must make firm and continuous two-sided quotations that are
timely and that accurately reflect market conditions. In making these
quotations, the specialist's transactions are calculated to contribute to the
maintenance of price continuity with reasonable depth. Following is an
illustration of how a specialist acts as principal to maintain price continuity:
The most recent sale in a listed stock was $50, the best public bid (to buy)
on the specialist's book is $49 3/4, and the best public offer (to sell) on
the book is $50 1/4. A broker who wants to buy 100 shares at the market in
this instance without a specialist would purchase at $50 1/4, the offer
price. Similarly, a broker seeking to sell 100 shares without a specialist
would receive $49 3/4, the bid price. The specialist, who is expected to
provide reasonable price continuity, in this case might narrow the quote
spread by offering or bidding for stock for its own account. In this
instance, the broker who wants to buy 100 shares might buy at $50 1/16 from
the specialist, as opposed to buying the same amount of shares from the best
offer of $50 1/4, thereby offering price improvement to the customer. In the
next trade, a broker willing to sell 100 shares might sell to the specialist
at $50, as opposed to selling to the best available bid of $49 3/4, again
achieving price improvement for the customer.
TRADING RESTRICTIONS. In trading for its own account, the specialist must
avoid initiating a market-destabilizing transaction. All purchases and sales
must be reasonably necessary to permit the specialist to maintain, as far as
practicable, a fair and orderly market in its specialist stocks. In addition,
the specialist must comply with the following trading requirements:
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- A specialist must first satisfy a customer's market buy order (an order to
buy at the prevailing market price) before buying any stock for its own
account. Similarly, a specialist must first satisfy a customer's market
sell order (an order to sell at the prevailing market price) before
selling any stock for its own account.
- A specialist must first satisfy a customer's limit order held by it before
buying or selling at the same price for its own account. A limit order is
an order either to buy only at or below a specified price, or to sell only
at or above a specified price. A specialist may not have priority over any
customer's limit order. A specialist, however, may buy or sell at the same
price as a customer limit order as long as that limit order is executed
first.
- If a public buyer wants to buy at a particular price and a seller wants to
sell at the same price, the buyer and seller trade directly with each
other, and the specialist should not interfere in the transaction.
- The specialist does not charge commissions for trades in which it acts as
a principal.
- Except in some circumstances in less active markets, the specialist may
not, without permission from an NYSE official, initiate destabilizing
trades for its own account which cause the stock price to rise or fall.
- Any transactions by the specialist for its own account must be effected in
a reasonable and orderly manner in relation to the condition of the
general market, the market in the particular stock and the adequacy of the
specialist's position to the immediate and reasonably anticipated needs of
the market.
In addition, the specialist cannot be in a control relationship with any of
its listed companies. This means a specialist may not acquire more than 5% of
any common or preferred issue of its specialist stocks and may not own 10% or
more of any common or preferred stock. A specialist may not hold any position as
an officer or director or receive payments or loans or engage in business
transactions with any of its listed companies.
RISK MANAGEMENT
Because our specialist activities expose our capital to significant risks,
managing these risks is a constant priority for us. Our central role in the
auction process helps us to reduce risks by enabling us to incorporate
up-to-date market information in the management of our inventory, subject to our
specialist obligations. In addition, we have developed a risk management process
which is designed to balance our ability to profit from our specialist
activities with our exposure to potential losses. Our risk management process
includes as participants our executive operating committee, our floor management
committee, our floor team captains and our specialists. These parties' roles are
described as follows:
EXECUTIVE OPERATING COMMITTEE. Our executive operating committee is
composed of Michael LaBranche, Vincent J. Flaherty, Alfred O. Hayward, Jr.,
Michael J. Naughton, James G. Gallagher, Harvey S. Traison and John O. Pickett.
This committee is responsible for approving all risk management policies and
trading guidelines for particular specialist stocks, after receiving input and
proposals by the floor management committee. In addition, our executive
operating committee reviews all unusual situations reported to it by our floor
management committee.
FLOOR MANAGEMENT COMMITTEE. Our floor management committee is composed of
Messrs. Flaherty, Hayward, Naughton, Gallagher and Pickett. This committee is
responsible for formulating and overseeing our overall risk management policies
and risk guidelines for each of our specialist stocks. In arriving at these
policies and guidelines, our floor management committee considers the advice and
input of our floor team captains. Our floor management committee meets with all
floor team captains no less than once a month to review and, if necessary,
revise the risk management
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policies for our company as a whole and/or for particular specialist stocks. In
addition, a member of our floor management committee is always available on the
trading floor to review and assist with any unusual situations reported by a
captain. Our floor management committee reports to our executive operating
committee about each of these situations.
FLOOR TEAM CAPTAINS. We have ten floor team captains who monitor the
activities of our specialists throughout the trading day from various positions
at our trading posts. The captains observe trades and constantly review trading
positions in real-time through our information systems. In addition, the
captains are readily available to assist our specialists in determining when to
deviate from our policies and guidelines to react to any unusual situations or
market conditions. The captains must report these unusual situations to
management, including any deviations from our policies and guidelines. Captains
meet with each specialist at least once a week to evaluate the specialist's
adherence to our risk management policies and guidelines. Captains also meet
among themselves at least twice weekly to review risk policies and guidelines
and, if appropriate, make new recommendations to the floor management committee.
SPECIALISTS. Our specialists conduct auctions based upon the conditions of
the marketplace. In doing so, specialists should observe our risk management
policies and guidelines as much as practicable. Specialists must immediately
notify a captain of any unusual situations or market conditions requiring a
deviation from our policies and guidelines.
We rely heavily on our information systems in conducting our risk
management. Management members and captains must constantly monitor our
positions and transactions in order to mitigate our risks and identify
troublesome trends as they occur. We have invested substantial capital 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;
- the various positions of any one of our trading professionals;
- our overall position in a particular stock;
- capital and profit-and-loss information on an aggregate, per specialist or
per issue basis; and
- average position size.
CIRCUIT BREAKER RULES. The NYSE has instituted certain circuit breaker
rules intended to halt trading in all NYSE-listed stocks in the event of a
severe market decline. The circuit breaker rules impose temporary halts in
trading when the Dow Jones Industrial Average drops a certain number of points.
Circuit breaker levels are set quarterly at 10, 20 and 30 percent of the Dow
Jones Industrial Average closing values of the previous month, rounded to the
nearest 50 points.
LISTED COMPANY SERVICES
We are committed to providing our listed companies with a high level of
service, in addition to our specialist functions on the trading floor. We have a
Corporate Relations Department, consisting of seven full-time employees and one
independent consultant devoted to serving our listed companies. The most
important function of the Corporate Relations Department is to provide current
information to the listed companies. Upon request, our Corporate Relations
Department provides our listed companies with the following reports:
- daily reports on the trading results of their stock;
- real-time data regarding intra-day trading activity in their stock; and
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- weekly, monthly and yearly reports which analyze short and long term
trading trends in their stock.
In addition to providing trading information, we help to educate our listed
companies on general market trends. We organize annual educational conferences
that review trends in the securities industry and NYSE trading. We also publish
for and distribute to our listed companies a periodic newsletter that reviews
market trends. Finally, we survey our specialist companies annually on the
quality of our services, and use the information obtained in these surveys to
continually improve our services.
NYSE MEMBERSHIPS
NYSE memberships are granted only to individuals, and each individual
specialist must own or lease a NYSE membership. As of December 31, 1999, we had
48 specialists. As of May 31, 2000, we had 73 specialists, each of whom owned or
leased a membership under the following arrangements:
- 10 memberships were owned directly by 10 of our specialists;
- 26 were owned by specialists and 1 was owned by our subsidiary Henderson
Brothers in order to operate as a clearing organization, all of which are
financed by LaBranche & Co.; and
- 37 were leased by 37 of our specialists from other individual members and
we pay and guarantee the lease payments.
OUR INFORMATION AND COMMUNICATIONS SYSTEMS AND THE NYSE'S SUPER-DOT SYSTEM
As a self-clearing broker-dealer, we have made significant investments in
our trade processing systems. Our use of and dependence on technology have
allowed us to maintain our significant growth over the past several years. In
addition to using consultants who primarily service the specialist industry, we
have an in-house information technology staff. We currently clear an average of
approximately 60,000 principal trades per day. We have continued the clearing
operations of Henderson Brothers, which included limited clearing of trades for
third parties. Our information systems send and receive data from the NYSE
through a dedicated data feed.
Our systems enable us to monitor, on a real-time basis, our profits and
losses along with our trading positions. The NYSE supplies us with specialist
position reporting system terminals both on the trading floor and in our
offices. These terminals allow us to monitor our trading profits and losses as
well as our positions. We have also developed software that allows us to monitor
these items in the event that the NYSE-provided systems fail.
We have a back-up disaster recovery center in Hoboken, NJ. The back-up
system operates as a mirror image of our primary computer system in New York
City as we have a direct connection between the two sites which we utilize to
back-up all data on an hourly basis. On a regular basis, we test both systems to
assure that they are fully operational.
In executing trades on the NYSE, we receive electronic orders from the
Super-DOT system, an order routing system operated by the NYSE. The Super-DOT
System is designed to handle individual orders of up to 100,000 shares and is
essentially an electronic broker. Orders that originate through the Super-DOT
system are routed directly to us through our computer system at the NYSE. When
we receive an order from the Super-DOT system, we conduct the same auction
process and we are subject to the same obligations as with any other order.
Our information technology staff has developed software which enables our
corporate relations staff and our specialists to share information with each
other regarding upcoming company and industry conferences. In addition, we
monitor each of our specialist stocks intra-day to see if there are any
significant price and/or volume variances of which we should alert the listed
company. This has proven to be a valuable customer service tool.
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OUR PROPRIETARY TRADING
In 1995, we initiated a proprietary trading program, seeking to leverage our
trading and market experience. Our strategy is short-term oriented, and most of
our positions are intra-day and not held overnight. Four of our traders focus
primarily on stocks listed on the NYSE. A fifth trader focuses entirely on
listed futures and options on both United States Treasury obligations and
Eurodollars. In 1999, we derived 3.3% of our revenues from our proprietary
trading. Our proprietary trading desk utilizes a Windows NT based trade
reporting system which captures all trades executed by the trading desk and
marks all positions to market. We are not permitted to trade in stocks for which
we act as specialist.
We have taken the following actions to manage the risks associated with our
proprietary trading:
- for 2000, we have limited our capital commitment for our proprietary
trading to an aggregate maximum of $19.5 million intra-day and overnight
positions of up to $12.0 million per day;
- each of our proprietary traders have specific trading limits, which may
not be exceeded without the approval of executive management. Our most
experienced trader may invest up to $12.0 million per day and may hold
overnight positions up to $7.5 million. Each of our other traders have
daily investment limits of $5.0 million or less and overnight investment
limits of $3.0 million or less, depending on their experience;
- the positions of our futures and options traders are monitored by an
in-house model that measures potential intra-day risk as well as actual
dollar exposure; and
- one of our managing directors oversees all of our proprietary trading and
has the authority to instruct the proprietary trading desk to liquidate
positions or otherwise reduce risk. He reports directly to Michael
LaBranche, our Chairman, Chief Executive Officer and President.
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SPECIALIST COMPANIES
As of December 31, 1999, we acted as specialist for 271 common stocks listed
on the NYSE. As of May 31, 2000, subsequent to our recent acquisitions, we acted
as specialist for 404 common stock listings. Our listed companies operate in a
variety of industries, including financial services, media, oil and gas, retail,
technology and telecommunications. They ranged in market capitalization from
some of the smallest on the NYSE to some of its largest and well-known
corporations. We also represented 42 foreign listings on the NYSE as of
December 31, 1999 and 57 foreign listings as of May 31, 2000. The following is a
list of our top 50 listed companies in terms of market capitalization as of
May 31, 2000
in order of their respective global market capitalization (read in descending
order from top to bottom, left to right):
Exxon Mobile Corporation
Nokia Corporation
Lucent Technologies Inc.
Merck & Co., Inc.
Toyota Motor Corporation
SBC Communications Inc.
TOTAL Fina Elf S.A.
AT&T Corp.
Glaxo Wellcome, plc
HSBC Holdings plc
Viacom Inc.
Royal PTT Nederland, NV
Morgan Stanley Dean Witter & Co.
Tyco International Ltd.
Berkshire Hathaway, Inc. Class A
American Express Company
Smithkline Beecham plc
Schering-Plough Corp.
Taiwan Semiconductor Manufacturing Company Ltd.
AT&T Wireless
Medtronic, Inc.
Chevron Corporation
Koninklijke Philips Electronics N.V.
ING Groep N.V.
Ford Motor Co.
Encl S.p.A.
Cable and Wireless plc
Novartis AG
Compaq Computer Corporation
MediaOne Group, Inc.
Schlumberger Limited
U.S. West Inc.
First Union Corporation
Minnesota Mining & Manufacturing Company
ABN Amro Holding N.V.
Agilent Technologies, Inc.
Qwest Communications International Inc.
Federal Home Loan Mortgage Corp.
The Gap, Inc.
Diageo plc
Clear Channel Communications, Inc.
Firstar Corporation
First Data Corp.
Halliburton Co.
National Australia Bank, Ltd.
Household International, Inc.
San Paolo IMI S.p.A.
J.P. Morgan & Co., Inc.
Associates First Capital Corporation
Suntrust Bank, Inc.
MARKETING
It is a priority for our management to proactively identify potential
listing companies before the allocation process begins. We contact these
companies and commence our marketing efforts upon determining that they are
considering listing on the NYSE. Our marketing efforts typically consist of
members of our management group visiting with the companies that are considering
listing on the NYSE and describing our services. We also provide written
literature describing our operations, our listed companies, our 75-year history
as a specialist firm and our industry in general.
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REGULATORY MATTERS
GENERAL
The securities industry in the United States, including all broker-dealers,
is subject to extensive regulation under both federal and state laws. In
addition, the SEC and the NYSE require strict compliance with their rules and
regulations. As a matter of public policy, regulatory bodies are charged with
safeguarding the integrity of the securities and other financial markets and
with protecting the interests of investors participating in those markets.
As a broker-dealer, we are subject to regulations concerning operational and
financial aspects of our business. We are subject to extensive registration
requirements with various government entities and self-regulatory organizations,
commonly referred to as SROs, with which we must comply before we can conduct
our business. We are also subject to laws, rules and regulations forcing us to
comply with financial reporting requirements, trade practices, capital structure
requirements, and record retention requirements governing the conduct of our
directors, officers and employees. Failure to comply with any of these laws,
rules or regulations could result in censure, fine, the issuance of
cease-and-desist orders or the suspension or disqualification of our directors,
officers or employees, and other adverse consequences, which could have an
adverse effect on our business.
As a NYSE specialist firm, we are under constant review by the NYSE on all
aspects of our operations and financial condition. As part of the price
discovery mechanism implemented by the NYSE, every specialist transaction is
published immediately on the tape and is broadcast worldwide. The NYSE also
employs sophisticated monitoring and stringent rules approved by the SEC. The
NYSE's Market Surveillance Division examines specialists' trading in all stocks,
every trading day, including specialists' decisions to trade or to not trade as
principal.
CAPITAL REQUIREMENTS
As a broker-dealer, we are subject to SEC Rule 15c3-1, which requires
minimum net regulatory capital. We are required to maintain minimum net capital,
as defined, equivalent to the greater of $100,000 or 1/15 of our aggregate
indebtedness, as defined. At December 31, 1999, our net capital, as defined by
this rule, was approximately $161.4 million and exceeded minimum requirements by
approximately $159.9 million.
The NYSE also requires members registered as specialists to maintain a
minimum regulatory capital dollar amount to establish that they can meet, with
their own net liquid assets, their position requirement. During November 1999,
subject to SEC approval, the NYSE approved changes to Rule 104, its minimum net
liquid asset requirements. These changes required specialist units that
currently exceed five percent in any of the NYSE's four concentration measures
to maintain minimum net liquid assets based upon the securities for which they
act as the specialist. The requirements state that the net liquid assets must be
equivalent to $4.0 million for each stock in the Dow Jones Industrial Average,
$2.0 million for each stock in the S&P 100 Stock Price Index, excluding stocks
included in the previous classification, $1.0 million for each stock in the S&P
500 Stock Price Index, excluding stocks included in the previous classification,
$500,000 for each common stock, excluding bond funds and stocks included in the
previous classifications, and $100,000 for each stock not included in any of the
above classifications. In addition, the NYSE has proposed to require any new
specialist entities that result from a merger, acquisition, consolidation or
other combination of specialist assets to maintain net liquid assets equivalent
to the greater of either (1) the aggregate net liquid assets of the specialist
entities prior to their combination or (2) the new capital requirements
prescribed under Rule 104. Effective after the completion of our recent
acquisitions of Henderson Brothers and Webco, the net liquid asset requirement
for our combined entity is $284.3 million, which represents the combined net
liquid assets of the three firms as separate entities. "Net liquid assets" for a
specialist firm that also engages in transactions other than specialist
activities is based upon its excess net capital as determined
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in accordance with SEC Rule 15c3-1. As of December 31, 1999, our NYSE minimum
required dollar amount of net liquid assets was $93.6 million compared to actual
net liquid assets of approximately $175.9 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.
COMPETITION
We obtain each of our new listings on the NYSE by participating in an
allocation process. As part of this process, either the allocation committee of
the NYSE or the listing company chooses the specialist firm. We compete with
other specialist firms based on a number of factors, including:
- the strength of our capital base;
- our willingness to commit our own capital and trade for our own account
while conducting our specialist operations; and
- the ancillary services we offer our specialist companies, such as
providing information on the trading activities in their stocks.
The following is a list of the top ten specialist units as of December 31,
1999, based on their number of common stock listings:
- Spear, Leeds & Kellogg
- LaBranche & Co.
- Fleet Specialists, Inc.
- Wagner, Stott, Mercator LLC
- Van Der Moolen Specialists USA, LLC
- Robb Peck McCooey Specialist Corp.
- Bear/Hunter Specialists, LLC
- MJ Meehan & Co., LLC
- Susquehanna Specialists, Inc.
- Jacobson (Benjamin) & Sons, LLC
The competition for obtaining new listed companies is intense. We expect
competition to continue and intensify in the future. Some of our competitors may
have significantly greater financial resources than we have and may also have
greater name recognition. These competitors may be able to respond more quickly
to new or evolving opportunities and listed company requirements. They may also
be able to undertake more extensive promotional activities to attract new
listing companies. In addition, the specialist industry has recently been
consolidating. The combined companies resulting from the consolidation may have
a stronger capital position. This trend has intensified the competition in our
industry. We cannot be sure that we will be able to compete effectively with our
current or future competitors. We also cannot be sure that the competitive
pressures we face will not have an adverse effect on our business, financial
condition and/or operating results.
NYSE-listed stocks may be traded:
- by NYSE members over-the-counter; and
- by non-NYSE members over-the-counter.
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Technological advances have also contributed to the recent emergence of
trading through alternative trading systems, such as electronic communication
networks and crossing systems. In April 1999, the SEC ruled that alternative
trading systems can apply and, in specified cases, are required to register as
stock exchanges, subject to regulation as a stock exchange. This would enable
NYSE members to trade all NYSE-listed stocks on these networks, regardless of
when the stocks were originally listed. These networks may be developed,
organized and operated by large brokerage houses and investment banks with
greater capital, better access to technology and direct access to investors. As
a result, these parties may be well-positioned to direct trading to these
networks. These alternative trading systems may adversely affect the trading of
NYSE-listed stock through specialists on the NYSE. That, in turn, would have an
adverse effect on our business.
The NYSE faces competition from Nasdaq for new listings. Nasdaq continues to
grow and gain in popularity, attracting companies which might otherwise have
listed on the NYSE. In recent years in particular, many high technology
companies have opted to be quoted on Nasdaq, even though many of them would have
qualified for NYSE listing. If more companies decide to be quoted on Nasdaq as
opposed to listing their stocks on the NYSE, trading volume on the NYSE could be
adversely affected.
EMPLOYEES
As of May 31, 2000, we have 259 full-time employees, including 41 managing
directors with:
- 73 specialists, including managing directors;
- 6 traders in our proprietary trading department;
- 143 trading assistants;
- 8 Corporate Relations Department employees; and
- 29 management, administration and finance staff, including 2 managing
directors.
Our employees are not covered by a collective bargaining agreement. We have
never experienced an employment-related work stoppage. We consider our employee
relations to be good.
PROPERTIES
Our offices are located at One Exchange Plaza, New York, New York. We lease
approximately 35,000 square feet under three separate leases, expiring in
October 2001, December 2002 and January 2008. In addition, we lease three
trading posts on the floor of the NYSE. We believe that our current leased space
is suitable and adequate for the operation of our business as presently
conducted and as contemplated to be conducted in the immediate future.
LEGAL PROCEEDINGS
We are not a party to any material legal proceeding.
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MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------------------- ---------------------------------------------------------
<S> <C> <C>
Michael LaBranche......... 44 Chairman, Chief Executive Officer and President
James G. Gallagher........ 53 Executive Vice President and Director
Alfred O. Hayward, Jr..... 52 Executive Vice President and Director
S. Lawrence Prendergast... 59 Executive Vice President, Finance and Director
E. Margie Filter.......... 59 Director
Thomas E. Dooley.......... 43 Director
Harvey S. Traison......... Senior Vice President, Chief Financial Officer and
60 Director
Vincent J. Flaherty....... 55 Senior Vice President, Floor Operations
Michael J. Naughton....... 54 Senior Vice President, Specialist Operations
</TABLE>
MICHAEL LABRANCHE has been our Chairman, Chief Executive Officer and
President since our initial public offering in August 1999. Mr. LaBranche has
served as Chairman of the Managing Committee of LaBranche & Co. since 1996, as a
member of the Managing Committee of LaBranche & Co. since 1988 and as a
specialist with LaBranche & Co. since 1977. He currently is a Governor of the
NYSE and is a member of the NYSE's Market Performance Committee.
JAMES G. GALLAGHER has been our Executive Vice President and a director
since our initial public offering in August 1999. Mr. Gallagher has served as a
member of the Managing Committee of LaBranche & Co. since 1998. From 1980 to
July 1998, Mr. Gallagher was a specialist and managing partner with Fowler,
Rosenau & Geary, LLC. Mr. Gallagher is currently a NYSE Senior Floor Official.
Mr. Gallagher has also served for six years as a NYSE Floor Governor.
ALFRED O. HAYWARD, JR. has been our Executive Vice President and a director
since our initial public offering in August 1999. Mr. Hayward has been a
specialist with LaBranche & Co. since 1983 and has served as a member of the
Managing Committee of LaBranche & Co. since 1994. He currently sits on the NYSE
Arbitration Panel and is involved with NYSE education programs. Mr. Hayward has
served as a NYSE Floor Official and has also served as the Chairman of the
Allocation Committee.
S. LAWRENCE PRENDERGAST has been our Executive Vice President, Finance and a
director since our initial public offering in August 1999. From May 1997 to
August 1999, Mr. Prendergast was the Chairman and CEO of AT&T Investment
Management Corp. Prior to 1997, Mr. Prendergast was the Vice President and
Treasurer of AT&T for 14 years. Mr. Prendergast currently is a director of AT&T
Investment Management Corp., a money management subsidiary of AT&T.
E. MARGIE FILTER has been a director of LaBranche since October 1999.
Ms. Filter joined Xerox Corporation in 1973 and is currently Vice President,
Treasurer and Secretary of Xerox Corporation and President and Chief Executive
Officer of Xerox Credit Corporation. Ms. Filter is also a director of Baker
Hughes Inc. and Briggs and Stratton Corporation.
THOMAS E. DOOLEY has been a director of LaBranche since March 2000.
Mr. Dooley is Deputy Chairman and Executive Vice President of Viacom Inc. and a
member of its Board of Directors. Since 1980, Mr. Dooley has held various
divisional and corporate finance positions, most recently serving as Executive
Vice President, Finance, Corporate Development and Communications. Mr. Dooley
currently is a director of the International Radio & Television Society.
HARVEY S. TRAISON has been our Senior Vice President and Chief Financial
Officer and a director since March 2000. As of December 31, 1999, Mr. Traison
retired from the position of Vice President, Treasurer and Member of the Board
of Directors of DaimlerChrysler North America Holding Corporation and
DaimlerChrysler Canada Finance Inc. Mr. Traison joined Daimler-Benz (a
predecessor of DaimlerChrysler) in 1984.
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VINCENT J. FLAHERTY has been our Senior Vice President, Floor Operations
since our initial public offering in August 1999. Mr. Flaherty has been a
specialist with LaBranche & Co. since 1997. Prior to joining our specialist
firm, Mr. Flaherty was the managing partner of Homans & Co., an NYSE specialist
firm, which he joined in 1963.
MICHAEL J. NAUGHTON has been our Senior Vice President, Specialist
Operations since our initial public offering in August 1999. Mr. Naughton has
been a specialist with LaBranche & Co. since 1979 and was appointed to the
Managing Committee of LaBranche & Co. in 1990.
There are no family relationships among any of our directors and executive
officers.
BOARD COMMITTEES
Our Board of Directors has an audit committee and a compensation committee.
The audit committee of our Board of Directors was established on March 17,
2000 and is composed of E. Margie Filter and Thomas E. Dooley. The audit
committee reviews, acts on and reports to our Board of Directors with respect to
various auditing and accounting matters, including the recommendation of our
auditors, the scope of our annual audits, fees to be paid to our auditors, the
performance of our independent auditors and our accounting practices. The audit
committee is comprised solely of independent directors.
The compensation committee of our Board of Directors was established on
March 17, 2000 and is composed of E. Margie Filter, Thomas E. Dooley and Michael
LaBranche. The compensation committee recommends, reviews and oversees salaries,
bonuses, benefits and equity incentives for our employees, consultants and
directors. The compensation committee also administers our incentive
compensation plans. The compensation committee is comprised of a majority of
independent directors.
Prior to March 17, 2000, the duties described above were fulfilled by our
Board of Directors.
DIRECTOR COMPENSATION
We have appointed two non-employee directors. Each of our non-employee
directors currently receives an annual retainer of $28,000 and attendance fees
of $1,500 per board meeting and $1,000 per committee meeting attended. The
attendance fees are paid after the end of each year in shares of our common
stock under our Equity Incentive Plan. Our employee directors do not receive any
additional compensation for serving on our Board of Directors or any committee
of our board.
EXECUTIVE COMPENSATION
Prior to our reorganization transactions in August 1999, many of our
managing directors were members of LaB Investing Co. L.L.C., the general partner
of LaBranche & Co. The aggregate amount of compensation received by all our
managing directors generally approximated LaB Investing Co. L.L.C.'s interest in
LaBranche & Co.'s income before managing directors' compensation. These payments
of compensation were allocated among our managing directors based on the
managing directors' respective percentage interests in the profits of LaB
Investing Co. L.L.C. Since our reorganization from partnership to corporate
form, our managing directors, including our executive officers, receive
compensation in the form of salary plus participation in our Equity Incentive
Plan and our Annual Incentive Plan.
The following table sets forth the annual compensation we paid during fiscal
1999 to our Chief Executive Officer and our four other highest paid executive
officers (the "Named Executive Officers") whose total salary for fiscal 1999
exceeded $100,000 for services rendered to LaBranche and its subsidiaries in all
capacities. Such amounts reflect the amounts paid to these individuals under the
compensation arrangements in effect prior to our reorganization in August 1999,
plus amounts paid under the restructured compensation plan following our
reorganization. As a result, these amounts may not be indicative of amounts to
be paid to the Named Executive Officers in future years. No executive who would
otherwise have been includable in such table on the basis of salary and bonus
earned for fiscal 1999 resigned or otherwise terminated employment during fiscal
1999.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
POST-REORGANIZATION PRE-REORGANIZATION
-------------------------------------------------------------- ------------------
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
----------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION STOCK OPTIONS COMPENSATION(2)
--------------------------------- -------- -------- --------- ------------ ------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Michael LaBranche................ 1999 $93,750 $815,460 -- 500,000 $4,226,312
Chairman, Chief Executive
Officer and President
James G. Gallagher............... 1999 93,750 375,625 -- 250,000 2,826,863
Executive Vice President
Alfred O. Hayward, Jr............ 1999 93,750 500,460 -- 100,000 2,831,843
Executive Vice President
Vincent J. Flaherty.............. 1999 93,750 300,460 -- 50,000 4,010,514
Senior Vice President, Floor
Operations
Michael J. Naughton.............. 1999 93,750 250,460 -- 100,000 2,831,843
Senior Vice President,
Specialist Operations
</TABLE>
------------------------
(1) Reflects bonus amount earned in 1999.
(2) Reflects managing directors' compensation from our partnership paid to our
Named Executive Officers prior to our reorganization.
The following table sets forth certain summary information concerning
individual grants of stock options made during the year ended December 31, 1999
to each of our Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES OF
OPTIONS EXERCISE STOCK PRICE APPRECIATION
SHARES GRANTED OR BASE FOR OPTION TERM
UNDERLYING TO EMPLOYEES PRICE PER EXPIRATION ----------------------------
OPTIONS IN 1999 SHARE DATE 5% 10%
---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael LaBranche............ 500,000 41.7% $14.00 08/19/2009 $4,402,262 $11,156,197
James G. Gallagher........... 250,000 20.8% 14.00 08/19/2009 2,201,131 5,578,099
Alfred O. Hayward, Jr........ 100,000 8.3% 14.00 08/19/2009 880,452 2,231,239
Vincent J. Flaherty.......... 50,000 4.2% 14.00 08/19/2009 440,226 1,115,620
Michael J. Naughton.......... 100,000 8.3% 14.00 08/19/2009 880,452 2,231,239
</TABLE>
The following table sets forth the number of options and value of
unexercised options held by each of our Named Executive Officers at
December 31, 1999.
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AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR
END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT YEAR END MONEY OPTIONS AT YEAR END
--------------------------- -----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Michael LaBranche.............................. -- 500,000 -- --
James G. Gallagher............................. -- 250,000 -- --
Alfred O. Hayward, Jr.......................... -- 100,000 -- --
Vincent J. Flaherty............................ -- 50,000 -- --
Michael J. Naughton............................ -- 100,000 -- --
</TABLE>
EMPLOYMENT AGREEMENTS AND NONCOMPETITION AGREEMENTS
As part of the reorganization of our firm from partnership to corporate
form, our managing directors, all of whom are members of LaB Investing Co.
L.L.C., exchanged their membership interests in LaB Investing Co. L.L.C. for
shares of our common stock. We have entered into employment agreements, pledge
agreements and agreements regarding noncompetition and other covenants with all
members who continued as managing directors after our initial public offering,
including each managing director who is a member of our board of directors or is
an executive officer. We have also entered into an employment agreement and
noncompetition agreement with our Executive Vice President, Finance. Our Senior
Vice President/Chief Financial Officer has entered into an employment agreement
which contains comparable provisions regarding noncompetition. The material
terms of the employment, noncompetition and pledge agreements are described
below. You should refer to the exhibits that are a part of the registration
statement for copies of the forms of these agreements. See "Available
Information."
THE EMPLOYMENT AGREEMENTS
Each employment agreement, other than the employment agreements with our
Executive Vice President, Finance and our Senior Vice President and Chief
Financial Officer, has an initial term of at least one but not more than five
years, requires the managing director to devote his entire working time to our
business and affairs, contains various restrictive covenants and is terminable
on 90 days' notice by either party. The employment agreement with our Executive
Vice President, Finance, has an initial term of one year, requires him to devote
his time as is reasonably necessary for him to perform his duties and
responsibilities and is terminable on 30 days' notice by either party. The
employment agreement with our Senior Vice President and Chief Financial Officer
has an initial term of three years, requires him to devote substantially all of
his business time to the performance of his duties and responsibilities, is
terminable on 90 days' notice by either party and provides for automatic
one-year renewals, subject to notice of termination.
THE NONCOMPETITION AGREEMENTS
Each noncompetition agreement contains the following provisions:
CONFIDENTIALITY. Each managing director and each executive officer is
required to protect and use "confidential information" in accordance with the
restrictions which we place on its use and disclosure.
NONCOMPETITION. During employment and until the later of 12 months
following termination of employment with us or the fifth anniversary of our
common stock offering, a managing director or executive officer may not:
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- form, or acquire a 5% or greater ownership, voting or profit participation
interest in, any competitive enterprise; or
- associate with any competitive enterprise and in connection with such
association engage in, or directly or indirectly manage or supervise
personnel engaged in, any business activity that is related to his or her
activities with us.
For this purpose, a "competitive enterprise" is any business enterprise that
engages in activity, or owns or controls a significant interest in an entity
that engages in activity that competes, directly or indirectly, with any
activity in which we are engaged. These activities include, without limitation,
specialist services and/or securities brokerage, sales, lending, custody,
clearance, settlement or trading.
NONSOLICITATION. During employment and until the later of 12 months
following termination of employment with us or the fifth anniversary of our
common stock offering, a managing director or executive officer may not,
directly or indirectly:
- solicit any of our listed companies;
- interfere with or damage any relationship between us and any of our listed
companies or prospective allocated companies; or
- solicit any of our employees to apply for, or accept employment with, any
competitive enterprise.
TRANSITION ASSISTANCE. The noncompetition agreements also provide that each
managing director and each executive officer will take all actions and do all
things reasonably requested by us during a 90-day transition period following
termination of employment to maintain the business, goodwill and business
relationships in which or with which he or she was previously involved on our
behalf.
LIQUIDATED DAMAGES. If a managing director breaches the noncompetition or
nonsolicitation provisions of the noncompetition agreement before the later of
12 months following termination of employment with us or the fifth anniversary
of the date of the completion of our common stock offering, then he or she will
be liable for liquidated damages in an amount equal to 75% of the aggregate
value of the common stock and cash received by that managing director from us in
exchange for his or her membership interest in LaB Investing Co. L.L.C. The
noncompetition agreement with our Executive Vice President, Finance does not
provide for the payment of liquidated damages. The noncompetition provisions of
the employment agreement with our Senior Vice President/Chief Financial Officer
does not provide for the payment of liquidated damages.
THE PLEDGE AGREEMENTS
Under each managing director's pledge agreement, the liquidated damages
obligations under each noncompetition agreement are secured by a pledge of
common stock with an initial value equal to 100% of the liquidated damages
amount. The pledge agreement will terminate with respect to a managing director
on the earliest to occur of:
- the death of the managing director;
- the fifth anniversary of the date of the completion of our initial public
offering; or
- payment in cash or other satisfaction by the managing director of all
liquidated damages incurred.
NONEXCLUSIVITY AND ARBITRATION
The liquidated damages and pledge arrangements discussed above are not
exclusive of any injunctive relief to which we may be entitled for a breach of a
covenant against competition or solicitation. Prior to and after the expiration
of the pledge agreements, we will be entitled to all available remedies for a
breach of the noncompetition agreements. The employment and noncompetition
agreements generally provide that any disputes thereunder will be resolved by
binding arbitration.
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INCENTIVE AWARDS TO OUR EMPLOYEES
THE EQUITY INCENTIVE PLAN
Currently, under the Equity Incentive Plan, there are outstanding,
(1) options to purchase an aggregate of 1,200,000 shares of our common stock
granted at $14.00 to our executive officers, (2) restricted stock units for
1,064,655 shares of common stock granted to our employees who are not managing
directors and (3) 368 shares of unrestricted stock issued to one of our
independent directors as compensation for her attendance at board meetings in
1999. Subject to continuing service with the firm and certain other conditions,
the options already granted will generally become exercisable in three equal
annual installments commencing on the first anniversary of the date of the grant
and restricted stock units will generally vest in three equal annual
installments commencing on the third anniversary of the grant date.
TYPES OF AWARDS. The Equity Incentive Plan provides for grants of options
to purchase shares of common stock, including options intended to qualify as
incentive stock options ("ISOs") (within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended), and options which do not qualify as
ISOs ("NQSOs"), restricted shares of our common stock, restricted stock units,
the value of which is tied to shares of our common stock, and other equity-based
awards related to our common stock.
AVAILABLE SHARES. A maximum of 4,687,500 shares of our common stock has been
reserved for issuance under the Equity Incentive Plan. The number, class and
exercise price per share will be adjusted proportionately or as otherwise
appropriate to reflect any increase in, decrease in, or exchange of the
outstanding shares of our common stock through merger, consolidation,
recapitalization, reclassification, stock split, reverse stock split, stock
dividend or similar corporate transaction. These shares may be authorized but
unissued shares of our common stock or issued shares of our common stock held in
our treasury or otherwise acquired for the purposes of the Equity Incentive
Plan. New awards may be granted under the Equity Incentive Plan with respect to
shares of our common stock covered by any award that terminates or expires by
its terms (by cancellation or otherwise) or with respect to shares of our common
stock that are withheld or surrendered to satisfy a recipient's income tax or
other withholding obligations or tendered to pay the purchase price of any
award. There are currently available 2,422,477 shares of our common stock with
respect to which awards may be granted under the Equity Incentive Plan.
The maximum number of shares of our common stock with respect to which
options, restricted stock, restricted stock units or other equity-based awards
may be granted under the Equity Incentive Plan during any calendar year to any
employee may not exceed 500,000 shares, subject to adjustment upon certain
corporate transactions (as described above).
ELIGIBILITY. Awards under the Equity Incentive Plan may be granted to any
of our directors, officers, managing directors or other employees, including any
prospective employee, and to any of our advisors or consultants selected by the
compensation committee of our Board of Directors.
ADMINISTRATION. The Equity Incentive Plan, which had been administered by
our Board of Directors until March 17, 2000, is currently administered by our
compensation committee. The compensation committee will have full discretion and
authority to make awards under the Equity Incentive Plan, to apply and interpret
the provisions of the Equity Incentive Plan and to take such other actions as
may be necessary or desirable in order to carry out the provisions of the Equity
Incentive Plan. The determinations of the compensation committee on all matters
relating to the Equity Incentive Plan and the options, restricted stock,
restricted stock units and other equity-based awards granted thereunder will be
final, binding and conclusive.
STOCK OPTIONS. The compensation committee may authorize the grant of ISOs
and NQSOs in such amounts and subject to such terms and conditions as it may
determine. The exercise price of an
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option granted under the Equity Incentive Plan may not be less than the fair
market value of our common stock on the date of grant (as determined under the
plan). Unless sooner terminated or exercised, options will generally expire ten
years from the date of grant. Payment for shares acquired upon the exercise of
an option may be made (as determined by the compensation committee) in cash
and/or such other form of payment as may be permitted from time to time, which
may include previously-owned shares of our common stock or pursuant to a
broker's cashless exercise procedure. Except as otherwise permitted by the
compensation committee, no option may be exercised more than 30 days after
termination of the optionee's service (or, if the optionee's service is
terminated by reason of disability or death, one year thereafter). If an
optionee's employment is terminated for cause, options held by such optionee
immediately terminate. An optionee will not have any of the rights of a
stockholder with respect to shares subject to an option until the issuance of
such shares.
RESTRICTED STOCK. The compensation committee may grant restricted shares of
our common stock in amounts, and subject to terms and conditions (such as time
vesting and/or performance-based vesting criteria), as it may determine.
Generally, prior to vesting, the recipient will have the rights of a stockholder
with respect to the restricted stock, subject to any restrictions and conditions
as the compensation committee may include in the award agreement.
RESTRICTED STOCK UNITS. The compensation committee may grant restricted
stock units, the value of which is tied to shares of our common stock, in
amounts, and subject to terms and conditions, as the compensation committee may
determine. Recipients of restricted stock units have only the rights of our
general unsecured creditors and no rights as a stockholder until the common
stock referenced by the restricted stock units is delivered to the recipient.
OTHER EQUITY-BASED AWARDS. The compensation committee may grant other types
of equity-based awards related to our common stock under the Equity Incentive
Plan, including the grant of unrestricted shares of our common stock and stock
appreciation rights, in amounts and subject to terms and conditions as the
compensation committee may determine. These awards may involve the transfer of
actual shares of common stock or the payment in cash or otherwise of amounts
based on the value of shares of our common stock.
CHANGE IN CONTROL. The compensation committee may provide, in any award
agreement, for provisions relating to a "change in control" of us or any of our
subsidiaries or affiliates, including, without limitation, the acceleration of
the exercisability of, or the lapse of restrictions with respect to, the award.
NONASSIGNABILITY. Except to the extent otherwise provided in an award
agreement or approved by the compensation committee with respect to NQSOs, no
award granted under the Equity Incentive Plan will be assignable or transferable
other than by will or by the laws of descent and distribution and all awards
will be exercisable during the life of a recipient only by the recipient or his
or her legal representative.
AMENDMENT AND TERMINATION. The Equity Incentive Plan may be amended or
terminated at any time by our Board of Directors, subject, however, to
stockholder approval in the case of certain material amendments, such as an
increase in the number of shares available under the Equity Incentive Plan or a
change in the class of individuals eligible to participate in the Equity
Incentive Plan.
U.S. FEDERAL INCOME TAX CONSEQUENCES. The following is a brief description
of the material U.S. federal income tax consequences generally arising with
respect to awards granted under the Equity Incentive Plan.
The grant of an option will have no income tax consequences to the recipient
or to us. Upon the exercise of an option, other than an ISO, the recipient
generally will recognize ordinary income equal to the excess of the fair market
value of the shares of common stock subject to the option on the date
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<PAGE>
of exercise over the exercise price for such shares (i.e., the option spread),
and we generally will be entitled to a corresponding tax deduction in the same
amount. Upon the sale of the shares of our common stock acquired pursuant to the
exercise of an option, the recipient will recognize capital gain or loss equal
to the difference between the selling price and the sum of the exercise price
plus the amount of ordinary income recognized on the exercise.
A recipient generally will not recognize ordinary income upon the exercise
of an ISO (although, on exercise, the option spread is an item of tax preference
potentially subject to the alternative minimum tax), and we will not receive any
deduction. If the stock acquired upon exercise of an ISO is sold or otherwise
disposed of within two years from the grant date or within one year from the
exercise date, then gain realized on the sale generally is treated as ordinary
income to the extent of the ordinary income that would have been realized upon
exercise if the option had not been an ISO, and we generally will be entitled to
a corresponding deduction in the same amount. Any remaining gain is treated as
capital gain.
If the shares acquired upon the exercise of an ISO are held for at least two
years from the grant date and one year from the exercise date and the recipient
is employed by us at all times beginning on the grant date and ending on the
date three months prior to the exercise date, then all gain or loss realized
upon the sale will be capital gain or loss and we will not receive any
deduction.
In general, an individual who receives an award of restricted stock will
recognize ordinary income at the time such award vests in an amount equal to the
difference between the value of the vested shares and the purchase price for
such shares, if any, and we generally will be entitled to a deduction in an
amount equal to the ordinary income recognized by the recipient at such time.
The recipient of an award of restricted stock units generally will recognize
ordinary income upon the issuance of the shares of common stock underlying such
restricted stock units in an amount equal to the difference between the value of
such shares and the purchase price for such units and/or shares, if any, and we
generally will be entitled to a deduction in an amount equal to the ordinary
income recognized by the recipient at such time.
With respect to other equity based awards, upon the payment of cash or the
issuance of shares or other property that is either not restricted as to
transferability or not subject to a substantial risk of forfeiture, the
participant generally will recognize ordinary income equal to the cash or the
fair market value of shares or other property delivered, less any amount paid by
the participant for such award. Generally, we will be entitled to a deduction in
an amount equal to the ordinary income recognized by the participant.
THE ANNUAL INCENTIVE PLAN
We adopted the LaBranche & Co Inc. Annual Incentive Plan at the time of our
initial public offering in August 1999. Our managing directors and other
employees selected by the compensation committee of our Board of Directors are
eligible to participate in the Annual Incentive Plan. Under this plan, a
compensation pool of up to 30% of our pre-tax income, or such lesser percentage
determined by the compensation committee, is set aside for our managing
directors and other employees selected by the compensation committee to
participate in this plan. In determining the 30% compensation pool, the
compensation expenses relating to the awards under our Equity Incentive Plan
will be deducted. Under the plan, no individual participant may receive more
than 25% of the compensation pool for any fiscal year. The amounts payable under
the Annual Incentive Plan to our plan participants are reviewed on an annual
basis and are based on such factors and considerations as the compensation
committee deems appropriate in individual cases and on our operating results and
the overall performance of these participants. An award made by the compensation
committee to our managing directors and other employees is completely
discretionary. The Annual Incentive Plan may be amended or terminated at any
time by our Board of Directors.
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PRINCIPAL STOCKHOLDERS
The following table presents information as of May 31, 2000 regarding the
beneficial ownership of our common stock by:
- each person known to beneficially own more than 5.0% of the outstanding
shares of common stock;
- each of our directors;
- each named executive officer;
- and all executive officers and directors as a group.
All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated. Unless otherwise indicated, the address
of the beneficial owners is: c/o One Exchange Plaza, New York, New York, 10006.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock issuable to options, to
the extent such options are currently exercisable or convertible within 60 days
of May 31, 2000, are treated as outstanding for computing the percentage of the
person holding such securities but are not treated as outstanding for computing
the percentage of any other person.
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES BENEFICIALLY PERCENTAGE OF SHARES
OF BENEFICIAL OWNER (1) OWNED BENEFICIALLY OWNED
----------------------- ------------------- --------------------
<S> <C> <C>
George M. L. (Michael) LaBranche, IV....................... 3,501,094 7.2 %
James G. Gallagher......................................... 2,287,100 4.7
Alfred O. Hayward, Jr...................................... 1,908,068 3.9
S. Lawrence Prendergast.................................... 107,000 *
E. Margie Filter........................................... 1,368 *
Thomas E. Dooley........................................... 0 -
Harvey S. Traison.......................................... 1,000 *
Vincent J. Flaherty........................................ 2,087,926 4.3
Michael J. Naughton........................................ 1,958,066 4.0
All executive officers and directors as a group............ 11,851,622 24.3
</TABLE>
------------------------
* Less than 1%
(1) Each of our managing directors has entered into a stockholders' agreement
pursuant to which he or she has agreed to vote his or her shares as
determined by a majority of Messrs. LaBranche, Gallagher and Hayward.
Messrs. LaBranche, Gallagher and Hayward individually beneficially own an
aggregate of 7,696,262 shares of common stock, constituting approximately
15.8% of the outstanding shares of our common stock. As a result of the
stockholders' agreement, Messrs. LaBranche, Gallagher and Hayward, acting
together as a group, may be deemed to beneficially own an aggregate of
34,686,443 shares of common stock (including the 7,696,262 shares
beneficially owned by them individually), constituting approximately 71.3%
of the outstanding shares of our common stock. Each of Messrs. LaBranche,
Gallagher and Hayward disclaims beneficial ownership of any and all shares
of common stock held by any person or entity other than him.
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CERTAIN TRANSACTIONS
REORGANIZATION AND RELATED TRANSACTIONS
REORGANIZATION
Concurrently with our August 1999 senior note offering and our initial
public offering of common stock, we completed a number of transactions in order
to effect the reorganization of our firm from partnership to corporate form.
These transactions are summarized below:
[LOGO]
- The 36 members of LaB Investing Co. L.L.C. exchanged their membership
interests in LaB Investing Co. L.L.C. which represented a 69.8% interest
in the profit of LaBranche & Co. for an aggregate of 34,816,334 shares of
our common stock. In addition to receiving a portion of those shares,
three members of LaB Investing Co. L.L.C. also received an aggregate of
$9.0 million in cash as part of their exchange. All members who have
remained employed by us following our common stock offering only received
shares of our common stock, and no cash, in the reorganization. We thus
became the sole member of LaB Investing Co. L.L.C., and LaB Investing Co.
L.L.C. continues to be the general partner of LaBranche & Co. Our common
stock received by the members of LaB Investing Co. L.L.C. is subject to
certain restrictions, as described below under "--Stockholders'
Agreement." Set forth below is the percentage interest in the profits of
LaBranche & Co. owned by each of our Named Executive Officers, as members
of LaB Investing Co. L.L.C., before giving effect to the reorganization
and the number of shares
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of our common stock that each of our Named Executive Officers received
upon the closing of our initial public offering of common stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PERCENTAGE INTEREST IN OUR
NAMED EXECUTIVE OFFICER PROFITS OF LABRANCHE & CO. COMMON STOCK RECEIVED
----------------------- -------------------------- ---------------------
<S> <C> <C>
Michael LaBranche................................. 5.3% 3,500,994
James G. Gallagher................................ 3.6 2,287,100
Alfred O. Hayward, Jr............................. 3.6 1,908,068
Vincent J. Flaherty............................... 5.0 2,087,926
Michael J. Naughton............................... 3.6 1,958,066
</TABLE>
- The 19 limited partners of LaBranche & Co., other than Mill Bridge, Inc.,
exchanged their limited partnership interests in LaBranche & Co which
represented a 16.0% interest in the profits of LaBranche & Co. to us in
exchange for an aggregate of $66.2 million in cash, 558,666 shares of our
common stock and subordinated indebtedness of $350,000 issued to a family
member of Mr. Gallagher. The shares of our common stock received by
limited partners are subject to lock-up restrictions which prohibits the
transfer of 50% of those shares for a period of one year and the remaining
50% for a period of two years following our common stock offering.
- Mill Bridge, Inc., a subsidiary of Van der Moolen Holding NV, received
$90.0 million from us, including $74.0 million in cash and our note for
$16.0 million, in exchange for its limited partnership interest in
LaBranche & Co., which represented a 14.2% interest in the profit of
LaBranche & Co. In addition, we repaid $5.0 million of subordinated debt
to an affiliate of Van der Moolen.
- As a result of the above transactions, we became the sole limited partner
of LaBranche & Co., which will continue to be a broker-dealer and a NYSE
specialist firm.
- Immediately prior to the closing of our initial public offering of common
stock, we granted options under the Equity Incentive Plan to purchase an
aggregate of 1,200,000 shares of our common stock to our executive
officers. The options have an exercise price of $14, the initial public
offering price of our common stock, and are not currently exercisable.
- Immediately prior to the closing of our initial public offering of common
stock, we granted restricted stock units under the Equity Incentive Plan
for 1,059,000 shares of our common stock to employees who are not managing
directors. The restricted stock units are not yet vested.
- Prior to the closing of our initial public offering of common stock, we
completely discharged our remaining obligations under all outstanding
loans received from the LaBranche & Co. Retirement Plan by making a single
lump sum payment in the amount of $1.1 million to the plan. Since certain
of our executive officers directed the plan to lend to us a portion of the
amounts credited to their individual accounts under the plan, part of the
proceeds of our payment were allocated to those individual accounts in
accordance with the terms of the plan.
The consideration paid to the members and limited partners in connection
with the reorganization was arrived at through negotiation.
STOCKHOLDERS' AGREEMENT
We entered into a stockholders' agreement with all 36 members of LaB
Investing Co. L.L.C. who received our common stock in the reorganization, 29 of
whom remain managing directors, and with the employees who received options and
restricted stock or restricted stock unit awards in connection with the
reorganization. This stockholders' agreement contains various restrictions on
the transfer of our stock by the parties to such agreement and a voting
agreement.
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<PAGE>
TRANSFER RESTRICTIONS. The stockholders' agreement prohibits the transfer
of our shares by the former members of LaB Investing Co. L.L.C. who remain
managing directors following our initial public offering of common stock for a
period of three years. Beginning on the third anniversary of our initial public
offering of common stock, up to one-third of these shares may be transferred.
Beginning on the fourth anniversary, up to an additional one-third of these
shares may be transferred, and beginning on the fifth anniversary, all of these
shares may be transferred. In addition, the former members of LaB Investing Co.
L.L.C. who did not continue as managing directors after our common stock
offering are restricted from transferring shares as follows:
- 50% of the shares will be transferable after the first anniversary of our
common stock offering; and
- all of the shares will be transferable after the second anniversary of our
common stock offering.
Notwithstanding this,
- if the stockholder is employed by us, at all times during the course of
his or her employment, he or she must retain at least 25% of the aggregate
of the shares of our common stock received in the reorganization and other
shares received under the Equity Incentive Plan or similar plans; and
- an employee may not sell shares of our common stock which are subject to a
pledge agreement, unless the requirements of the pledge agreement are
waived by us.
VOTING AGREEMENT. The shares owned by each party to the stockholders'
agreement will be voted at the general stockholder vote as directed by
Messrs. LaBranche, Gallagher and Hayward, as determined by a majority of those
individuals. These individuals will name alternates to replace them in the event
of their death or disability.
INTEREST ON CAPITAL
The members of LaB Investing Co. L.L.C. historically contributed capital to
LaB Investing Co. L.L.C., which was, in turn, contributed to LaBranche & Co. For
1999, the Named Executive Officers listed below earned interest income on their
capital account balance in the amounts set forth opposite their names:
<TABLE>
<CAPTION>
CAPITAL INTEREST
NAME INCOME
---- ----------------
<S> <C>
Michael LaBranche........................................... $364,404
James G. Gallagher.......................................... 277,852
Alfred O. Hayward, Jr....................................... 236,491
Vincent J. Flaherty......................................... 196,047
Michael J. Naughton......................................... 254,985
</TABLE>
LEASE PAYMENT ON MEMBERSHIPS
Some of our Named Executive Officers have contributed the use of their NYSE
memberships to LaBranche & Co. and receive lease payments from LaBranche & Co.
based on the market value of the memberships. For 1999, the Named Executive
Officers listed below received payments from LaBranche & Co. in the amounts set
forth opposite their names:
<TABLE>
<CAPTION>
NAME LEASE INCOME
---- ------------
<S> <C>
Michael LaBranche........................................... $192,000
James G. Gallagher.......................................... 192,000
Michael J. Naughton......................................... 192,000
</TABLE>
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INTEREST ON INDEBTEDNESS
A family member of Mr. Flaherty holds $600,000 of subordinated indebtedness
due August 31, 2000, which currently bears interest at an annual rate of 10.0%
payable on a quarterly basis. Mr. LaBranche's spouse holds $1.3 million of
secured subordinated indebtedness due March 2, 2001, which currently bears
interest at an annual rate of 8.0% payable on a quarterly basis. The agreements
relating to this debt have automatic rollover provisions which extend the
maturities for an additional year, unless the lender provides notice at least
seven months prior to maturity. The interest income in 1999 for Mr. Flaherty's
family member was $60,000 and the interest income in 1999 for Mr. LaBranche's
spouse was $123,333.
DESCRIPTION OF EXCHANGE NOTES
The initial notes were, and the exchange notes will be, issued under an
indenture (the "Indenture") dated as of March 2, 2000 by and among the Company
and Firstar Bank, NA., as Trustee (the "Trustee"). The following is a summary of
the material provisions of the Indenture. It does not include all of the
provisions of the Indenture. We urge you to read the Indenture because it
defines your rights. The terms of the exchange notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). A copy of the Indenture may be
obtained from the Company.
You can find definitions of certain capitalized terms used in this
description under "--Certain Definitions." When we refer to the "Company" in
this section, we mean only LaBranche & Co Inc. and not its Subsidiaries.
OVERVIEW OF THE EXCHANGE NOTES
The exchange notes will:
- be general unsecured subordinated obligations of the Company,
- rank junior in right of payment to all existing and future senior
unsecured obligations of the Company,
- rank equal in right of payment to all existing and future subordinated
indebtedness of the Company, if any,
- be effectively subordinated to all existing and future secured
indebtedness of the Company, and
- not be guaranteed by any Subsidiary of the Company and therefore will be
effectively subordinated to all existing and future indebtedness of any
Subsidiary of the Company.
As of May 31, 2000:
- the Company and its Subsidiaries had $415.5 million consolidated aggregate
principal amount of indebtedness (excluding subordinated liabilities
related to contributed exchange memberships),
- the Company had $369.0 million aggregate principal amount of indebtedness,
of which $119.0 million was senior to the Senior Subordinated Notes, and
- Subsidiaries of the Company had long-term indebtedness of $46.5 million,
excluding any intercompany indebtedness.
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<PAGE>
PRINCIPAL, MATURITY AND INTEREST
The exchange notes will be limited to $250.0 million aggregate principal
amount. The exchange notes will mature on March 2, 2007 (the "Maturity Date").
Interest on the exchange notes will accrue at the rate of 12% per annum and will
be payable semi-annually in cash on each March 1 and September 1 commencing on
September 1, 2000, to the persons who are registered holders of the exchange
notes (the "note holders") at the close of business on the February 15 and
August 15 immediately preceding the applicable interest payment date; provided,
however, that the final interest payment date will be the Maturity Date instead
of March 1, 2007. Interest on the exchange notes will accrue from and including
the most recent date to which interest has been paid or, if no interest has been
paid, from and including the date of issuance.
The exchange notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as paying agent and registrar for the exchange notes. The
exchange notes may be presented for registration or transfer and exchange at the
offices of the registrar, which initially will be the Trustee's corporate trust
office. The Company may change any paying agent and registrar without notice to
the note holders.
The Company will pay principal (and premium, if any) on the exchange notes
at the Trustee's corporate office in New York, New York. At the Company's
option, interest may be paid at the Trustee's corporate trust office or by check
mailed to the respective registered addresses of the note holders.
The exchange notes will not be entitled to the benefit of any mandatory
sinking fund.
OPTIONAL REDEMPTION
The Indenture does not contain any provisions that permit the Company to
redeem the exchange notes at its option prior to the Maturity Date.
EXCESS CASH FLOW OFFER
If the Company has Excess Cash Flow for any fiscal year (commencing with
fiscal year 2000), the Company shall make an offer to purchase (the "Excess Cash
Flow Offer"), on a business day (the "Excess Cash Flow Payment Date") not later
than 150 days following the end of such fiscal year, from all holders of
exchange notes, up to a maximum principal amount (expressed as a multiple of
$1,000) of exchange notes equal to the note holder's Pro Rata Share of such
Excess Cash Flow in such fiscal year. The purchase price of exchange notes to be
purchased pursuant to the Excess Cash Flow Offer shall be equal to 103% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the Excess Cash Flow Payment Date. Notice of an Excess Cash Flow Offer shall be
given to note holders not less than 30 business days before the Excess Cash Flow
Payment Date. The Excess Cash Flow Offer is required to remain open for 20
business days and payment pursuant to the Excess Cash Flow Offer will be made on
the Excess Cash Flow Payment Date.
Notwithstanding the foregoing:
(1) the amount of Excess Cash Flow included in any Excess Cash Flow
Offer shall not exceed:
(a) the amount that the Company is permitted to use to repurchase
exchange notes in such Excess Cash Flow Offer pursuant to the indenture
relating to the Senior Notes (the "Senior Note Indenture") as in effect
on the Issue Date; or
(b) the amount that LaBranche is permitted to distribute to the
Company pursuant to the note purchase agreement relating to LaBranche's
outstanding unsecured exchange notes in the aggregate principal amount of
$20.0 million (the "$20 million Note Purchase Agreement") and the note
purchase agreement relating to LaBranche & Co.'s outstanding unsecured
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exchange notes in the aggregate principal amount of $15.0 million (the
"$15 million Note Purchase Agreement," together with the $20 million Note
Purchase Agreement, the "Note Purchase Agreements"); and
(2) the Company will not be required to make an Excess Cash Flow Offer
for any fiscal year if the amount of such Excess Cash Flow Offer would be
less than $5.0 million;
provided that any amounts excluded from an Excess Cash Flow Offer pursuant to
clause (1) or (2) above shall be carried forward for purposes of determining
whether an Excess Cash Flow Offer is required with respect to subsequent fiscal
years and the amount thereof.
To the extent an Excess Cash Flow Offer is not fully subscribed to by
holders of the exchange notes, the unsubscribed portion of such Excess Cash Flow
may be retained by the Company and/or used for any purpose, subject to the
covenants contained in the Indenture, and shall be excluded from the calculation
of Excess Cash Flow for any subsequent period.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and other applicable laws or regulations in
connection with the purchase of the exchange notes pursuant to this covenant. To
the extent that the provisions of any applicable laws or regulations conflict
with the provisions of the Indenture, the Company will comply with the
applicable laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The Company's ability to make an Excess Cash Flow Offer is subject to
compliance with the restricted payments covenants in the Senior Note Indenture
and the Note Purchase Agreements, and no Default will occur on the exchange
notes if the Company fails to make an Excess Cash Flow Offer in order to comply
with these covenants. In order to comply with these restricted payment covenants
in connection with an Excess Cash Flow Offer, the Company must satisfy a 2.75 to
1 Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Note
Indenture). In addition, the amount included in the Excess Cash Flow Offer
cannot exceed an amount calculated pursuant to the Senior Note Indenture or a
Note Purchase Agreement, as the case may be, and based, among other things, on
the Company's income and the amount of certain equity capital contributed to the
Company, less certain other payments made pursuant to the restricted payments
covenant, including dividends and payments on the Company's Capital Stock,
payments made pursuant to previous Excess Cash Flow Offers and certain
investments. Under the Senior Note Indenture, calculations with respect to
Restricted Payments operate on a cumulative basis starting on October 1, 1999.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each note holder will have the
right to require that the Company purchase all or a portion of such note
holder's exchange notes pursuant to the offer described below (the "Change of
Control Offer"), at a purchase price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, thereon to the date of
purchase.
Within 30 days following the date upon which the Change of Control occurs,
the Company must send, by first class mail, a notice to each note holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). A note holder electing to have an exchange note purchased
pursuant to a Change of Control Offer will be required to surrender the exchange
note, with the form entitled "Option of Note Holder to Elect Purchase" on the
reverse of the exchange note completed, to the paying agent for the exchange
notes at the address specified in the notice prior to the close of business on
the third business day prior to the Change of Control Payment Date.
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If a Change of Control Offer is required to be made, there can be no
assurance that the Company will be permitted by the terms of the Credit
Agreement, the note purchase agreements relating to LaBranche & Co.'s existing
senior indebtedness or the indenture governing the Senior Notes to make such a
Change of Control Offer or that it will have available funds sufficient to pay
the Change of Control purchase price for all the exchange notes that might be
delivered by note holders seeking to accept the Change of Control Offer. A
Change of Control may be a default under the Credit Agreement. In the event the
Company is required to purchase outstanding exchange notes pursuant to a Change
of Control Offer, the Company expects that it would seek third party financing
to the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain such
financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a note holder's right to require the purchase of exchange
notes upon a Change of Control. Restrictions in the Indenture on the ability of
the Company and the Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on its property, to make Restricted Payments and to make Asset Sales
may also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require the purchase of the exchange
notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such purchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the note holders protection in all circumstances from the adverse aspects of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with a Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the Indenture,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the "Change of
Control" provisions of the Indenture by virtue thereof.
SUBORDINATION
The payment of principal, premium, if any, and interest on the exchange
notes is subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full in cash of all Senior Debt of the Company, whether
outstanding on the Issue Date or thereafter incurred.
The holders of Senior Debt will be entitled to receive payment in full in
cash of all Obligations due in respect of Senior Debt (including interest after
the commencement of any bankruptcy proceeding at the rate specified in the
applicable Senior Debt, whether or not allowed as a claim in such proceeding)
before the note holders will be entitled to receive any payment with respect to
the exchange notes (except that the note holders may receive and retain
Permitted Junior Securities and payments made from the trust described under
"--Legal Defeasance and Covenant Defeasance"), in the event of any distribution
to creditors of the Company:
(a) in a liquidation or dissolution of the Company;
(b) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property;
(c) in an assignment for the benefit of creditors; or
(d) in any marshalling of the Company's assets and liabilities.
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The Company also may not make any payment in respect of the exchange notes
(except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if:
(a) a payment default on Designated Senior Debt occurs and is continuing;
or
(b) any other default occurs and is continuing on Designated Senior Debt
that permits holders of the Designated Senior Debt to accelerate its
maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any
Designated Senior Debt.
Payments on the exchange notes may and shall be resumed:
(a) in the case of a payment default, upon the date on which such default
is cured or waived; and
(b) in case of a nonpayment default, the earlier of the date on which
such nonpayment default is cured or waived or 179 days after the date
on which the applicable Payment Blockage Notice is received, unless
the maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice unless such default shall have
been cured or waived for a period of not less than 180 days.
The Company must promptly notify holders of Senior Debt if payment of the
exchange notes is accelerated because of an Event of Default. Payments received
by the note holders in violation of the subordination provisions must be repaid
to the holders of the relevant Senior Debt. As a result of the subordination
provisions described above, in the event of a bankruptcy, liquidation or
reorganization of the Company, the note holders may recover less ratably than
creditors of the Company who are holders of Senior Debt. See "Risk Factors--Your
rights to receive payments on the exchange notes will be junior to our
outstanding senior debt and effectively subordinated to the debt of our
subsidiaries."
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS
The Company will not, and will not permit any of the Restricted Subsidiaries
to, directly or indirectly, Incur any Indebtedness, other than Permitted
Indebtedness; provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
Incurrence of any such Indebtedness, the Company may Incur Indebtedness and the
Restricted Subsidiaries may Incur Acquired Indebtedness, in each case if on the
date of the Incurrence of such Indebtedness, after giving effect to the
Incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.75 to 1.
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LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly:
(a) declare or pay any dividend or make any distribution, other than
dividends or distributions payable in Qualified Capital Stock of the
Company, on or in respect of shares of the Company's Capital Stock;
(b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock;
(c) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness which is
subordinated in right of payment to the exchange notes, except a payment
of interest or any principal payment at the Stated Maturity thereof;
(d) make any Investment, other than a Permitted Investment; or
(e) make compensation or consulting payments in excess of base salaries
limited to $350,000 to managing directors and other executive officers
(as defined in Rule 3b-7 under the Exchange Act) of the Company or any of
its Restricted Subsidiaries, except to the extent authorized under the
Annual Incentive Plan or the Equity Incentive Plan or otherwise approved
by a majority of the disinterested members of the Board of Directors of
the Company or a duly authorized committee thereof who are not managing
directors or other executive officers of the Company or any of its
Affiliates;
(each of the foregoing actions set forth in clauses (a), (b), (c), (d) and
(e) being referred to as a "Restricted Payment"), if at the time of such
Restricted Payment or immediately after giving effect thereto:
(1) a Default or an Event of Default shall have occurred and be
continuing; or
(2) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with
the covenant described under "Limitation on Incurrence of Additional
Indebtedness"; or
(3) the aggregate amount of Restricted Payments, including the proposed
Restricted Payment, made subsequent to the Issue Date (the amount
expended for such purpose, if other than in cash, being the fair
market value of such property as determined reasonably and in good
faith by the Board of Directors of the Company) shall exceed the sum
of:
(A) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss)
of the Company earned from the beginning of the first full fiscal
quarter following the Issue Date and through the end of the most
recent fiscal quarter for which financial statements are
available prior to the date such Restricted Payment occurs (the
"Reference Date"), treating such period as a single accounting
period; plus
(B) 100% of the aggregate net cash proceeds received by the Company
from any Person, other than a Subsidiary of the Company, from the
issuance and sale subsequent to the Issue Date and on or prior to
the Reference Date of Qualified Capital Stock of the Company or
of other securities that have been converted into Qualified
Capital Stock of the Company; plus
(C) without duplication of any amounts included in clause (3)(B)
above, 100% of the aggregate net cash proceeds of any
contribution to the common equity capital of the
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Company received by the Company from a holder of the Company's
Qualified Capital Stock,
excluding, in the case of clauses (3)(B) and (C), any net proceeds from a
sale of Qualified Capital Stock received from a Subsidiary of the Company or
applied in accordance with clause (2)(b) of the immediately following
paragraph; plus
(D) an amount equal to the lesser of:
- the sum of the fair market value of the Capital Stock of an
Unrestricted Subsidiary owned by the Company and/or the
Restricted Subsidiaries and the aggregate amount of all
Indebtedness of such Unrestricted Subsidiary owed to the
Company and each Restricted Subsidiary on the date of
Revocation of such Unrestricted Subsidiary as an Unrestricted
Subsidiary in accordance with the covenant described under
"Limitation on Designations of Unrestricted Subsidiaries"; and
- the Designation Amount treated as a Restricted Payment pursuant
to clause (d) above with respect to such Unrestricted
Subsidiary on the date of the Designation of such Subsidiary as
an Unrestricted Subsidiary in accordance with the covenant
described under "--Limitation on Designations of Unrestricted
Subsidiaries"; plus
(E) in the case of the disposition of an Investment treated as a
Restricted Payment pursuant to clause (d) above to a Person other
than the Company or one of its Subsidiaries, an amount equal to
the lesser of:
- the amount of such Investment treated as a Restricted Payment
pursuant to clause (d) above, and
- the amount in cash received by the Company or any Restricted
Subsidiary upon such disposition; plus
(F) $15.0 million.
The provisions set forth in the immediately preceding paragraph do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if the dividend would have been
permitted on the date of declaration;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of Indebtedness of the Company or any Restricted
Subsidiary or of Capital Stock of the Company, in each case to the
extent constituting a Restricted Payment pursuant to clause (b) or
(c) of the first paragraph of this covenant either:
(a) solely in exchange for shares of Qualified Capital Stock of the Company,
or
(b) through the application of net proceeds of a substantially concurrent
sale for cash (other than to a Subsidiary of the Company) of shares of
Qualified Capital Stock of the Company or of any contribution to the
common equity capital of the Company received by the Company from a
holder of the Company's Qualified Capital Stock;
(3) the defeasance, redemption, repurchase or other acquisition of
Indebtedness of the Company or any Restricted Subsidiary with the net
cash proceeds from an Incurrence of Permitted Refinancing
Indebtedness therefor; and
(4) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases of Capital Stock (or options therefor) of the
Company from officers, directors, employees, consultants or former
officers, directors, employees or consultants of
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the Company (or any of its Subsidiaries) pursuant to equity ownership
or compensation plans or stockholders agreements not to exceed
$5.0 million in any year.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (3) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1) and (4) of this paragraph
shall be included in the calculation.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any of the Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of the Asset Sale at least
equal to the fair market value of the assets sold or otherwise
disposed of as determined in good faith by the Board of Directors of
the Company;
(2) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from the Asset Sale shall
be in the form of cash or Cash Equivalents and is received at the
time of such Asset Sale; and
(3) upon the consummation of the Asset Sale, the Company may apply, or
cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 360 days of receipt thereof
either:
(a) to repay Senior Debt of the Company or Indebtedness of any Restricted
Subsidiary, in each case for borrowed money or constituting a Capitalized
Lease Obligation and permanently reduce the commitments with respect
thereto without Refinancing;
(b) to repay any Indebtedness of a Wholly Owned Restricted Subsidiary owed
to any Person other than the Company or any of its Affiliates and effect
a permanent reduction in any availability in respect of the Indebtedness
(without refinancing the Indebtedness);
(c) to acquire Replacement Assets; or
(d) a combination of prepayment and investment permitted by the preceding
clauses (3)(a), (b) and (c).
The assumption by the transferee in an Asset Sale (and release of the Company
and its Restricted Subsidiaries of further liability) of Indebtedness for
borrowed money of the Company or any Restricted Subsidiary other than
Disqualified Capital Stock or Indebtedness subordinated in right of payment to
the exchange notes shall be deemed to be cash applied in accordance with this
covenant. The receipt by the Company or the applicable Restricted Subsidiary of
marketable securities of a company subject to and then current in its
obligations as a reporting company under Section 13 or 15 under the Exchange
Act, which are resold for cash or Cash Equivalents by the Company or the
Restricted Subsidiary within 120 days of the relevant Asset Sale and applied in
accordance with this covenant, shall be deemed to be cash received pursuant to
clause (2) above.
On the 361st day after an Asset Sale or such earlier date, if any, as the
Board of Directors of the Company or of such Restricted Subsidiary determines
not to apply the Net Cash Proceeds relating to the Asset Sale as set forth in
clause (3) of the immediately preceding paragraph (each, a "Net Proceeds Offer
Trigger Date"), the aggregate amount of Net Cash Proceeds that have not been
applied on or before the Net Proceeds Offer Trigger Date as permitted in that
clause (3) (a "Net Proceeds Offer Amount") shall be applied by the Company to
make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net
Proceeds Offer Payment Date") not less than 30 nor more than 60 days following
the Net Proceeds Offer Trigger Date, from all note holders on a pro rata basis,
that principal amount
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of exchange notes equal to the Net Proceeds Offer Amount at a price equal to
100% of the principal amount of the exchange notes to be purchased, plus accrued
and unpaid interest, if any, thereon to the date of purchase; provided that the
Company may make a concurrent offer to repurchase on a pro rata basis
Indebtedness of a Wholly Owned Restricted Subsidiary or Indebtedness of the
Company ranking PARI PASSU with the exchange notes.
If at any time any non-cash consideration received by the Company or any
Restricted Subsidiary, as the case may be, in connection with any Asset Sale is
converted into or sold or otherwise disposed of for cash (other than interest
received with respect to any such non-cash consideration) or Cash Equivalents,
then such conversion or disposition shall be deemed to constitute an Asset Sale
hereunder and the Net Cash Proceeds thereof shall be applied in accordance with
this covenant. Pending application in accordance with this covenant, Net Cash
Proceeds may be used to repay revolving credit borrowings without reducing
commitments thereunder.
The Company may defer the Net Proceeds Offer until there is an aggregate
unutilized Net Proceeds Offer Amount equal to or in excess of $5.0 million
resulting from one or more Asset Sales or deemed Asset Sales (at which time, the
entire unutilized Net Proceeds Offer Amount, and not just the amount in excess
of $5.0 million, shall be applied as required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not
transferred for purposes of this covenant and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value (as determined in good faith by the Board of
Directors of the Company) of such properties and assets of the Company or the
Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record note holders as shown
on the register of note holders within 30 days following the Net Proceeds Offer
Trigger Date, with a copy to the Trustee, and shall comply with the procedures
set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
note holders may elect to tender their exchange notes in whole or in part in
integral multiples of $1,000 in exchange for cash. To the extent note holders
properly tender exchange notes in an amount exceeding the Net Proceeds Offer
Amount, exchange notes of tendering note holders will be purchased on a pro rata
basis based on the principal amount of exchange notes (and other Indebtedness
for which a concurrent offer is being made as permitted by this covenant)
tendered. A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-l under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of exchange notes pursuant to a Net Proceeds Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
"Asset Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
LIMITATION ON DISTRIBUTIONS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Company will not, and will not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(a) pay dividends or make any other distributions on or in respect of its
Capital Stock;
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(b) make loans or advances or pay any Indebtedness or other obligation owed
to the Company or any other Restricted Subsidiary; or
(c) transfer any of its property or assets to the Company or any other
Restricted Subsidiary,
except for such encumbrances or restrictions existing under or by reasons
of:
(1) applicable law or regulation or NYSE regulations;
(2) the Indenture;
(3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary;
(4) any instrument governing Acquired Indebtedness, which encumbrance or
restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person or the properties or
assets of the Person so acquired;
(5) agreements existing on the Issue Date to the extent and in the manner
such agreements are in effect on the Issue Date;
(6) any other agreement entered into after the Issue Date that contains
encumbrances and restrictions that are not materially more
restrictive with respect to any Restricted Subsidiary than those in
effect with respect to such Restricted Subsidiary pursuant to
agreements as in effect on the Issue Date so long as any such
restrictions expressly permit scheduled payments on the exchange
notes;
(7) customary restrictions on the transfer of any property or assets
arising under a security agreement governing a Lien permitted under
the Indenture; and
(8) any agreement governing Refinancing Indebtedness incurred to
Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4) or (5) above; provided,
however, that the provisions relating to such encumbrance or
restriction contained in any such Refinancing Indebtedness are not
materially more restrictive than the provisions relating to such
encumbrance or restriction contained in agreements referred to in
such clause (2), (4) or (5) and expressly permit dividends and other
distributions for scheduled payments on the exchange notes.
LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not permit:
(a) any Restricted Subsidiary to issue any Capital Stock other than to the
Company or a Restricted Subsidiary;
(b) any Person (other than the Company or a Restricted Subsidiary) to own or
control any Capital Stock of any Restricted Subsidiary (other than
directors' qualifying shares or as may be required by law);
provided that clauses (a) and (b) will not prohibit:
(1) any sale of 100% of the shares of the Capital Stock of any Restricted
Subsidiary owned by the Company or any Restricted Subsidiary effected
in accordance with "--Limitation on Asset Sales," or
(2) any sale of 100% of the shares of the Capital Stock of any Restricted
Subsidiary owned by the Company or any Restricted Subsidiary effected
in accordance with "--Merger, Consolidation and Sale of Assets."
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LIMITATION ON LAYERED INDEBTEDNESS
The Company will not, directly or indirectly, incur, create, issue, assume,
guarantee or otherwise become liable for any Indebtedness that is subordinate or
junior in right of payment to any Senior Debt of the Company and senior in any
respect in right of payment to the exchange notes.
LIMITATION ON LIENS
The Company will not, and will not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or permit or
suffer to exist any Liens of any kind (except for Liens securing Senior Debt and
Permitted Liens) against or upon, or enter into or otherwise become liable in
respect of, a Sale and Leaseback Transaction with respect to, any property or
assets of the Company or any of the Restricted Subsidiaries, whether owned on
the Issue Date or acquired after the Issue Date, or any proceeds therefrom or
assign or otherwise convey any right to receive income or profit therefrom
unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the exchange notes, the
exchange notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to such Liens; and
(2) in all other cases, the exchange notes are equally and ratably
secured,
except for:
(a) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date;
(b) Liens on Investment Securities securing Indebtedness incurred
pursuant to clause (b) of the definition of "Permitted
Indebtedness" and Interest Swap Obligations and Currency
Agreements related thereto;
(c) Liens securing Purchase Money Indebtedness (or Refinancing
Indebtedness in respect thereof) or Sale and Leaseback
Transactions involving Capitalized Lease Obligations, in each
case Incurred pursuant to clause (l) of the definition of
"Permitted Indebtedness"; provided, however, that:
(1) the Purchase Money Indebtedness (or Refinancing Indebtedness)
or Capitalized Lease Obligation shall not exceed the cost of
the property or assets to be acquired or which is the subject
of the Sale and Leaseback Transaction, and shall not be
secured by any property or assets of the Company or any
Restricted Subsidiary other than the property and assets to
be acquired or which is the subject of the Sale and Leaseback
Transaction, and
(2) the Lien securing any Purchase Money Indebtedness shall be
created within 90 days of such acquisition;
(d) Liens securing Acquired Indebtedness (and any Refinancing
Indebtedness in respect thereof); provided that:
(1) the Liens secured the Acquired Indebtedness at the time of
and prior to the Incurrence of the Acquired Indebtedness by
the Company or a Restricted Subsidiary and were not granted
in connection with, or in anticipation of, the Incurrence of
the Acquired Indebtedness by the Company or a Restricted
Subsidiary, and
(2) the Liens do not extend to or cover any property or assets of
the Company or of any of the Restricted Subsidiaries other
than the property or assets that secured
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the Acquired Indebtedness prior to the time the Indebtedness
became Acquired Indebtedness of the Company or a Restricted
Subsidiary;
(e) Liens securing the exchange notes;
(f) Liens in favor of the Company; and
(g) Liens securing Refinancing Indebtedness incurred to Refinance any
Indebtedness, which Refinanced Indebtedness had been secured by a
Lien permitted under the Indenture; PROVIDED, HOWEVER, that such
Liens do not extend to or cover any property or assets of the
Company or any of the Restricted Subsidiaries not securing the
Indebtedness so Refinanced.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not, in a single transaction or series of related
transactions, consolidate or merge with or into any Person, or sell, assign,
transfer, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary to sell, assign, transfer, lease, convey or otherwise
dispose of) all or substantially all of the Company's assets (determined on a
consolidated basis for the Company and the Restricted Subsidiaries) whether as
an entirety or substantially as an entirety to any Person unless:
(1) either:
(a) the Company shall be the surviving or continuing corporation; or
(b) the Person (if other than the Company) formed by such consolidation
or into which the Company is merged or the Person which acquires by
sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and the Restricted
Subsidiaries substantially as an entirety (the "Surviving Entity"):
(x) shall be a corporation organized and validly existing under the
laws of the United States or any State thereof or the District
of Columbia; and
(y) shall expressly assume, by supplemental indenture (in form and
substance reasonably satisfactory to the Trustee), executed and
delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the
exchange notes and the performance of every covenant of the
exchange notes, the Indenture and the Registration Rights
Agreement on the part of the Company to be performed or
observed;
(2) immediately after giving effect to such transaction and the assumption
contemplated by clause (1)(b)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness Incurred or anticipated to be
Incurred in connection with or in respect of such transaction), the
Company or such Surviving Entity, as the case may be, shall be able to
incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the covenant described under "-Limitation on
Incurrence of Additional Indebtedness";
(3) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (1)(b)(y) above
(including, without limitation, giving effect to any Indebtedness and
Acquired Indebtedness incurred or anticipated to be incurred and any Lien
granted in connection with or in respect of the transaction), no Default
or Event of Default shall have occurred or be continuing; and
(4) the Company or the Surviving Entity shall have delivered to the Trustee
an officers' certificate and an opinion of counsel, each stating that
such consolidation, merger, sale, assignment, transfer, lease, conveyance
or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with
the applicable
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provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
The above paragraph will not apply to a merger or consolidation between the
Company and a Restricted Subsidiary in which the Company is the Surviving Entity
or between one or more Restricted Subsidiaries to the extent that a Person that
is a Restricted Subsidiary immediately before and after the transaction is the
Surviving Entity, or to the sale of substantially all of the assets of a
Restricted Subsidiary to the Company or to a Person that is a Restricted
Subsidiary immediately before and after the transaction. For purposes of this
covenant, the transfer by lease, assignment, sale or otherwise, in a single
transaction or series of transactions, of all or substantially all of the
properties or assets of one or more Restricted Subsidiaries, the Capital Stock
of which constitutes all or substantially all of the properties and assets of
the Company, shall be deemed to be the transfer of all or substantially all of
the properties and assets of the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the Surviving
Entity, the successor Person formed by such consolidation or into which the
Company is merged, or to which such conveyance, lease or transfer is made, shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the exchange notes with the same effect as
if such Surviving Entity had been named as such.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES
(a) The Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, enter into or permit to exist
any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with, or for the benefit of, any of its
Affiliates (each an "Affiliate Transaction") unless the Affiliate
Transaction is on terms that are not materially less favorable than those
that would have reasonably been expected in a comparable transaction at
such time on an arm's-length basis from a Person that is not an Affiliate
of the Company or such Restricted Subsidiary. Prior to the consummation
by the Company or any Restricted Subsidiary of any Affiliate Transactions
(or series of related Affiliate Transactions which are similar or part of
a common plan) involving aggregate payments or other property with a fair
market value in excess of:
(1) $5.0 million, the Company or such Restricted Subsidiary, as the case
may be, shall obtain the approval of its Board of Directors
(including a majority of the independent directors) of such
transaction or series of related transactions evidenced by a Board
Resolution stating that such Board of Directors (including a majority
of the independent directors) has determined that such transaction
complies with the foregoing provisions, and
(2) $10.0 million, the Company or such Restricted Subsidiary, as the case
may be, shall obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial
point of view, from an Independent Financial Advisor, and file it
with the Trustee.
(b) The restrictions set forth in paragraph (a) above shall not apply to:
(1) employment, stock option, consulting, agency or other compensation or
benefit plans, arrangements and agreements of the Company or any
Restricted Subsidiary in accordance with the Annual Incentive Plan or
the Equity Incentive Plan or as approved by a majority of the
disinterested members of the Board of Directors (or a majority of the
disinterested members of a committee thereof);
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(2) reasonable fees and compensation paid to directors, and reasonable
indemnity provided on behalf of officers, directors, employees,
consultants or agents, of the Company or any Restricted Subsidiary as
determined in good faith by the Company's Board of Directors or
senior management;
(3) transactions exclusively between or among the Company and any
Restricted Subsidiaries or exclusively between or among Restricted
Subsidiaries, provided such transactions are not otherwise prohibited
by the Indenture; and
(4) Restricted Payments permitted to be made pursuant to the
"--Limitation on Restricted Payments" covenant.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES
The Company may designate after the Issue Date any Subsidiary of the
Company, other than LaBranche or a Person holding Capital Stock of LaBranche, as
an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or after
giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an Investment
at the time of Designation assuming the effectiveness of the Designation
in an amount (the "Designation Amount") equal to the sum of:
(1) the fair market value of the Capital Stock of the Subsidiary owned by
the Company and/or any of the Restricted Subsidiaries on such date,
and
(2) the aggregate amount of Indebtedness of the Subsidiary owed to the
Company and the Restricted Subsidiaries on that date; and
(c) the Company would be permitted to incur $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the covenant described
under "--Limitation on Incurrence of Additional Indebtedness" at the time
of Designation assuming the effectiveness of the Designation.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment in the Designation Amount
pursuant to the covenant described under "--Limitation on Restricted Payments"
for all purposes of the Indenture. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time:
(1) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness),
(2) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or
(3) be directly or indirectly liable for any Indebtedness that provides
that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the
occurrence of a default with respect to any Indebtedness of any
Unrestricted Subsidiary (including any right to take enforcement
action against the Unrestricted Subsidiary).
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary ("Revocation"), whereupon such Subsidiary shall then constitute a
Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time and after
giving effect to such Revocation; and
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(b) all Liens and Indebtedness of such Unrestricted Subsidiaries outstanding
immediately following such Revocation would, if incurred at such time,
have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by an officers'
certificate of the Company delivered to the Trustee certifying compliance with
the foregoing provisions.
REPORTS TO NOTE HOLDERS
The Indenture will provide that the Company will deliver to the Trustee
within 15 days after the filing of the same with the Commission, copies of the
quarterly and annual reports and of the information, documents and other
reports, if any, that the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Sections 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and note holders with such annual and quarterly reports and such information,
document and other reports specified in Section 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(a) the failure to pay interest (including any additional interest payable
under the Registration Rights Agreement) on any exchange notes when the
same becomes due and payable and the default continues for a period of
30 days, whether or not such payment shall be prohibited by the
subordination provision of the Indenture;
(b) the failure to pay the principal on any exchange notes, when such
principal becomes due and payable, at maturity or otherwise (including
the failure to make a payment to purchase exchange notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer), whether
or not such payment shall be prohibited by the subordination provision of
the Indenture;
(c) a default in the observance or performance of the covenant described
under "--Certain Covenants--Merger, Consolidation and Sale of Assets";
(d) a default in the observance or performance of any other covenant or
agreement contained in the Indenture, which default continues for a
period of 45 days after the Company receives written notice specifying
the default from the Trustee or the holders of at least 25% of the
outstanding principal amount of the exchange notes;
(e) a default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Restricted Subsidiary (or the
payment of which is guaranteed by the Company or any Restricted
Subsidiary), whether such Indebtedness now exists or is created after the
Issue Date, which default:
(1) is caused by failure to pay principal of such Indebtedness after any
applicable grace period provided in such Indebtedness on the date of
such default (a "payment default") or
(2) results in the acceleration of such Indebtedness prior to its express
maturity,
and the aggregate principal amount of any Indebtedness to which
clause (1) or (2) applies at the relevant time, exceeds $10.0 million;
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(f) one or more judgments in an aggregate amount in excess of $10.0 million
shall have been rendered against the Company or any of the Restricted
Subsidiaries and such judgments remain undischarged, unpaid or unstayed
for a period of 45 days after such judgment or judgments become final and
nonappealable;
(g) certain events of bankruptcy affecting the Company or any of the
Significant Subsidiaries (or any group of Subsidiaries which, taken
together, would constitute a Significant Subsidiary) pursuant to SIPA or
bankruptcy laws;
(h) LaBranche is not a specialist broker in good standing with the NYSE;
(i) the Commission revokes the registration of LaBranche as a broker-dealer
under the Exchange Act or LaBranche fails to maintain such registration;
or
(j) the Examining Authority (as defined in Rule 15c3-1) for the Company
shall suspend (and not reinstate within 10 days) or revoke LaBranche's
status as a member organization thereof.
If an Event of Default (other than an Event of Default specified in
clause (g) above) shall occur and be continuing, the Trustee or the holders of
at least 25% in principal amount of outstanding exchange notes may declare the
principal of, and accrued interest on, all the exchange notes to be due and
payable by notice in writing to the Company and (if given by the note holders)
the Trustee specifying the Event of Default and that it is a "notice of
acceleration," and the same shall become immediately due and payable. If an
Event of Default specified in clause (g) above occurs and is continuing, then
all unpaid principal of, and accrued and unpaid interest on, all of the
outstanding exchange notes shall become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any note
holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the exchange notes as described in the preceding
paragraph, the holders of a majority in principal amount of the then outstanding
exchange notes may rescind and cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely
because of the acceleration;
(3) to the extent payment of such interest is lawful, if interest on
overdue installments of interest and overdue principal, which has
become due otherwise than by such declaration of acceleration, has
been paid;
(4) if the Company has paid the Trustee its reasonable compensation and
reimbursed the Trustee for its expenses, disbursements and advances;
and
(5) in the event of the cure or waiver of an Event of Default of the type
described in clause (g) of the description above of Events of
Default, the Trustee shall have received an officers' certificate of
the Company and an opinion of counsel that such Event of Default has
been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The holders of a majority in principal amount of the then outstanding
exchange notes may waive any existing Default or Event of Default under the
Indenture, and its consequences, except a default in the payment of the
principal of or interest on any exchange notes.
Note holders may not enforce the Indenture or the exchange notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the note holders, unless such note holders
have offered to
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the Trustee reasonable indemnity. Subject to all provisions of the Indenture and
applicable law, the holders of a majority in aggregate principal amount of the
then outstanding exchange notes have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee.
The Company is required to provide an officers' certificate to the Trustee
promptly upon the Company obtaining knowledge of any Default or Event of Default
(provided that the Company shall provide such certification at least annually
whether or not it knows of any Default or Event of Default) that has occurred
and, if applicable, describe such Default or Event of Default and the status
thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding exchange notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
exchange notes, except for:
(1) the rights of note holders to receive payments in respect of the
principal of, premium, if any, and interest on the exchange notes
when such payments are due solely from the trust described below;
(2) the Company's obligations with respect to the exchange notes
concerning issuing temporary exchange notes, registration of exchange
notes, mutilated, destroyed, lost or stolen exchange notes and the
maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the Trustee and
the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indenture ("Covenant Defeasance") and thereafter any
omission or failure to comply with such obligations shall not constitute a
Default or Event of Default with respect to the exchange notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the exchange notes.
In order to exercise Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the note holders cash in U.S. dollars, non-callable U.S.
government obligations, or a combination thereof, in such amounts as will
be sufficient, in the opinion of a nationally recognized firm of
independent public accounts, to pay the principal of, premium, if any,
and interest on the exchange notes on the stated date of payment thereof;
(b) in the case of Legal Defeasance, the company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that:
(1) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(2) since the date of the Indenture,
there has been a change in the applicable federal income tax law, in either case
to the effect that, and based thereon such opinion of counsel shall confirm
that, the note holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
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federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred;
(c) in the case of Covenant Defeasance, the Company shall have delivered to
the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the note holders will not
recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on
the 91st day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under any material
agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with the intent of
preferring the note holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding other
creditors of the Company or others;
(g) the Company shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
(h) the Company shall have delivered to the Trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; and
(i) certain other customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
exchange notes, as expressly provided for in the Indenture) as to all
outstanding exchange notes when:
(a) either:
(1) all the exchange notes theretofor authenticated and delivered (except
lost, stolen or destroyed exchange notes which have been replaced or
paid and exchange notes for which payment money has theretofor been
deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust) have
been delivered to the Trustee for cancellation; or
(2) all exchange notes not theretofor delivered to the Trustee for
cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee
funds in an amount sufficient to pay and discharge the entire
Indebtedness on the exchange notes not theretofor delivered to the
Trustee for cancellation, for principal of, and premium, if any, and
interest on, the exchange notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to
apply such funds to the payment thereof at maturity;
(b) the Company has paid all other sums payable under the Indenture by the
Company; and
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(c) the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture
have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
note holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, doubts or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the note
holders in any material respect. In formulating its opinion on such matters, the
Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the holders of a majority in principal amount of the then outstanding exchange
notes issued under the Indenture, except that, without the consent of each note
holder affected thereby, no amendment may:
(a) reduce the amount of exchange notes whose holders must consent to an
amendment;
(b) reduce the rate of or change or have the effect of changing the time for
payment of interest, including defaulted interest, on any exchange notes;
(c) reduce the principal of or change or have the effect of changing the
Maturity Date of any exchange notes, or change the date on which any
exchange notes may be subject to repurchase, or reduce the repurchase
price therefor;
(d) make any exchange notes payable in money other than that stated in the
exchange notes;
(e) make any change in provisions of the Indenture protecting the right of
each note holder to receive payment of principal of and interest on such
exchange notes on or after the stated due date thereof or to bring suit
to enforce such payment, or permitting holders of a majority in principal
amount of the then outstanding exchange notes to waive Defaults or Events
of Default;
(f) amend, change or modify in any material respect the obligation of the
Company to make and consummate a Change of Control Offer after the
occurrence of a Change of Control or make and consummate a Net Proceeds
Offer with respect to any Asset Sale that has been consummated or modify
any of the provisions or definitions with respect thereto; or
(g) modify or change any provision of the Indenture or the related
definitions affecting the ranking of the exchange notes in a manner which
adversely affects the note holders.
GOVERNING LAW
The Indenture will provide that it and the exchange notes will be governed
by, and construed in accordance with, the laws of the State of New York but
without giving effect to applicable principles of conflicts of law to the extent
that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
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The Indenture and the provisions of the Trust Indenture Act contain certain
limitations on the rights of the Trustee, should it become a creditor of the
Company, to obtain payments of claims in certain cases or to realize on certain
property received in respect of any such claim as security or otherwise. Subject
to the Trust Indenture Act, the Trustee will be permitted to engage in other
transactions; provided that if the Trustee acquires any conflicting interest as
described in the Trust Indenture Act, it must eliminate such conflict or resign.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the exchange notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the exchange notes or because of the creation of any Indebtedness represented
thereby shall be had against any Person solely as a result of their capacity as
incorporator, stockholder, officer, director, employee or controlling person of
the Company or of any successor Person thereof. Each note holder, by accepting
the exchange notes, waives and releases all such liability.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. The Indenture includes the full definition of all these terms, as
well as any other terms used below for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed by the Company or any Restricted Subsidiary in
connection with the acquisition of assets from such Person and in each case
whether or not incurred by such Person in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "--Certain
Covenants--Limitation on Transactions with Affiliates."
"Annual Incentive Plan" means the LaBranche & Co Inc. Annual Incentive Plan
as in effect on the Issue Date or as amended from time to time as approved by a
majority of the disinterested members of the Board of Directors (or a majority
of the disinterested members of a committee thereof).
"Asset Acquisition" means:
(a) an Investment by the Company or any Restricted Subsidiary in any other
Person pursuant to which such Person shall become a Restricted Subsidiary
or shall be merged with or into the Company or any Restricted Subsidiary;
or
(b) the acquisition by the Company or any Restricted Subsidiary of the
assets of any Person (other than a Restricted Subsidiary) that constitute
all or substantially all of the assets of such Person or comprises any
division or line of business of such Person or any other properties or
assets of such Person other than in the ordinary course of business.
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"Asset Sale" means any direct or indirect sale, issuance, conveyance, lease,
assignment or other transfer (other than the granting of a Lien in accordance
with the Indenture) for value by the Company or any of the Restricted
Subsidiaries (including any Sale and Leaseback Transaction) to any Person other
than the Company or a Restricted Subsidiary of:
(a) any Capital Stock of any Restricted Subsidiary; or
(b) any other property or assets (excluding Capital Stock) of the Company or
any Restricted Subsidiary;
provided, however, that "Asset Sale" shall not include:
(1) a transaction or series of related transactions for which the Company
or the Restricted Subsidiaries receive aggregate consideration of
less than $2.0 million;
(2) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted by the
covenant described under "--Certain Covenants--Merger, Consolidation
and Sale of Assets";
(3) any Restricted Payment made in accordance with the covenant described
under "--Certain Covenants--Limitation on Restricted Payments";
(4) the sale or lending of Investment Securities in the ordinary course
of business of the Company and its Restricted Subsidiaries;
(5) Sale and Leaseback Transactions involving up to $15.0 million in the
aggregate after the Issue Date; or
(6) the disposition of obsolete or worn-out equipment or entering into
operating leases for real property or equipment or subleases in
respect thereof, in each case in the ordinary course of business.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the secretary or an assistant secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"Capital Expenditures" means, for any period, the aggregate of all
expenditures made by the Company and its Restricted Subsidiaries during such
period on a consolidated basis which, as determined in accordance with GAAP, are
required to be included in property, plant or equipment or a similar fixed
asset.
"Capital Stock" means:
(a) with respect to any Person that is a corporation, any and all shares,
interests, participations or other equivalents (however designated and
whether or not voting) of corporate stock, including each class of Common
Stock and Preferred Stock of such Person; and
(b) with respect to any Person that is not a corporation, any and all
partnership, limited liability company interests or other equity
interests of such Person.
"Cash Equivalents" means:
(a) marketable direct obligations issued by, or unconditionally guaranteed
by, the United States Government or issued by any agency thereof and
backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
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(b) marketable direct obligations issued by any state of the United States
of America or any political subdivision of any such state or any public
instrumentality thereof maturing within twelve months from the date of
acquisition thereof and, at the time of acquisition, having one of the
two highest ratings obtainable from either Standard & Poor's Corporation
("S&P") or Moody's Investors Service, Inc. ("Moody's");
(c) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least A-1 from S&P or at least P-l from Moody's;
(d) certificates of deposit or bankers' acceptances maturing within one year
from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the
date of acquisition thereof combined capital and surplus of not less than
$500,000,000;
(e) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (a) entered into
with any bank meeting the qualifications specified in clause (d) above;
and
(f) investments in money market funds that invest substantially all their
assets in securities of the types described in clauses (a) through
(e) above.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Change of Control" means the occurrence of one or more of the following
events:
(a) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets
of the Company (determined on a consolidated basis) to any Person or
group of related Persons for purposes of Section 13(d) of the Exchange
Act (a "Group"), (whether or not otherwise in compliance with the
provisions of the Indenture);
(b) the approval by the holders of Capital Stock of the Company of any plan
or proposal for the liquidation or dissolution of the Company (whether or
not otherwise in compliance with the provisions of the Indenture);
(c) any Person or Group, other than the Permitted Holders, becomes the
beneficial owner (as defined by Section 13(d) of the Exchange Act)
directly or indirectly, of more than 35% of the total voting power of the
Capital Stock of the Company, and the Permitted Holders beneficially own,
directly or indirectly in the aggregate, a lesser percentage of the total
voting power of the Capital Stock of the Company than such Person or
Group and do not have the right or ability by voting power, contract, or
otherwise to elect or designate for election a majority of the Board of
Directors (or any analogous governing body) of the Company; or
(d) the replacement of a majority of the Board of Directors of the Company
over a consecutive 24-month period from the directors who constituted the
Board of Directors of the Company at the beginning of such period, and
such replacement shall not have been approved by a vote of at least a
majority of the Board of Directors of the Company, then still in office
who either were members of such Board of Directors at the beginning of
such period or whose election as a member of such Board of Directors was
previously so approved.
"Change of Control Offer" has the meaning set forth under "--Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "--Change
of Control."
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"Commission" means the Securities and Exchange Commission, as from time to
time constituted, or if at any time after the execution of the Indenture such
Commission is not existing and performing the applicable duties now assigned to
it, then the body or bodies performing such duties at such time.
"Commission Net Capital" means, at any time, the "net capital" of LaBranche
computed in accordance with Rule 15c3-1.
"Commission Required Net Capital" means, at any time, the minimum amount to
which Commission Net Capital must be equal pursuant to Rule 15c3-1 in order to
remain in compliance with all provisions thereof.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to the Company, for any period,
the sum (without duplication) of:
(a) Consolidated Net Income; and
(b) to the extent Consolidated Net Income has been reduced thereby,
(1) all income taxes of the Company and the Restricted Subsidiaries paid
or accrued in accordance with GAAP for such period (other than income
taxes attributable to extraordinary or nonrecurring gains or taxes
attributable to Asset Sales outside the ordinary course of business);
(2) Consolidated Interest Expense; and
(3) Consolidated Non-cash Charges,
less any non-cash items increasing Consolidated Net Income for such period,
all as determined on a consolidated basis for the Company and the Restricted
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to the
Company, the ratio of Consolidated EBITDA of the Company during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") of the Company for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to:
(a) the Incurrence or repayment of any Indebtedness of the Company or any of
the Restricted Subsidiaries (and the application of the proceeds thereof)
giving rise to the need to make such calculation and any Incurrence or
repayment of other Indebtedness (and the application of the proceeds
thereof), other than the Incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to
working capital facilities, occurring during the Four Quarter Period or
at any time subsequent to the last day of the Four Quarter Period and on
or prior to the Transaction Date, as if such Incurrence or repayment, as
the case may be (and the application of the proceeds thereof), occurred
on the first day of the Four Quarter Period; and
(b) any Asset Sales, any disposition of assets excluded from the definition
of Asset Sale pursuant to clause (3) thereof or any Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of the Company or one of the
Restricted Subsidiaries (including any Person that becomes a Restricted
Subsidiary
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as a result of the Asset Acquisition) incurring, assuming or otherwise
being liable for Acquired Indebtedness and also including any
Consolidated EBITDA attributable to the assets which are the subject of
the Asset Acquisition or Asset Sale or other disposition during the Four
Quarter Period, provided that such Consolidated EBITDA shall be included
only to the extent includable pursuant to the definition of "Consolidated
Net Income") occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to
the Transaction Date as if such Asset Sale, other disposition or Asset
Acquisition (including the Incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If the Company or any of the Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the Incurrence of such guaranteed
Indebtedness as if the Company or any Restricted Subsidiary had directly
incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of the "Consolidated Fixed
Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate
per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date;
(2) if interest on any Indebtedness actually incurred on the Transaction
Date may optionally be determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness determined
on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the
operation of such agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of:
(a) Consolidated Interest Expense; plus
(b) the product of:
(1) the amount of all dividend payments on any series of Preferred Stock
of the Company (other than dividends paid in Qualified Capital Stock)
paid, accrued or scheduled to be paid or accrued during such period
times; and
(2) a fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated federal,
state and local income tax rate of the Company, expressed as a
decimal.
"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication:
(a) the aggregate of the interest expense of the Company and the Restricted
Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP, including without limitation, whether or not
constituting interest expense in accordance with GAAP:
(1) any amortization of debt discount,
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(2) the net costs under Interest Swap Obligations,
(3) all capitalized interest, and
(4) the interest portion of any deferred payment obligation; and
(b) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Company and the Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom:
(a) after-tax gains (but not losses) from Asset Sales or reserves relating
thereto;
(b) extraordinary gains or losses;
(c) for purposes of calculating Consolidated Net Income pursuant to
clause (3) of the first paragraph of "--Certain Covenants--Limitation on
Restricted Payments" only, the net income of any Person acquired in a
"pooling of interests" transaction accrued prior to the date it becomes a
Restricted Subsidiary or is merged or consolidated with the Company or
any Restricted Subsidiary;
(d) the net income (but not loss) of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the relevant time
permitted by a contract, operation of law or otherwise;
(e) any increase (but not decrease) in net income attributable to minority
interests in Restricted Subsidiaries;
(f) the net income of any Person, other than a Restricted Subsidiary, except
to the extent of cash dividends or distributions paid to the Company or
to a Restricted Subsidiary by such Person;
(g) any restoration to income of any contingency reserve, except to the
extent that provision for such reserve was made out of Consolidated Net
Income accrued at any time following the Issue Date;
(h) in the case of a successor to the Company by consolidation or merger or
as a transferee of the Company's assets, for purposes of calculating
Consolidated Net Income pursuant to clause (3) of the first paragraph of
"--Certain Covenants--Limitation on Restricted Payments" only, any
earnings of the successor corporation prior to such consolidation, merger
or transfer of assets; and
(i) the cumulative effect of changes in accounting principles.
"Consolidated Non-cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (excluding any such charge that requires an accrual of or a reserve
for cash charges for any future period).
"Covenant Defeasance" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."
"Credit Agreement" means the Credit Agreement between LaBranche and The Bank
of New York, dated June 26, 1998, as amended.
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"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice of both would be, an Event of Default.
"Designated Senior Debt" means (1) Obligations under the Credit Agreement
and (2) any other Senior Debt permitted under the Indenture the principal amount
of which is $25.0 million or more and that has been designated by the Company as
"Designated Senior Debt."
"Designation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "--Certain
Covenants--Limitations on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock that,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is mandatorily exchangeable for Indebtedness, or is redeemable, or exchangeable
for Indebtedness, at the sole option of the holder thereof on or prior to the
91st day after the final maturity date of the exchange notes.
"Equity Incentive Plan" means the LaBranche & Co Inc. Equity Incentive Plan
as in effect on the Issue Date or as amended from time to time as approved by a
majority of the disinterested members of the Board of Directors (or a majority
of the disinterested members of a committee thereof).
"Equity Interests" means Capital Stock and all warrants, options or other
right to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Excess Cash Flow" means, with respect to the Company, for any fiscal year,
forty percent (40%) of the amount by which Consolidated EBITDA exceeds the sum
of:
(1) Consolidated Interest Expense, plus
(2) all taxes of the Company and the Restricted Subsidiaries paid or
accrued in accordance with GAAP for such fiscal year, plus
(3) the amount of any increases in Commission Required Net Capital, NYSE
Required Net Capital and/or NYSE Required Regulatory Capital funded
by the Company with retained earnings in such fiscal year, plus
(4) Capital Expenditures of the Company and its Restricted Subsidiaries
in such fiscal year, plus
(5) all cash amounts (excluding any cash generated or otherwise derived
from any debt or equity financing or refinancing transaction) paid or
committed to be paid (as evidenced by an executed definitive
agreement with a third party seller) by the Company or any of its
Restricted Subsidiaries in connection with an Asset Acquisition
relating to a NYSE
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specialist in such fiscal year; provided, however, that the aggregate
amount of such cash amounts shall not exceed $40.0 million, plus
(6) all cash amounts (excluding any cash generated or otherwise derived
from any debt or equity financing or refinancing transaction) paid in
such fiscal year by the Company or any of its Restricted Subsidiaries
in respect of principal made on the scheduled maturity (including any
mandatory redemption) of any (i) Indebtedness existing on the Issue
Date, (ii) Senior Debt or (iii) Indebtedness the documentation for
which expressly provides that (a) it is on parity with Senior Debt or
(b) senior in right of payment to the exchange notes, other than the
Indebtedness under the $20.0 million Note Purchase Agreement,
and, to the extent applicable, "Excess Cash Flow" shall also include any amounts
excluded from an Excess Cash Flow Offer in previous fiscal years pursuant to the
second paragraph of "--Excess Cash Flow Offer."
"Excess Cash Flow Offer" has the meaning set forth under "--Excess Cash Flow
Offer."
"Excess Cash Flow Payment Date" has the meaning set forth under "--Excess
Cash Flow Offer."
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"Event of Default" has the meaning set forth under "--Events of Default."
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accounts and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession
of the United States, which are in effect as of the Issue Date.
"note holders" has the meaning set forth under "--Principal, Maturity and
Interest."
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable, contingently or
otherwise, in respect of such Indebtedness or other obligation on the balance
sheet of such Person. Indebtedness of any Acquired Person or any of its
Subsidiaries existing at the time such Acquired Person becomes a Restricted
Subsidiary (or is merged into or consolidated with the Company or any Restricted
Subsidiary), whether or not such Indebtedness was Incurred in connection with,
as a result of, or in contemplation of, such Acquired Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Company or
any Restricted Subsidiary), shall be deemed Incurred at the time any such
Acquired Person becomes a Restricted Subsidiary or merges into or consolidates
with the Company or any Restricted Subsidiary.
"Indebtedness" means, with respect to any Person, without duplication:
(a) all Obligations of such Person for borrowed money;
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(b) all Obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments;
(c) all Capitalized Lease Obligations of such Person;
(d) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business that are not overdue by 90 days or more or are being
contested in good faith by appropriate proceedings promptly instituted
and diligently conducted);
(e) all letters of credit, banker's acceptances or similar credit
transactions (including any Obligations for reimbursement in respect
thereof);
(f) guarantees and other contingent obligations in respect of Indebtedness
of any other Person referred to in clauses (a) through (e) above and
clause (h) below;
(g) all Obligations of any other Person of the type referred to in clauses
(a) through (e) that are secured by any Lien on any property or asset of
such Person, the amount of such Obligation being deemed to be the lesser
of the fair market value of such property or asset or the amount of the
Obligation so secured;
(h) all Obligations under Currency Agreements and Interest Swap Obligations
of such Person; and
(i) all Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if
any.
Notwithstanding anything to the contrary herein, "Indebtedness" shall not
include any overnight borrowings by the Company or any Restricted Subsidiary
Incurred in connection with the lending of Investment Securities which does not
constitute indebtedness under GAAP.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such Disqualified Capital
Stock.
"Independent Financial Advisor" means a qualified accounting, appraisal or
investment banking firm of national standing that does not, and whose directors,
officers and employees and Affiliates do not, have a direct or indirect
financial interest in the Company.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person:
(a) any direct or indirect advance, loan or other extension of credit
(including, without limitation, a guarantee) or capital contribution to
any other Person (by means of any transfer of cash or
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other property to others or any payment for property or services for the
account or use of others); or
(b) any purchase or acquisition by such Person of any Capital Stock (or
warrants, rights or options to purchase Capital Stock), bonds, notes,
debentures or other securities or evidences of Indebtedness issued by,
any other Person.
"Investment" shall exclude extensions of trade credit by the Company and the
Restricted Subsidiaries on commercially reasonable terms in accordance with
normal trade practices of the Company or such Restricted Subsidiary, as the case
may be. If the Company or any Restricted Subsidiary sells or otherwise disposes
of any Capital Stock of any Restricted Subsidiary (the "Referent Subsidiary")
such that, after giving effect to any such sale or disposition the Referent
Subsidiary shall cease to be a Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Capital Stock of the Referent Subsidiary
not sold or disposed of.
"Investment Securities" means marketable securities of a Person (other than
an Affiliate or joint venture of the Company or any Restricted Subsidiary)
acquired by the Company or any of its Restricted Subsidiaries in the ordinary
course of its specialist or related businesses.
"Issue Date" means the first date of issuance of the initial notes.
"LaBranche" means LaBranche & Co., a New York limited partnership, or any
other Wholly-Owned Subsidiary registered as a broker-dealer under the Exchange
Act which succeeds to the business of LaBranche & Co.
"Legal Defeasance" has the meaning set forth under "--Legal Defeasance and
Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Maturity Date" has the meaning set forth under "--Principal, Maturity and
Interest."
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents, including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest), received
by the Company or any of the Restricted Subsidiaries from such Asset Sale net
of:
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking
fees, sales commissions and relocation expenses);
(b) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and
any tax sharing arrangements;
(c) repayments of Indebtedness secured by the property or assets subject to
such Asset Sale that is required to be repaid in connection with such
Asset Sale; and
(d) appropriate amounts to be determined by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by
the Company or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated
with such Asset Sale.
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"Net Proceeds Offer" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Net Proceeds Offer Trigger Date" has the meaning set forth under "--Certain
Covenants--Limitation on Asset Sales."
"Note Purchase Agreements" has the meaning set forth under "--Excess Cash
Flow Offer."
"NYSE" means the New York Stock Exchange, Inc. or any successor operator of
the New York Stock Exchange.
"NYSE Net Capital" means, at any time, the "net capital" of LaBranche
computed in accordance with Rule 326(a) of the NYSE (or any successor
provision).
"NYSE Required Net Capital" means, at any time, the minimum amount of NYSE
Net Capital necessary at such time in order to permit LaBranche to "expand its
business" pursuant to Rule 326(a) of the NYSE (or any successor provision).
"NYSE Required Regulatory Capital" means, at any time, the minimum net
capital requirements prescribed under Rule 104 of the NYSE (or any successor
provision).
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any indebtedness.
"Payment Blockage Notice" has the meaning set forth under "--Subordination."
"Permitted Holders" means:
(a) individually or a combination of any of the following individuals:
George M.L. LaBranche, IV, James G. Gallagher, Alfred O. Hayward, Jr.,
Vincent J. Flaherty or Michael J. Naughton;
(b) a spouse of any of the Person, referred to in clause (a) or any of his
or her lineal descendants;
(c) the trustee(s) of any trust established solely for any of the Persons
referred to in clause (a) or (b);
(d) any organization to which contributions by any of the Persons referred
to in clause (a), (b) or (c) are deductible for federal income, estate or
gift tax purposes or any split-interest trust described in Section 4947
of the Internal Revenue Code of 1986, as amended, provided that, in each
case, such Person is a trustee or a member of the board of directors,
trustees or other governing body or group having the ultimate authority,
inter alia, to vote, dispose or direct the voting or disposition of
Capital Stock of the Company held by such Person; and
(e) a corporation of which a majority of the voting power of its outstanding
Capital Stock is beneficially owned by, or a partnership or limited
liability company of which a majority of the partnership or limited
liability company interests entitled to vote and participate in the
management of the partnership or limited liability company are
beneficially owned by, a Person described in clause (a), (b), (c) or (d).
"Permitted Indebtedness" means, without duplication, each of the following:
(a) Indebtedness under the initial notes (including exchange notes issued
therefor);
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(b) Indebtedness of the Company and the Restricted Subsidiaries Incurred
pursuant to working capital facilities (including, without limitation,
the Credit Agreement) in an amount not to exceed 70% of the market value
of the Investment Securities securing such facilities constituting equity
securities listed on the NYSE or the NASDAQ National Market System, less
the amount of any permanent prepayments or reductions of commitments in
respect of any such Indebtedness made pursuant to "--Certain
Covenants--Limitation on Asset Sales";
(c) Indebtedness of the Company and the Restricted Subsidiaries outstanding
on the Issue Date (excluding Indebtedness under the Credit Agreement)
reduced by the amount of any scheduled amortization payments or mandatory
prepayments when actually paid or permanent reductions thereon;
(d) Permitted Subordinated Indebtedness Incurred after the Issue Date not to
exceed $50.0 million at any one time outstanding;
(e) Interest Swap Obligations of the Company covering Indebtedness of the
Company and Interest Swap Obligations of any Restricted Subsidiary
covering Indebtedness of such Restricted Subsidiary; provided, however,
that such Interest Swap Obligations are entered into to protect the
Company and the Restricted Subsidiaries from fluctuations in interest
rates on Indebtedness incurred in accordance with the Indenture to the
extent the notional principal amount of such Interest Swap Obligations
does not exceed the principal amount of the indebtedness to which such
Interest Swap Obligations relates;
(f) Indebtedness under Currency Agreements; provided that in the case of
Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder;
(g) Indebtedness of a Restricted Subsidiary to the Company or another
Restricted Subsidiary for so long as the Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held
by a Person other than the Company or a Restricted Subsidiary; provided
that if as of any date any Person other than the Company or a Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such Indebtedness shall be deemed to be Incurred on
such date and not constitute Permitted Indebtedness under this
clause (g);
(h) Indebtedness of the Company to a Restricted Subsidiary, provided that:
(1) any Indebtedness of the Company to any Restricted Subsidiary is
subordinate in right of payment to the exchange notes, and
(2) if as of any date any Person other than a Restricted Subsidiary owns
or holds any such Indebtedness or any Person holds a Lien in respect
of such Indebtedness, such date shall be deemed the date of
Incurrence of Indebtedness not constituting Permitted Indebtedness by
the Company;
(i) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar installment inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
indebtedness is extinguished within five business days of Incurrence;
(j) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security
for workers' compensation clams, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of
business;
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(k) Refinancing Indebtedness;
(l) Purchase Money Indebtedness and Capitalized Lease Obligations (and any
Indebtedness incurred to Refinance such Purchase Money Indebtedness or
Capitalized Lease Obligations) of the Company or any Restricted
Subsidiary not to exceed $20.0 million at any one time outstanding;
(m) additional Indebtedness of the Company or any Restricted Subsidiary in
an aggregate principal amount not to exceed $25.0 million at any one time
outstanding; and
(n) the promissory notes issued to the stockholders of Webco
Securities, Inc. ("Webco") as part of the consideration in the
acquisition of Webco by the Company pursuant to the Agreement and Plan of
Merger, dated as of January 26, 2000 by and between LaBranche & Co Inc.
and Webco (not including any amendments thereto).
"Permitted Investments" means:
(a) Investments by the Company or any Restricted Subsidiary in any Person
that is or will become immediately after such Investment a Restricted
Subsidiary or that will merge or consolidate into the Company or a
Restricted Subsidiary;
(b) Investments in the Company by any Restricted Subsidiary; provided that
any Indebtedness evidencing such Investment is unsecured and subordinate
to the exchange notes;
(c) Investments in cash and Cash Equivalents;
(d) loans and advances to employees, officers and directors of the Company
and the Restricted Subsidiaries in the ordinary course of business for
bona fide business purposes not in excess of $5.0 million at any time
outstanding in the aggregate;
(e) Currency Agreements and Interest Swap Obligations entered into in the
ordinary course of the Company's or a Restricted Subsidiary's businesses
and otherwise in compliance with the Indenture;
(f) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(g) Investments made by the Company or the Restricted Subsidiaries as a
result of noncash consideration received in connection with an Asset Sale
made in compliance with the covenant described under "--Certain
Covenants--Limitation on Asset Sales";
(h) Investments in Investment Securities (including borrowings or loans of
Investment Securities) in the ordinary course of business of the Company
and its Restricted Subsidiaries; or
(i) additional Investments not to exceed $10.0 million at any one time
outstanding in the aggregate.
"Permitted Junior Securities" means:
(a) Equity Interests in the Company; or
(b) debt securities that are subordinated to all Senior Debt and any debt
securities issued in exchange for Senior Debt to substantially the same
extent, as, or to a greater extent than, the exchange notes are
subordinated to Senior Debt under the Indenture.
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"Permitted Liens" means the following types of Liens:
(a) Liens for taxes, assessments or governmental charges or claims either:
(1) not delinquent; or
(2) contested in good faith by appropriate proceedings and as to which
the Company or any Restricted Subsidiary shall have set aside on its
books such reserves as may be required pursuant to GAAP;
(b) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by
law or pursuant to customary reservations or retentions of title, in each
case arising in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have
been made in respect thereof;
(c) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice
in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(d) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may
have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may
be initiated shall not have expired;
(e) easements, rights-of-way, zoning restrictions, minor defects or
irregularities in title and other similar charges or encumbrances in
respect of real property not impairing in any material respect the
ordinary conduct of the business of the Company or any Restricted
Subsidiary;
(f) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(g) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(h) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(i) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the
Company or any of the Restricted Subsidiaries, including rights of offset
and set-off;
(j) leases or subleases in respect of real property or equipment granted to
others not interfering in any material respect with the ordinary conduct
of the business of the Company or any Restricted Subsidiary;
(k) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of customs duties in connection with the
importation of goods; and
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(l) normal and customary rights of setoff upon deposits of cash in favor of
banks or other depositary institutions.
"Permitted Subordinated Indebtedness" means Indebtedness of the Company
Incurred at a time when no Default or Event of Default has occurred and is
continuing:
(a) which matures at least 91 days after the final maturity date for the
exchange notes and is not prior to that time:
(1) mandatorily redeemable, or
(2) exchangeable for Indebtedness other than Permitted Subordinated
Indebtedness pursuant to a sinking fund obligation or otherwise or
upon the occurrence of any event,
(b) which has a Weighted Average Life greater than that of the exchange
notes;
(c) which is subordinate in right of payment to the exchange notes with
payment blockage rights in favor of the note holders equivalent to those
set forth in the Indenture for Senior Debt; and
(d) the proceeds of which are loaned by the Company to LaBranche pursuant to
clause (g) of the definition of Permitted Indebtedness and a subordinated
loan agreement (as defined in Appendix D to Rule 15c3-1) for use by
LaBranche for net capital purposes and properly accounted for by
LaBranche as Commission Net Capital and NYSE Net Capital; provided that
any subordination of the loan by the Company will apply only to the
extent required to permit the loan to qualify as Commission Net Capital
and NYSE Net Capital.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Pro Rata Share" means, with respect to a note holder, a fraction equal to
the quotient of (x) the aggregate principal amount of initial notes or exchange
notes then held by such note holder divided by (y) the aggregate principal
amount of initial notes and exchange notes then outstanding.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property,
provided that the aggregate principal amount of such Indebtedness does not
exceed such purchase price or cost.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"Refinance" means in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with "--Certain
Covenants--Limitation on the Incurrence of
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Additional Indebtedness" (other than Permitted Indebtedness) or clause (a) or
(c) of the definition of "Permitted Indebtedness," in each case that does not:
(a) result in an increase in the aggregate principal amount of any
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium reasonably necessary to Refinance such
Indebtedness and plus the amount of reasonable expenses incurred by the
Company in connection with such Refinancing); or
(b) create Indebtedness with:
(1) a Weighted Average Life to Maturity that is less than the Weighted
Average Life to Maturity of the Indebtedness being Refinanced or
(2) a final maturity earlier than the final maturity of the Indebtedness
being Refinanced; provided that if such Indebtedness being Refinanced
is Indebtedness of the Company, then such Refinancing Indebtedness
shall be Indebtedness solely of the Company.
"Registration Rights Agreement" means the Registration Rights Agreement
dated the Issue Date by and among the Company and Donaldson, Lufkin & Jenrette
Securities Corporation, Salomon Smith Barney Inc. and ABN AMRO Incorporated, as
Initial Purchasers.
"Replacement Assets" means assets and property that will be used in the
business of the Company and/or its Restricted Subsidiaries as such business is
then being conducted (including Capital Stock of a Person that becomes a Wholly
Owned Restricted Subsidiary).
"Restricted Payment" has the meaning set forth under "--Certain
Covenants--Limitations on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "--Certain Covenants--Limitation on
Designations of Unrestricted Subsidiaries." Any such Designation may be revoked
by a Board Resolution of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Rule 15c3-1" means Rule 15c3-1 under the Exchange Act (or any successor
provision).
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute or statutes thereto, and the rules and regulations of the
Commission promulgated thereunder.
"Senior Debt" means:
(a) all Indebtedness outstanding under Credit Facilities and all Interest
Swap Obligations with respect thereto;
(b) any other Indebtedness permitted to be incurred by the Company under the
terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with
or subordinated in right of payment to the exchange notes; and
(c) all Obligations with respect to the items listed in the preceding
clauses (a) and (b).
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Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or owing
by the Company or any of its Subsidiaries;
(2) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates;
(3) any trade payables;
(4) any Indebtedness that is incurred in violation of the Indenture;
(5) Disqualified Capital Stock; or
(6) any Indebtedness that, when Incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is
without recourse to the Company.
"SIPA" means the Securities Investor Protection Act of 1970, as amended, or
any successor statute or statutes thereto, and the rules and regulations of
promulgated thereunder.
"Significant Subsidiary" means, with respect to any Person, any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Section 1.02(w) of Regulation S-X under the Securities
Act as in effect on the Issue Date, except that all references to 10% in
Section 1.02(w) shall be changed to 5%.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subsidiary" with respect to any Person, means:
(a) any corporation of which the outstanding Capital Stock having at least a
majority of the votes entitled to be cast in the election of directors
under ordinary circumstances shall at the time be owned, directly or
indirectly, by such Person; or
(b) any other Person of which at least a majority of the voting interest
under ordinary circumstances is at the time, directly or indirectly,
owned by such Person.
"Surviving Entity" has the meaning set forth under "--Certain
Covenants--Merger, Consolidation and Sale of Assets."
"Transaction Date" has the meaning set forth in the definition of
"--Consolidated Fixed Charge Coverage Ratio."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(a) the then outstanding aggregate principal amount of such Indebtedness
into
(b) the sum of the total of the products obtained by multiplying:
(1) the amount of each then remaining installment, sinking fund, serial
maturity or other required payment of principal, including payment at
final maturity, in respect thereof, by
(2) the number of years (calculated to the nearest one-twelfth) which
will elapse between such date and the making of such payment.
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"Wholly Owned Restricted Subsidiary" of the Company means any Restricted
Subsidiary of which all the outstanding voting securities (other than in the
case of a Subsidiary not organized under the laws of a State of the United
States, directors' qualifying shares or an immaterial amount of shares required
to be owned by other Persons pursuant to applicable law) are owned directly or
indirectly by the Company or any Wholly Owned Restricted Subsidiary.
BOOK-ENTRY, DELIVERY AND FORM
The exchange notes will be issued in the form of a global note (the "Global
Note"). The Global Note will be deposited with, or on behalf of, The Depository
Trust Company ("DTC") and registered in the name of DTC or its nominee. Except
as set forth below, the Global Note may be transferred in whole and not in part,
only to DTC or another nominee of DTC. Investors may hold their beneficial
interests in the Global Note directly through DTC if they have an account with
DTC or indirectly through Euroclear System ("Euroclear") or Cedel Bank, N.A.
("Cedel Bank"), organizations which have accounts with DTC.
Exchange notes that are issued as described below under "Certificated
Exchange Notes" will be issued in definitive form. Upon the transfer of an
exchange note in definitive form, such exchange note will, unless the Global
Note has previously been exchanged for exchange notes in definitive form, be
exchanged for an interest in the Global Note representing the principal amount
of exchange notes being transferred.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTE
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel Bank set forth below are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. The
Company takes no responsibility for these operations or procedures, and
investors are urged to contact the relevant system or its participants directly
to discuss these matters.
DTC has advised the Company that it is:
- a limited purpose trust company organized under the laws of the State of
New York,
- a "banking organization" within the meaning of the New York Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended and
- a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of Participants, thereby eliminating the need for physical transfer and
delivery of certificates. DTC Participants include securities brokers and
dealers (including the initial purchasers), banks and trust companies, clearing
corporations and certain other organizations. Indirect access to DTC's system is
also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants") that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly. Investors who are not Participants may beneficially own securities
held by or on behalf of DTC only through Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC
- upon deposit of the Global Note, DTC will credit the accounts of
Participants with an interest in the Global Note, and
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- ownership of the exchange notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC
(with respect to the interests of Participants) and the records of
Participants and the Indirect Participants (with respect to the interests
of persons other than Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the exchange notes represented
by a Global Note to such persons may be limited. In addition, because DTC can
act only on behalf of its Participants, who in turn act on behalf of persons who
hold interests through Participants, the ability of a person having an interest
in exchange notes represented by a Global Note to pledge or transfer such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of the Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the exchange notes represented by the Global Note for all purposes
under the Indenture. Except as provided below, owners of beneficial interests in
the Global Note will not be entitled to have exchange notes represented by such
Global Note registered in their names, will not receive or be entitled to
receive physical delivery of certificated notes, and will not be considered the
owners or holders thereof under the Indenture for any purpose, including with
respect to the giving of any direction, instruction or approval to the Trustee
thereunder. Accordingly, each holder owning a beneficial interest in the Global
Note must rely on the procedures of DTC and, if such holder is not a Participant
or an Indirect Participant, on the procedures of the Participant through which
such holder owns its interest, to exercise any rights of a holder of exchange
notes under the Indenture of such Global Note. The Company understands that
under existing industry practice, in the event that the Company requests any
action of holders of exchange notes, or a holder that is an owner of a
beneficial interest in the Global Note desires to take any action that DTC, as
the holder of such Global Note, is entitled to take, DTC could authorize the
Participants to take such action and the Participants would authorize holders
owning through such Participants to take such action or would otherwise act upon
the instruction of such holders. Neither the Company nor the Trustee will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of exchange notes by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to such exchange notes.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest on the Global Note, will credit Participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of the Global Note as shown on the records of DTC or its
nominee. The Company also expects that payments by Participants to owners of
beneficial interests in the Global Note held through such Participants will be
governed by standing instructions and customary practices and will be the
responsibility of such Participants. The Company will not have any
responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the Global Note
for any exchange note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or for any other aspect of the
relationship between DTC and Participants or the relationship between such
Participants and the owners of beneficial interests in the Global Note owning
through such Participants.
Transfers between Participants will be effected in accordance with DTC's
procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel Bank will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Cross-market transfers between Participants, on the one hand, and Euroclear
or Cedel Bank participants, on the other hand, will be effected through DTC in
accordance with DTC's rules on behalf of Euroclear or Cedel Bank, as the case
may be, by its respective depositary; however, such
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cross-market transactions will require delivery of instructions to Euroclear or
Cedel Bank, as the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of such system. Euroclear or Cedel Bank, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Notes in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel Bank
participants may not deliver instructions directly to the depositaries for
Euroclear or Cedel Bank.
Because of time zone differences, the securities account of a Euroclear or
Cedel Bank participant purchasing an interest in a Global Note from a
Participant will be credited, and any such crediting will be reported to the
relevant Euroclear or Cedel Bank participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedel Bank)
immediately following the settlement date of DTC. Cash received in Euroclear or
Cedel Bank as a result of sales of interests in the Global Note by or through a
Euroclear or Cedel Bank participant to a Participant will be received with value
on the settlement date of DTC but will be available in the relevant Euroclear or
Cedel Bank cash account only as of the business day for Euroclear or Cedel Bank
following DTC's settlement date.
Although DTC, Euroclear and Cedel Bank have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Note among
participants in DTC, Euroclear and Cedel Bank, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel Bank or their
respective participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE NOTES
If:
- DTC (1) notifies the Company that it is no longer willing or able to act
as a depositary and the Company fails to appoint a successor depositary or
(2) ceases to be registered as a clearing agency under the Exchange Act;
- the Company, at its option, notifies the Trustee in writing that it elects
to cause the issuance of exchange notes in certificated form; or
- at the request of DTC, if there shall have occurred and be continuing an
event of default with respect to the exchange notes,
then, upon surrender by DTC of the Global Note, certificated exchange notes in
definitive form in denominations of U.S. $1,000 and integral multiples thereof
will be issued to each person that DTC identifies as the beneficial owner of the
exchange notes represented by the Global Note. Upon any such issuance, the
Trustee is required to register such certificated exchange notes in the name of
such person or persons (or the nominee of any thereof) and cause the same to be
delivered thereto. Subject to the foregoing, the Global Note is not
exchangeable, except for a Global Note of the same aggregate denomination to be
registered in the name of DTC or its nominee.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related exchange notes and each such person may conclusively rely on, and
shall be protected in relying on, instructions from DTC for all purposes,
including with respect to the registration and delivery, and the respective
principal amounts, of the exchange notes to be issued.
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REGISTRATION RIGHTS; LIQUIDATED DAMAGES
We entered into a Registration Rights Agreement with the initial purchasers
concurrently with the issuance of the initial notes. You may obtain a copy of
the agreement by calling or writing to us at One Exchange Plaza, New York, New
York 10006; (212) 425-1144. Under the agreement, we also agreed to file a
registration statement relating to the exchange offer of which this prospectus
is a part with the SEC by May 1, 2000 and use our best efforts to have it
declared effective at the earliest possible time. We also agreed to use our best
efforts to cause the registration statement to be effective continuously, to
keep the exchange offer open for a period of not less than 20 business days and
to cause the exchange offer to be consummated no later than the 30th business
day after it is declared effective by the SEC. Pursuant to the exchange offer,
certain holders of the initial notes which constitute "transfer restricted
securities" may exchange their transfer restricted securities for registered
exchange notes. To participate in the exchange offer, each holder must represent
that it is not our affiliate, that it is not engaged in, and does not intend to
engage in, and has no arrangement or understanding with any person to
participate in, a distribution of the exchange notes that are issued in the
exchange offer, and that it is acquiring the exchange notes in the exchange
offer in its ordinary course of business.
We will file with the SEC a shelf registration statement to register for
public resale the transfer restricted securities held by any such holder who
provides us with certain information for inclusion in the Shelf Registration
Statement if:
(1) the exchange offer is not permitted by applicable law or SEC policy, or
(2) any holder of initial notes which are transfer restricted securities
notifies us prior to the 20th business day following the consummation of
the exchange offer that
(a) it is prohibited by law or SEC policy from participating in the
exchange offer,
(b) it may not resell the exchange notes acquired by it in the exchange
offer to the public without delivering a prospectus, and the
prospectus contained in the registration statement is not appropriate
or available for such resales by it, or
(c) it is a broker-dealer and holds initial notes acquired directly from
us or any of our affiliates.
The term "transfer restricted securities" means each initial note or
exchange note, until the earliest of the date which:
- the initial note is exchanged in the exchange offer for a new note in the
exchange offer which can be publicly resold by the holder without
complying with prospectus delivery requirements of the Securities Act of
1933;
- the resale of the initial note is effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement;
- the initial note is publicly distributed under Rule 144; or
- the exchange note is disposed of by a broker-dealer pursuant to the "Plan
of Distribution."
The following events are considered registration defaults. We will pay
liquidated damages if:
(1) we fail to file the exchange offer registration statement, of which this
prospectus is a part, by May 1, 2000;
(2) the exchange offer registration statement is not declared effective by
the SEC by June 30, 2000;
(3) we fail to consummate the exchange offer by the 30th day after the
registration statement relating to the exchange offer becomes effective;
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(4) we are obligated to file the shelf registration statement and we fail to
file it with the SEC on or before the 60(th) day after our filing
obligation arises;
(5) we are obligated to file the shelf registration statement and it is not
declared effective on or before the 120(th) day after our filing
obligation arises; or
(6) the exchange offer registration statement or the shelf registration
statement, as the case may be, is declared effective but thereafter
ceases to be effective or usable for its intended purpose, without being
succeeded immediately by a post-effective amendment to the registration
statement that cures this failure and is declared effective immediately.
If a registration default occurs, we will be obligated to pay as liquidated
damages to each holder of transfer restricted securities an amount equal to $.05
per week per $1,000 in principal amount of transfer restricted securities held
by each holder for each week or portion of a week that the registration default
continues for the first 90 day period immediately following the occurrence of
the registration default. The amount of liquidated damages will increase by an
additional $.05 per week per $1,000 in principal amount of transfer restricted
securities with respect to each subsequent 90-day period until all registration
defaults have been cured, up to a maximum of liquidated damages of $.50 per week
per $1,000 in principal amount of transfer restricted securities. We be shall
not be required to pay liquidated damages for more than one registration default
at any given time. Liquidated damages will cease to accrue upon the cure of
registration defaults.
Upon completion of the exchange offer, subject to certain exceptions,
holders of initial notes who do not exchange their initial notes for exchange
notes in the exchange offer will no longer be entitled to registration rights
and will not be able to offer or sell their initial notes, unless the initial
notes are subsequently registered under the Securities Act (which, subject to
certain limited exceptions, we will have no obligation to do), except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors--If you do not participate
in the exchange offer, you will continue to be subject to transfer
restrictions."
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DESCRIPTION OF OTHER INDEBTEDNESS
The following summarizes the principal terms of the other indebtedness of
LaBranche & Co Inc., LaBranche & Co. and LaB Investing Co. L.L.C. Copies of the
material agreements relating to the other existing indebtedness have been filed
with the SEC and the description below is qualified in its entirety by reference
to the agreements. See "Available Information."
LABRANCHE'S SENIOR NOTES
On August 24, 1999, we issued $100.0 million aggregate principal amount of
9 1/2% Senior Notes due 2004 in an offering exempt from registration pursuant to
Rule 144A and Regulation S under the Securities Act and applicable state
securities laws. Salomon Smith Barney Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation acted as initial purchasers.
In December 1999, all the holders of Senior Notes exchanged the Senior Notes
for registered Exchange Senior Notes in an exchange offer. The Exchange Senior
Notes are identical to the Senior Notes in all respects except that the Exchange
Senior Notes are registered under the Securities Exchange Act of 1934, as
amended.
The Exchange Senior Notes accrue interest at 9 1/2% per year. We pay
interest on the Exchange Senior Notes on February 15 and August 15 of each year.
The Exchange Senior Notes are senior obligations of LaBranche & Co Inc. and rank
equally with our existing and future other unsecured senior indebtedness. They
rank senior in right of payment to all of our current and future subordinated
indebtedness for borrowed money, except existing and future secured indebtedness
to the extent of the assets securing such indebtedness. The Exchange Senior
Notes are effectively subordinated to the outstanding indebtedness of our
existing subsidiaries.
The Exchange Senior Notes are redeemable, at our option at any time, in
whole or in part, at a price equal to 100% of the principal amount plus accrued
and unpaid interest, if any, to the date of redemption plus a make-whole
premium.
If we sell substantially all our assets or experience specific kinds of
changes of control, we must offer to repurchase the Exchange Senior Notes at a
price in cash equal to 101% of their principal amount, plus accrued and unpaid
interest, if any, to the date of purchase.
The Exchange Senior Notes were issued under an indenture with Firstar Bank,
N.A. The indenture contains certain covenants that, among other things, limits
our ability to:
- borrow money;
- pay dividends on our stock or purchase our stock;
- make investments in certain subsidiaries;
- engage in transactions with stockholders and affiliates;
- create liens on our assets; and
- sell assets or engage in mergers and consolidations.
LABRANCHE & CO.'S CREDIT AGREEMENT
In February 2000, the credit agreement between LaBranche & Co. and The Bank
of New York was extended until February 2, 2001 and amended in order to increase
the credit facility available thereunder from $100.0 million to $200.0 million.
Borrowings under the Credit Agreement are secured by a pledge of the investment
securities of LaBranche & Co. identified in the Credit Agreement. Loans under
the Credit Agreement will bear interest at The Bank of New York's broker loan
rate.
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The credit agreement contains covenants that require LaBranche & Co., among
other things, to
- maintain net capital of not less than $150.0 million, and
- maintain a net worth of not less than $300.0 million.
The credit agreement also restricts LaBranche & Co.'s ability to incur
additional indebtedness, including guarantee liabilities, and certain mortgages
or other encumbrances on the assets pledged under the credit agreement.
LABRANCHE & CO.'S SUBORDINATED DEBT
LaBranche & Co. has two series of outstanding unsecured senior subordinated
notes in the aggregate principal amounts of $20.0 million and $15.0 million,
respectively. These notes mature on September 15, 2002 and June 3, 2008,
respectively, and bear interest payable quarterly at respective annual rates of
8.17% and 7.69%.
LaBranche & Co. may prepay, at a premium, all or any part of the senior
subordinated notes at any time, provided that the amount prepaid is not less
than 5% of the aggregate principal amount of the senior subordinated notes then
outstanding.
Upon the occurrence of a change of control, LaBranche & Co. may, but is not
required to, make one irrevocable separate offer to each holder of the senior
subordinated notes to prepay all of the senior subordinated notes then held by
that holder. The occurrence of a change of control also constitutes an event of
acceleration under each of the series of senior subordinated notes.
Among other things, the agreements relating to the senior subordinated
notes, as amended, require that LaBranche & Co. comply with certain covenants,
including covenants that
- restrict the type of businesses in which it may engage;
- require its net capital to be at least 150% of the net capital required by
the NYSE or the SEC and its adjusted partners' capital to be at least
$94.0 million; and
- prohibit it from making certain cash distributions and other restricted
payments.
A failure to make timely payments of principal and/or interest on the senior
subordinated notes or the occurrence of certain other events may result in a
default under, or an acceleration of, the senior subordinated notes. These
events include:
- the Securities Investor Protection Corporation makes an application
stating that the customers of LaBranche & Co. are in need of protection
under the Securities Investor Protection Act, and the application is not
dismissed within 30 days;
- the SEC revokes the registration of LaBranche & Co. as a broker-dealer;
- the NYSE suspends the status of LaBranche & Co. as a member organization;
and
- LaBranche & Co. fails to meet its net capital requirements.
CASH SUBORDINATED LOAN AGREEMENTS
LaBranche & Co. is a party to a number of separate cash subordinated loan
agreements with current employees, former partners and family members or
affiliates of current and former partners of the firm. These cash subordinated
loan agreements represent junior subordinated debt of LaBranche & Co. The
current aggregate principal amount of such subordinated indebtedness is
approximately $11.5 million. Approximately $9.4 million of this debt currently
bears interest payable quarterly at an annual rate of 10.0%, while two cash
subordinated loan agreements representing an aggregate of $2.1 million bear
interest payable quarterly at an annual rate of 8.0%. LaBranche & Co. has the
option
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to prepay all or a portion of this debt, subject to the approval of the NYSE and
the satisfaction of applicable regulatory net capital requirements. The
indebtedness represented by these cash subordinated loan agreements generally
matures one year from the date of issuance, subject to automatic rollover for
additional one-year terms, unless notice is given by either party not to renew
the term at least seven months prior to the scheduled maturity date. As of
May 31, 2000, seven parties have given such notice. On November 30, 2000, we
will pay approximately $850,000 and on December 2000, we will pay approximately
$3.7 million to satisfy our indebtedness to these seven parties.
As part of the reorganization of our firm from partnership to corporate
form, LaBranche & Co. repaid $5.0 million in satisfaction of one of these cash
subordinated loan agreements and incurred $350,000 of subordinated indebtedness
pursuant to a new cash subordinated loan agreement in connection with the
redemption of a limited partnership interest which bears interest at an annual
rate of 8.0%.
NOTE ISSUED TO MILL BRIDGE
In connection with the reorganization of our firm from partnership to
corporate form, we acquired the limited partnership interest in LaBranche & Co.
held by Mill Bridge, Inc. for $90.0 million, of which $74.0 million was paid in
cash upon the consummation of our Senior Note offering and the initial public
offering of our common stock and $16.0 million was satisfied by our issuance of
a note payable over three years. This $16.0 million obligation is a senior
unsecured obligation of LaBranche & Co Inc. of which $6.0 million is payable on
August 24, 2000, $5.0 million is payable on August 24, 2001 and $5.0 million is
payable on August 24, 2002, and bears interest at an annual rate of 9.5%. This
obligation ranks pari passu with the Exchange Senior Notes.
NOTES ISSUED TO STOCKHOLDERS OF WEBCO
Under the terms of our agreement to acquire Webco, we issued senior
promissory notes in the aggregate principal amount of $3.0 million, each bearing
interest at a rate of 10.0% per annum which will rank pari passu with the
exchange notes. Of that amount, $500,000 was used to secure Webco's obligation
to deliver working capital, as defined, of $18.0 million at the closing. This
promissory note has been paid in full upon the final determination of Webco's
working capital as of the closing date. The remaining $2.5 million of the
aggregate principal amount secures the Webco stockholders' obligation to
indemnify us for any breach of their or Webco's representations, warranties and
covenants under the agreement, and is due November 9, 2001.
118
<PAGE>
UNITED STATES INCOME TAX CONSIDERATIONS
The following summary describes the material U.S. federal income tax
consequences of the exchange of the initial notes for exchange notes that may be
relevant to a beneficial owner of initial notes that is a citizen or resident of
the United States or a U.S. domestic corporation or that otherwise is subject to
United States federal income taxation on a net income basis in respect of such
initial notes. This summary is based on laws, regulations, rulings and judicial
and administrative decisions now in effect, all of which are subject to change.
This summary deals only with investors that hold the initial notes as capital
assets, and does not address tax considerations applicable to investors that may
be subject to special tax rules, such as, but not limited to, banks, tax-exempt
entities, insurance companies or dealers in securities or currencies, traders in
securities electing to mark to market, persons that hold the initial notes as a
position in a "straddle" or conversion transaction, or as part of a "synthetic
security" or other integrated financial transaction or persons that have a
"functional currency" other than the U.S. dollar.
The exchange of initial notes for exchange notes pursuant to the exchange
offer will not be a taxable event for U.S. federal income tax purposes. As a
result, a U.S. holder of an initial note whose initial note is accepted in the
exchange offer will not recognize gain or loss on the exchange for U.S. federal
income tax purposes. Such holder's tax basis in the exchange notes will be equal
to such holder's tax basis in the initial notes exchanged therefor, and the
holding period for the exchange notes received pursuant to the exchange offer
will include the holder's holding period for the initial notes surrendered
therefor.
Investors should consult their own tax advisors in determining the tax
consequences to them, as a result of their individual circumstances, of the
exchange of initial notes for exchange notes and of the ownership and
disposition of exchange notes received in the exchange offer, including the
application of state, local, foreign or other tax laws.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in
exchange for initial notes pursuant to the exchange offer, where such initial
notes were acquired by such broker-dealer as a result of market making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for initial notes where such initial notes were acquired as a result of
market-making activities or other trading activities. We have agreed that, for a
period of up to one year, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and that participates in a distribution of such
exchange notes may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, as amended, and any profit on any such resale of
exchange notes and any commission or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
letter of transmittal states that by
119
<PAGE>
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of up to six-months, we will promptly send additional copies of
this prospectus and any amendment or supplement to this prospectus to any
broker-dealer that requests such documents in the letter of transmittal. We have
agreed to pay all expenses incident to the exchange offer, including the
expenses of one special counsel for all of the holders of the initial notes,
other than commissions or concessions of any broker-dealers. We will indemnify
the holders of the initial notes, including any broker-dealers, against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of issuance of the exchange notes offered hereby will be passed
upon for LaBranche & Co Inc. by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The audited financial statements and schedules of LaBranche & Co Inc. and
Subsidiaries included in this prospectus have been audited by Arthur Andersen
LLP, independent auditors, as stated in their reports appearing herein.
The 1997 audited financial statements of Henderson Brothers Holdings, Inc.
and subsidiary included in this prospectus have been audited by Goldstein Golub
Kessler & Company, P.C., independent auditors, as stated in their report
appearing herein.
The 1999 and 1998 audited financial statements and schedules of Henderson
Brothers Holdings, Inc. and subsidiary included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein.
The audited financial statements of Webco Securities, Inc. included in this
prospectus have been audited by Glasser & Haims, P.C., independent auditors, as
stated in their report appearing herein.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the Securities Act
on Form S-4 with respect to the exchange notes (together with all amendments and
exhibits thereto, the "Registration Statement") and are subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports, proxy statements and other information with the SEC. For
further information with respect to LaBranche & Co Inc., please refer to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this prospectus as to the
contents of any contract, agreement of any other document referred to are not
necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the Registration Statement. Each
such statement is qualified in all respects by such reference to such exhibit. A
copy of the Registration Statement, including exhibits and schedules thereto,
may be inspected without charge and obtained at prescribed rates at the Public
Reference Section of the SEC at its principal offices, located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and may be inspected without charge at the
regional offices of the SEC located at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The Registration Statement, including the exhibits and
schedules thereto, is also available at the SEC's site on the World Wide Web at
http://www.sec.gov.
120
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LABRANCHE & CO INC. AND SUBSIDIARIES PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Pro Forma Condensed Consolidated Financial Information
(unaudited) Overview.................................... F-3
Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended
December 31, 1999 (unaudited)........................... F-6
Pro Forma Condensed Consolidated Statement of Operations
for the Three Months Ended
March 31, 2000 (unaudited).............................. F-7
Notes to Pro Forma Condensed Consolidated Financial
Information (unaudited)................................. F-8
LABRANCHE & CO INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statements of Financial Condition
as of
March 31, 2000 (unaudited) and December 31, 1999........ F-10
Condensed Consolidated Statements of Operations
(unaudited) for the Three Months Ended
March 31, 2000 and March 31, 1999....................... F-11
Condensed Consolidated Statements of Changes in
Stockholders' Equity (unaudited) for the Three Months
Ended March 31, 2000 and March 31, 1999................. F-12
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Three Months Ended
March 31, 2000 and March 31, 1999....................... F-13
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................. F-14
LABRANCHE & CO INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Public Accountants.................. F-19
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998.............................. F-20
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997........................ F-21
Consolidated Statements of Changes in Stockholders'
Equity/Members' Capital for the Years Ended December 31,
1999, 1998 and 1997..................................... F-22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997........................ F-23
Notes to Consolidated Financial Statements................ F-24
LABRANCHE & CO INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL STATEMENTS
Condensed Statements of Financial Condition as of December
31, 1999 and 1998....................................... F-34
Condensed Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997........................ F-35
Condensed Statements of Changes in Stockholders'
Equity/Members' Capital for the Years Ended December 31,
1999, 1998 and 1997..................................... F-36
Condensed Statements of Cash Flow for the Years Ended
December 31, 1999, 1998 and 1997........................ F-37
Note to Condensed Financial Statements.................... F-38
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-39
Report of Independent Public Accountants.................. F-40
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998.............................. F-41
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997........................ F-42
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................ F-43
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997.... F-44
Notes to Consolidated Financial Statements................ F-45
HENDERSON BROTHERS HOLDINGS, INC. FINANCIAL STATEMENTS
SCHEDULE--PARENT COMPANY ONLY CONDENSED FINANCIAL
STATEMENTS
Independent Auditors' Report.............................. F-50
Condensed Statements of Financial Condition as of December
31, 1999 and 1998....................................... F-51
Condensed Statements of Income for the Years Ended
December 31, 1999 and 1998.............................. F-52
Condensed Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.............................. F-53
Condensed Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999 and 1998.......... F-54
Notes to Condensed Financial Statements................... F-55
HENDERSON BROTHERS HOLDINGS, INC. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL STATEMENTS
Condensed Statement of Income for the Year Ended December
31, 1997................................................ F-56
Condensed Statement of Cash Flows for the Year Ended
December 31, 1997....................................... F-57
Condensed Statement of Changes in Stockholders' Equity for
the Year Ended December 31, 1997........................ F-58
Note to Condensed Financial Statements.................... F-59
WEBCO SECURITIES, INC. FINANCIAL STATEMENTS
Report of Independent Public Accountants.................. F-60
Balance Sheet as of October 31, 1999 and 1998............. F-61
Statements of Revenue and Expenses and Retained Earnings
for the Years Ended October 31, 1999, 1998 and 1997..... F-62
Statements of Cash Flows for the Years Ended October 31,
1999, 1998 and 1997..................................... F-63
Statements of Changes in Stockholders' Equity for the
Years Ended October 31, 1999, 1998 and 1997............. F-64
Notes to Financial Statements............................. F-65
</TABLE>
F-2
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
OVERVIEW
GENERAL
The following pro forma condensed consolidated financial information is
based on the historical consolidated financial statements of LaBranche &
Co Inc. and Subsidiaries (together the "Company") after giving effect to the
reorganization and related transactions to convert from a partnership to
corporate form (the "Reorganization Transactions"), the completed acquisitions
of Henderson Brothers Holdings, Inc. ("Henderson Brothers") and Webco
Securities, Inc. ("Webco") including (i) the application of proceeds of the
offering of the senior subordinated notes as payment for the Henderson Brothers
acquisition and a portion of the cash purchase price for the Webco acquisition
and (ii) the issuance of senior promissory notes and common stock and the
payment of the remaining cash purchase price in connection with the purchase of
Webco (the "Acquisition Transactions"). The Reorganization Transactions and the
Acquisition Transactions are described in greater detail below. The pro forma
consolidated statement of operations for the year ended December 31, 1999
presents the results of the Company as if the Reorganization Transactions and
the Acquisition Transactions occurred on January 1, 1999. The pro forma
condensed consolidated statement of operations for the three months ended
March 31, 2000 presents the results of the Company as if the Acquisition
Transactions occurred on January 1, 2000.
The pro forma condensed consolidated financial information has been prepared
by the Company's management and is not necessarily indicative of the results
that would have been achieved had the Reorganization Transactions and the
Acquisition Transactions occurred on the dates indicated or that may be achieved
in the future. The unaudited pro forma financial information should be read in
conjunction with the audited historical financial statements of the Company,
Henderson Brothers and Webco included elsewhere in this prospectus.
REORGANIZATION TRANSACTIONS
On August 24, 1999, the Company completed an initial public offering of
common stock and concurrently completed the following Reorganization
Transactions:
- The limited partners of LaBranche & Co. redeemed their interests for
$140.2 million in cash, a $16.0 million note, $350,000 of subordinated
indebtedness and 558,666 shares of common stock of LaBranche & Co Inc.
with a value of $7.8 million, for a total purchase price of
$164.4 million.
- The members of LaB Investing Co. L.L.C. exchanged their membership
interests in LaB Investing Co. L.L.C. for $9.0 million in cash and
34,816,334 shares of common stock of LaBranche & Co Inc.
- $5.0 million of subordinated debt at an interest rate of 10.0% was repaid.
In addition, simultaneously with the initial public offering, LaBranche &
Co Inc. incurred indebtedness with a principal amount of $100.0 million.
Prior to the reorganization, as a limited liability company, LaB Investing
Co. L.L.C. was not subject to federal or state income taxes, but was subject to
New York City unincorporated business tax. Subsequent to the reorganization, the
Company is subject to federal, state and local income taxes.
F-3
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
OVERVIEW
The redemption of limited partnership interests was accounted for as a step
acquisition under the purchase method of accounting. The excess of purchase
price over the limited partners' capital accounts was allocated to intangible
assets with corresponding respective lives as follows:
<TABLE>
<CAPTION>
INTANGIBLE ASSET AMOUNT LIFE
---------------- -------- --------
<S> <C> <C>
Specialist Stock Listing.................................. $ 93.6 40 years
Trade Name................................................ 26.6 40 years
Goodwill.................................................. 7.2 15 years
------
$127.4
======
</TABLE>
RECENT ACQUISITIONS
The Company accounted for the acquisitions of Henderson Brothers and Webco
under the purchase method of accounting. Accordingly, the Company established a
new basis of accounting for Henderson Brothers and Webco's assets and
liabilities based upon their fair values and the purchase price including the
costs associated with the acquisitions. The purchase accounting adjustments made
in connection with the development of pro forma condensed consolidated financial
statements are preliminary and have been made solely for purposes of developing
such pro forma consolidated financial information. The Company finalized the
purchase accounting in its financial statements for the three months ended
March 31, 2000. The pro forma adjustments do not reflect any operating
efficiencies or cost savings that may be achieved with respect to the combined
company.
Actual compensation expense for Henderson Brothers and Webco has been
adjusted for eighteen employees who were extended employment contracts. No other
compensation adjustments have been made in connection with the development of
the pro forma condensed consolidated results of operations. Additionally,
compensation expense for the year ended December 31, 1999 includes $8.2 million
for three employees of Henderson Brothers and five employees of Webco who
retired upon the completion of the acquisitions. Accordingly, management
believes the pro forma compensation expense may not reflect future cost savings
once comprehensive compensation policies are implemented for the combined
companies.
Under the terms of the Henderson Brothers agreement, the Company acquired
the outstanding capital stock of Henderson Brothers for approximately
$228.4 million in cash. Pursuant to the agreement, Henderson Brothers was
required to deliver at the closing, a minimum working capital, as defined in the
agreement, of $49.0 million and 19 NYSE memberships. The excess of the purchase
price over fair value of approximately $204.9 million was allocated to
intangible assets with the corresponding respective lives as follows:
<TABLE>
<CAPTION>
INTANGIBLE ASSET AMOUNT LIFE
---------------- -------- --------
<S> <C> <C>
Specialist Stock Listing.................................. $ 87.7 40 years
Goodwill.................................................. 117.2 15 years
------
$204.9
======
</TABLE>
Under the terms of the Webco agreement, the Company acquired Webco for
2.8 million shares of the Company's common stock, approximately $11.0 million in
cash and senior promissory notes in the aggregate of $3.0 million, each bearing
interest at 10% per annum. Pursuant to the agreement, Webco was obligated to
deliver a minimum working capital, as defined, of $18.0 million. The excess of
the
F-4
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
OVERVIEW
purchase price over fair value of approximately $28.8 million was allocated to
intangible assets with the corresponding respective lives as follows:
<TABLE>
<CAPTION>
INTANGIBLE ASSET AMOUNT LIFE
---------------- -------- --------
<S> <C> <C>
Specialist Stock Listing.................................. $ 9.8 36 years
Goodwill.................................................. 19.0 15 years
------
$ 28.8
======
</TABLE>
With respect to both of the acquisitions, the allocation of purchase price
and determination of useful lives was based upon an independent appraisal as of
a preliminary date. The useful life of the specialist stock list was determined
based upon analysis of historical turnover characteristics of the specialist
stocks.
The Company incurred indebtedness with a principal amount of
$250.0 million. The proceeds of the indebtedness, net of a discount of
approximately $4.3 million and estimated issuance costs of approximately
$6.9 million, were used for the acquisition of Henderson Brothers and partially
for the acquisition of Webco and to pay related transaction costs of both
acquisitions.
F-5
<PAGE>
LABRANCHE & CO INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
(000'S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTED
FOR THE FOR THE (I) (I)
REORGANIZATION REORGANIZATION WEBCO HENDERSON
HISTORICAL TRANSACTIONS TRANSACTIONS SECURITIES BROTHERS
---------- -------------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net gain on principal transactions........... 150,971 150,971 7,474 52,470
Commissions.................................. 37,222 37,222 5,714 23,663
Other........................................ 12,844 12,844 555 5,956
-------- ------- -------- ------- -------
Total revenues............................. 201,037 -- 201,037 13,743 82,089
-------- ------- -------- ------- -------
EXPENSES:
Employee compensation and related benefits... 34,268 25,214 (a) 59,482 7,912 43,263
Lease of exchange memberships................ 8,416 8,416 392
Interest..................................... 8,286 6,160 (b) 15,144 4,178
1,002 (c)
18 (d)
(322)(e)
Amortization of intangibles.................. 4,623 2,243 (f) 6,866
Exchange, clearing and brokerage fees........ 3,709 3,709 609 1,765
Occupancy.................................... 1,411 1,411 119 217
Communications............................... 1,193 1,193 137
Legal and professional fees.................. 1,622 1,622 887
Other........................................ 3,041 3,041 537 6,974
-------- ------- -------- ------- -------
Total expenses before Managing Directors'
compensation, Limited Partners' interest
in earnings of subsidiary and taxes...... 66,569 34,315 100,884 9,569 57,421
-------- ------- -------- ------- -------
Income before Managing Directors'
compensation, Limited Partners' interest
in earnings of subsidiary and taxes...... 134,468 (34,315) 100,153 4,174 24,668
MANAGING DIRECTORS' COMPENSATION............... 56,191 (56,191)(g) -- -- --
-------- ------- -------- ------- -------
Income before limited partners' interest in
earnings of sub and provision for
taxes.................................... 78,277 21,876 100,153 4,174 24,668
LIMITED PARTNERS' INTEREST IN EARNINGS OF
SUBSIDIARY................................... 25,344 (25,344)(h) -- -- --
-------- ------- -------- ------- -------
Income before provision for income taxes... 52,933 47,220 100,153 4,174 24,668
PROVISION FOR INCOME TAXES..................... 23,899 22,266 46,165 1,914 12,317
-------- ------- -------- ------- -------
Net income................................. $ 29,034 $24,954 $ 53,988 $ 2,260 $12,351
======== ======= ======== ======= =======
Pro forma weighted average shares
outstanding.............................. 40,443
========
Pro forma basic and diluted net earnings
per share................................ $ 0.72
========
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTED
ADJUSTMENTS FOR THE
FOR THE REORGANIZATION
ACQUISITION AND ACQUISITION
TRANSACTIONS TRANSACTIONS
-------------- ---------------
<S> <C> <C>
REVENUES:
Net gain on principal transactions........... 210,915
Commissions.................................. 66,599
Other........................................ 19,355
-------- -------
Total revenues............................. -- 296,869
-------- -------
EXPENSES:
Employee compensation and related benefits... (6,197)(k) 104,460
Lease of exchange memberships................ 8,808
Interest..................................... 31,078 (l) 46,712
250 (m)
(3,938)(n)
Amortization of intangibles.................. 11,647 (o) 18,513
Exchange, clearing and brokerage fees........ 6,083
Occupancy.................................... 1,747
Communications............................... 1,330
Legal and professional fees.................. 2,509
Other........................................ 10,552
-------- -------
Total expenses before Managing Directors'
compensation, Limited Partners' interest
in earnings of subsidiary and taxes...... 32,840 200,714
-------- -------
Income before Managing Directors'
compensation, Limited Partners' interest
in earnings of subsidiary and taxes...... (32,840) 96,155
MANAGING DIRECTORS' COMPENSATION............... --
-------- -------
Income before limited partners' interest in
earnings of sub and provision for
taxes.................................... (32,840) 96,155
LIMITED PARTNERS' INTEREST IN EARNINGS OF
SUBSIDIARY................................... -- --
-------- -------
Income before provision for income taxes... (32,840) 96,155
PROVISION FOR INCOME TAXES..................... (8,138)(p) 52,258
-------- -------
Net income................................. $(24,702) $43,897
======== =======
Pro forma weighted average shares
outstanding.............................. 48,675
=======
Pro forma basic and diluted net earnings
per share................................ $ 0.90
=======
</TABLE>
F-6
<PAGE>
LABRANCHE & CO INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(000'S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTED
(Q) (R) FOR THE FOR THE
WEBCO HENDERSON ACQUISITION ACQUISITION
HISTORICAL SECURITIES BROTHERS TRANSACTIONS TRANSACTIONS
---------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net gain on principal transactions..................... 65,391 1,972 7,178 74,541
Commissions............................................ 9,185 712 2,910 12,807
Other.................................................. 4,114 145 (275) 3,984
-------- ------- ------- -------- -------
Total revenues....................................... 78,690 2,829 9,814 -- 91,332
-------- ------- ------- -------- -------
EXPENSES:
Employee compensation and related benefits............. 22,782 2,091 6,635 1,085 (k) 32,594
Lease of exchange memberships.......................... 2,557 2,557
Interest............................................... 6,447 17 1,634 5,027 (l) 11,611
42 (m)
(1,557)(n)
Amortization of intangibles............................ 2,754 1,996 (o) 4,750
Exchange, clearing and brokerage fees.................. 1,033 191 254 1,478
Occupancy.............................................. 260 38 298
Communications......................................... 355 27 382
Legal and professional fees............................ 361 350 711
Other.................................................. 1,708 441 727 2,876
-------- ------- ------- -------- -------
Total expenses before Managing Directors'
compensation, Limited Partners' interest in
earnings of subsidiary and taxes................... 38,257 2,741 9,665 6,593 57,256
-------- ------- ------- -------- -------
Income before Managing Directors' compensation,
Limited Partners' interest in earnings of
subsidiary and taxes............................... 40,433 88 149 (6,593) 34,077
MANAGING DIRECTORS' COMPENSATION......................... -- -- -- --
-------- ------- ------- -------- -------
Income before Limited Partners' interest in earnings
of sub and provision for taxes..................... 40,433 88 149 (6,593) 34,077
LIMITED PARTNERS' INTEREST IN EARNINGS OF SUBSIDIARY..... -- -- -- -- --
-------- ------- ------- -------- -------
Income before provision for income taxes............. 40,433 88 149 (6,593) 34,077
PROVISION FOR INCOME TAXES............................... 19,878 (200) 250 (2,168)(p) 17,760
-------- ------- ------- -------- -------
Net income........................................... $ 20,555 $ 288 $ (101) $ (4,425) $16,317
======== ======= ======= ======== =======
Pro forma weighted average shares outstanding........ 46,640 48,675
======== =======
Pro forma basic and diluted net earnings per share... $ 0.44 $ 0.34
======== =======
</TABLE>
F-7
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
a. Employee compensation and benefits was adjusted to reflect managing
directors' compensation based on the revised compensation policies which
were implemented at the time of the reorganization. Under this policy, a
compensation pool of up to 30% of pre-tax income is set aside for
managing directors and other employees. The pro forma compensation
adjustment reflects managing directors' compensation, which is comprised
of an annual base salary of approximately $8.5 million (34 managing
directors at $250,000), and the remaining balance as bonus. The pro forma
adjustment also includes compensation expenses related to employee
restricted stock awards of $14.8 million which vest over 5 years and
result in an annual expense of approximately $3.0 million. The pro forma
adjustment does not include any other compensation expenses related to
employees who are not managing directors.
b. Reflects the interest expense for the $100.0 million of senior notes,
issued on August 24, 1999, based upon an interest rate of 9.5%.
c. Reflects the interest expense for the $16.0 million senior note, issued
on August 24, 1999, based on an interest rate of 9.5%.
d. Reflects the interest expense for the $350,000 of subordinated
indebtedness, issued on August 24, 1999, based on an interest rate of
8.0%.
e. Reflects the reversal of the actual interest expense, incurred prior to
the reorganization, related to the $5.0 million of subordinated
indebtedness repaid, based on an interest rate of 10.0%.
f. Reflects the amortization of intangibles, on a straight line basis,
related to the redemption of limited partners' interest.
g. Managing directors' compensation was adjusted to reverse the actual
amounts recorded prior to the reorganization.
h. Reflects reversal of actual limited partners' interest in earnings of
subsidiary prior to the reorganization.
i. Reflects the historical results of operations of Webco for the year
ended October 31, 1999.
j. Reflects the historical results of operations of Henderson Brothers for
the year ended December 31, 1999.
k. Employee compensation and benefits was adjusted to reverse actual
compensation paid to Henderson Brothers and Webco employees based upon
new compensation arrangements which were implemented at the time of the
closing. Eighteen Henderson Brothers and Webco employees will be added to
the LaBranche & Co Inc. Annual Incentive Plan and were paid a base annual
compensation and bonus as described in Note l above.
l. Reflects the interest expense for the $250.0 million of principal amount
of senior subordinated notes, including the accretion of approximately
$4.3 million of discount and the amortization of $6.9 million of debt
issuance costs based on an effective interest rate of approximately
13.0%. This excludes any payment made pursuant to an Excess Cash Flow
Offer.
m. Reflects the interest expense for $2.5 million of the $3.0 million senior
promissory notes, assuming that $500,000 aggregate amount of such
promissory notes is paid within less than one year, at an interest rate
of 10.0%.
n. Reflects the reversal of the actual interest expense incurred for the
repayment of Henderson Brothers' subordinated debt.
F-8
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
o. Reflects the amortization of intangibles, on a straight line basis,
related to the acquisitions of Henderson Brothers and Webco.
p. Reflects the consolidated federal, state and local taxes for the
combined company at an estimated tax rate of approximately 46%, including
the deferred tax benefit related to the amortization of the deferred tax
liability established in connection with the recording of the specialist
stock listings at the respective estimated life of the intangible assets.
q. Reflects the historical results of operations of Webco for the two month
period ended February 29, 2000.
r. Reflects the historical results of operations of Henderson Brothers for
the period ended March 2, 2000.
F-9
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED)
<TABLE>
<CAPTION>
AS OF
--------------------------
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
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, respectively)................................. 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
-------- --------
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 45,875,000 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.
F-10
<PAGE>
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.
F-11
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(000'S 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.
F-12
<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................. (184,550) (62)
--------- --------
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.
F-13
<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 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
F-14
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INCOME TAXES (CONTINUED)
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 (unaudited) 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 (unaudited) 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
F-15
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ACQUISITIONS DURING FIRST QUARTER 2000 (CONTINUED)
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
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.
F-16
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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.
F-17
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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>
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
LaBranche & Co Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of LaBranche & Co Inc. and Subsidiaries (collectively, the "Company")
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity/members' capital and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements and the condensed financial statements referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LaBranche & Co Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The parent company only condensed
financial statements appearing on pages F-34 through F-38 are presented for the
purpose of complying with the Securities and Exchange Commission's rules and are
not part of the basic financial statements. Such statements have been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
New York, New York
January 24, 2000
F-19
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS................................... $ 83,774 $ 4,722
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL............. 25,422 21,100
RECEIVABLE FROM BROKERS, DEALERS AND CLEARING
ORGANIZATIONS............................................. 33,662 54,808
SECURITIES OWNED, at market value:
Corporate equities........................................ 148,563 114,994
United States Government obligations...................... 1,471 1,468
Other..................................................... 2,515 1,360
COMMISSIONS RECEIVABLE...................................... 3,835 3,009
EXCHANGE MEMBERSHIPS CONTRIBUTED FOR USE, at market value... 20,700 12,250
EXCHANGE MEMBERSHIPS OWNED, at cost (market value of $9,200
and $4,900, respectively)................................. 6,300 6,300
OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost, less
accumulated depreciation and amortization of $1,250 and
$729, respectively........................................ 1,355 1,647
INTANGIBLE ASSETS, net of accumulated amortization:
Specialist Stock List..................................... 92,789 --
Trade Name................................................ 26,340 --
Goodwill.................................................. 51,212 47,532
OTHER ASSETS................................................ 7,187 3,011
-------- --------
Total assets............................................ $505,125 $272,201
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY/MEMBERS' CAPITAL
LIABILITIES:
Payable to brokers and dealers............................ $ 7,726 $ 3,892
Securities sold, but not yet purchased, at market value... 36,900 67,896
Accrued compensation...................................... 12,016 17,735
Accounts payable and other accrued expenses............... 5,522 6,347
Other liabilities......................................... 7,959 1,341
-------- --------
70,123 97,211
-------- --------
LONG TERM DEBT.............................................. 115,822 --
-------- --------
COMMITMENTS................................................. -- --
SUBORDINATED LIABILITIES:
Exchange memberships, at market value..................... 20,700 12,250
Other subordinated indebtedness........................... 46,508 48,073
-------- --------
67,208 60,323
-------- --------
LIMITED PARTNERS' INTEREST IN SUBSIDIARY.................... -- 37,574
-------- --------
STOCKHOLDERS' EQUITY/MEMBERS' CAPITAL:
Preferred Stock ($.01 par value, 10,000,000 shares
authorized; none issued and outstanding).................. -- --
Common stock (par value $.01 per share; 200,000,000 shares
authorized, 45,875,000 shares issued and outstanding) 459 --
Additional paid-in-capital.................................. 228,771 --
Retained earnings........................................... 22,742 --
-------- --------
Stockholders' equity/members' capital....................... 251,972 77,093
-------- --------
Total liabilities and stockholders' equity/members'
capital................................................. $505,125 $272,201
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-20
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Net gain on principal transactions........................ $150,971 $95,048 $47,817
Commissions............................................... 37,222 26,576 15,186
Other..................................................... 12,844 4,787 4,637
-------- ------- -------
Total revenues.......................................... 201,037 126,411 67,640
-------- ------- -------
EXPENSES:
Employee compensation and benefits........................ 34,268 13,921 8,108
Lease of exchange memberships............................. 8,416 6,568 3,727
Interest.................................................. 8,286 3,577 1,566
Amortization of intangibles............................... 4,623 2,526 737
Exchange, clearing and brokerage fees..................... 3,709 2,898 2,042
Legal and professional fees............................... 1,622 916 620
Occupancy................................................. 1,411 1,121 465
Communications............................................ 1,193 964 709
Other..................................................... 3,041 2,285 1,934
-------- ------- -------
Total expenses before managing directors' compensation,
limited partners' interest in earnings of subsidiary and
provision for income taxes.............................. 66,569 34,776 19,908
-------- ------- -------
Income before managing directors' compensation, limited
partners' interest in earnings of subsidiary and
provision for income taxes.............................. 134,468 91,635 47,732
MANAGING DIRECTORS' COMPENSATION............................ 56,191 58,783 30,008
-------- ------- -------
Income before limited partners' interest in earnings of
subsidiary and provision for income taxes............... 78,277 32,852 17,724
LIMITED PARTNERS' INTEREST IN EARNINGS OF SUBSIDIARY........ 25,344 26,292 14,354
-------- ------- -------
Income before provision for income taxes.................. 52,933 6,560 3,370
PROVISION FOR INCOME TAXES.................................. 23,899 3,900 1,881
-------- ------- -------
Net income................................................ $ 29,034 $ 2,660 $ 1,489
======== ======= =======
Weighted average shares outstanding....................... 40,443 24,318 10,329
======== ======= =======
Basic and diluted earnings per share...................... $ 0.72 $ 0.11 $ 0.14
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-21
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY/MEMBERS' CAPITAL
(000'S OMITTED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED MEMBERS'
SHARES AMOUNT CAPITAL EARNINGS CAPITAL TOTAL
-------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996.......................... -- $ -- $ -- $ -- $13,735 $ 13,735
Net income........................................ -- -- -- -- 1,489 1,489
Contributions to capital.......................... -- -- -- -- 28,574 28,574
Distributions of capital.......................... -- -- -- -- (6,140) (6,140)
------ ------- -------- ------- ------- --------
BALANCE, December 31, 1997.......................... -- -- -- -- 37,658 37,658
Net income........................................ -- -- -- -- 2,660 2,660
Contributions to capital.......................... -- -- -- -- 66,563 66,563
Distributions of capital.......................... -- -- -- -- (29,788) (29,788)
------ ------- -------- ------- ------- --------
BALANCE, December 31, 1998.......................... -- -- -- -- 77,093 77,093
Net income through August 23, 1999................ -- -- -- -- 6,292 6,292
Contributions to capital.......................... -- -- -- -- 18,096 18,096
Distributions of capital.......................... -- -- -- -- (8,095) (8,095)
------ ------- -------- ------- ------- --------
BALANCE, pre-reorganization......................... -- -- -- -- 93,386 93,386
Exchange of membership interests for shares of
common stock.................................... 35,375 354 93,032 -- (93,386) --
Initial public offering of common stock........... 10,500 105 134,689 -- -- 134,794
------ ------- -------- ------- ------- --------
BALANCE, post-reorganization and initial public
offering............................................ 45,875 459 227,721 -- -- 228,180
Net income (August 24, 1999 through December 31,
1999)........................................... -- -- -- 22,742 -- 22,742
Compensation related to restricted stock units
granted......................................... -- -- 1,050 -- -- 1,050
------ ------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1999........................ 45,875 $ 459 $228,771 $22,742 $ -- $251,972
====== ======= ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-22
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 29,034 $ 2,660 $ 1,489
Adjustments to reconcile net income to net cash (used in)
operating activities-
Depreciation and amortization........................... 5,348 3,020 909
Undistributed limited partners interest in earnings of
subsidiary............................................ -- 3,646 1,241
Compensation related to the restricted stock units........ 1,050 -- --
Deferred tax provision.................................. 335 -- --
Changes in assets and liabilities
Securities purchased under agreements to resell......... (4,322) (6,100) (8,500)
Receivable from brokers, dealers and clearing
organizations......................................... 21,146 3,366 (40,188)
Corporate equities...................................... (33,569) (77,967) (6,338)
United States government obligations.................... (3) 998 1
Other securities owned.................................. (1,155) -- --
Commissions receivable.................................. (826) -- --
Other assets............................................ (4,161) (1,970) (2,047)
Payable to brokers and dealers.......................... 3,834 2,231 (2,731)
Securities sold, but not yet purchased.................. (30,996) 28,569 20,591
Accrued compensation.................................... (5,719) 8,891 (5,322)
Accounts payable and other accrued expenses............. (2,166) 2,379 1,371
Income taxes payables................................... 7,624 -- --
--------- ------- -------
Net cash (used in) operating activities................. (14,546) (30,277) (39,524)
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of office equipment and leasehold
improvements............................................ (228) (1,550) (278)
Payments to limited partners for redemption of
interests............................................... (140,186) -- --
--------- ------- -------
Net cash (used in) investing activities................. (140,414) (1,550) (278)
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of subordinated debt........... 3,435 16,750 28,900
Repayment of subordinated debt............................ (5,000) -- (896)
Net proceeds from the initial public offering............. 134,794 -- --
Proceeds from the issuance of long term debt.............. 99,807 -- --
Payments to members upon reorganization................... (9,025) -- --
Proceeds from contributions of capital.................... 18,096 46,598 10,948
Payments for distributions of capital..................... (8,095) (29,788) (6,140)
--------- ------- -------
Net cash provided by financing activities............... 234,012 33,560 32,812
--------- ------- -------
Increase (decrease) in cash and cash equivalents........ 79,052 1,733 (6,990)
CASH AND CASH EQUIVALENTS, beginning of year................ 4,722 2,989 9,979
--------- ------- -------
CASH AND CASH EQUIVALENTS, end of year...................... $ 83,774 $ 4,722 $ 2,989
========= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest.................................................. $ 4,557 $ 8,788 $ 4,360
Income taxes.............................................. $ 17,989 $ 2,244 $ 2,161
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES
Excess of purchase price over fair value of assets
acquired for issuance of membership interest and limited
partnership interests in subsidiary..................... $ -- $25,815 $24,980
Exchange of membership interests for shares of common
stock................................................... $ 93,386 $ -- $ --
Issuance of subordinated debt and shares of common stock
for redemption of limited partner interests upon
reorganization.......................................... $ 23,821 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-23
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The 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"), and LaBranche & Co., a New York limited partnership (collectively,
the "Company"). LaB Investing is the sole general partner of LaBranche & Co. and
has a partnership interest in LaBranche & Co. of 84.1%. The Holding Company is
the sole limited partner of LaBranche & Co. 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 & Co.
LaBranche & Co. operates primarily as a specialist in certain equity securities
listed on the New York Stock Exchange, Inc. ("NYSE").
2. INITIAL PUBLIC OFFERING AND DEBT ISSUANCE
On August 24, 1999, the Company reorganized from partnership to corporate
form, upon the members of LaB Investing exchanging their membership interests
for common stock in the Holding Company, 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. See
Note 12 for further information regarding the long term debt.
3. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Management does not believe
that actual results will differ materially from these estimates.
INTANGIBLE ASSETS
Intangible assets are comprised of the Company's specialist stock list,
trade name, and goodwill from acquisitions and the limited partner buyout that
occurred in concurrence with our reorganization to corporate form. The
specialist stock list and trade name are being amortized on a straight-line
basis over 40 years and the goodwill is being amortized on a straight-line basis
over 15 years. The allocation of purchase price and determination of useful
lives were based upon an independent appraisal. The useful life of the
specialist stock list was determined based upon analysis of historical turnover
characteristics of the specialist stocks.
The Company continually evaluates whether later events and circumstances
have occurred that indicate the remaining estimated useful life may warrant
revision or that the remaining balance may not be recoverable. When factors
indicate that intangible assets should be evaluated for possible impairment, the
Company uses an estimate of undiscounted net income over the remaining life in
measuring whether the assets are recoverable.
EXCHANGE MEMBERSHIPS
Exchange memberships owned by the Company are carried at cost.
F-24
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Certain members of the Company have contributed the use of 9 memberships on
the NYSE to the Company. These memberships are subordinated to claims of general
creditors and are carried at market value with a corresponding amount recorded
in subordinated liabilities. Lease payments are paid by the Company to its
members for the use of the exchange memberships at a rate that is commensurate
with the rent paid to nonaffiliated parties for the use of their exchange
memberships.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of less than three months.
SECURITIES TRANSACTIONS
Securities transactions and the related revenues and expenses are recorded
on a trade date basis. Securities owned and securities sold, but not yet
purchased are reflected at market value and unrealized gains and losses are
reflected in net gain on principal transactions. Dividends and Securities and
Exchange Commission ("SEC") fees are also included in net gain on principal
transactions. Dividend income and expense are recognized on the payable date,
which does not differ materially from the ex-date.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are calculated using the straight-line method
over the estimated useful lives of office equipment and leasehold improvements.
COLLATERALIZED FINANCING TRANSACTIONS
Securities purchased and sold under agreements to resell and repurchase, as
well as securities borrowed and loaned for which cash is deposited or received,
are treated as collateralized financing transactions and are recorded at
contract amount.
COLLATERAL
The Company continues to report assets as owned when they are pledged as
collateral in secured financing arrangements and the secured party cannot sell
or repledge the assets or the Company can substitute collateral or otherwise
redeem it on short notice. The Company continues not to report securities
received as collateral in secured financing arrangements because the debtor
typically has the right to substitute or redeem the collateral on short notice.
REPORTABLE OPERATING SEGMENT
The Company considers its present operations to be one reportable segment
for purposes of presenting consolidated financial information and for evaluating
its performance. The financial statement information presented in the
accompanying consolidated financial statements is consistent with the
preparation of financial information for the purpose of internal use.
F-25
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MANAGING DIRECTORS' COMPENSATION
Prior to the reorganization on August 24, 1999 the managing directors of
LaBranche & Co. were the members of LaB Investing. LaBranche & Co. paid out
substantially all of its earnings as compensation expense to its managing
directors. Subsequent to August 24, 1999, the managing directors of the Company
are compensated based on an annual salary as well as an incentive based
compensation pool which is determined based upon a certain percentage of pre-tax
income.
NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standard Board has issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities," which is effective for periods beginning
after June 15, 2000. Management does not believe the impact of the adoption of
SFAS No. 133 on the Company's financial position or results of operations, will
be material.
4. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
The balances presented as receivables from and payables to brokers,
dealers and clearing organizations consists of the following at December 31,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Receivable from brokers, dealers and clearing organizations:
Pending trades, net....................................... $ -- $34,390
Securities borrowed....................................... 26,230 17,386
Receivable from clearing organizations.................... 3,373 1,813
Securities failed to deliver.............................. 827 1,219
Other receivables from brokers and dealers................ 3,232 --
------- -------
$33,662 $54,808
======= =======
Payable to brokers and dealers:
Pending trades, net......................................... $ 6,435 $ --
Securities failed to receive................................ 1,264 3,892
Other payables to brokers and dealers....................... 27 --
------- -------
$ 7,726 $ 3,892
======= =======
</TABLE>
5. INCOME TAXES
Prior to its conversion to corporate form, LaBranche & Co. operated as a
partnership and generally was not subject to U.S. federal and state income
taxes. The earnings of LaBranche & Co., however, were subject to local
unincorporated business taxes. The members were taxed on their proportionate
share of the partnership'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
F-26
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
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 differences between the financial reporting and tax bases of its
assets and liabilities. Deferred tax assets and liabilities relate to
stock-based compensation and amortization of certain intangibles. As a result of
its conversion to corporate form, the Company recognized the tax effect of the
change in its income tax rate on the earnings attributable to the period from
August 24, 1999 to December 31, 1999. The Company's effective tax rate differs
from the federal statutory rate primarily due to its conversion to corporate
form and non-deductible amortization of intangibles. The components of provision
for income taxes reflected on the consolidated statements of operations are set
forth below:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current federal, state and local taxes.................. $18,346 $ -- $ --
Unincorporated business tax............................. 5,218 3,900 1,881
Deferred tax provision.................................. 335 -- --
------- ------ ------
Total provision for income taxes.................. $23,899 $3,900 $1,881
======= ====== ======
</TABLE>
6. CAPITAL AND NET LIQUID ASSET REQUIREMENTS
LaBranche & Co., as a specialist and member of the NYSE, is subject to SEC
Rule 15c3-1 as adopted and administered by the NYSE and the SEC. 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.
As of December 31, 1999 and 1998, LaBranche & Co.'s net capital, as defined
under SEC Rule 15c3-1, was $161.4 million and $86.5 million, respectively, and
exceeded minimum requirements by $159.9 million and $85.2 million, respectively.
LaBranche & Co.'s aggregate indebtedness to net capital ratio was .13 to 1 and
.24 to 1, respectively.
The NYSE also requires members registered as regular specialists to
establish that they can meet, with their own net liquid assets, a minimum dollar
amount which shall be the greater of $1.0 million or 25% of their position
requirement ("Rule 104.2"). In 1998, due to the concentration of LaBranche &
Co.'s specialist book, the NYSE required LaBranche & Co. to maintain minimum net
liquid assets of the greater of 120% of LaBranche & Co.'s Rule 104.2 position
requirement, or $90.0 million, adjusted by the amount of the position
requirement for any new stock allocations. The position requirement is the
ability to assume positions in stocks in which they are registered of 30,000
shares of each S&P 500 common stock, 22,500 shares in all other common stocks,
4,500 shares in each convertible preferred stock and 1,800 shares in each
nonconvertible preferred stock. The term "net liquid assets" for a specialist
who also engages in transactions other than specialist activities is based on
its excess net capital determined in accordance with SEC Rule 15c3-1.
As of December 31, 1999 and 1998, LaBranche & Co.'s NYSE minimum required
dollar amount of net liquid assets, as defined, was $93.6 million and
$90.6 million, respectively, compared to actual net liquid assets, as defined,
of $175.9 million and $103.1 million, respectively.
F-27
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACQUISITIONS
Effective July 1, 1997, LaBranche & Co. acquired a portion of the specialist
operations of Stern Bros., LLC for an aggregate purchase price of approximately
$9.3 million, representing an 8.3% total general partners' interest in
LaBranche & Co. The goodwill associated with the acquisition was approximately
$7.8 million.
Effective August 1, 1997, LaBranche & Co. acquired the specialist operations
of Ernst, Homans, Ware & Keelips for an aggregate purchase price of
approximately $18.5 million, representing general and limited partnership
interests totaling 16.4%. The excess purchase price over fair value of net
assets acquired was approximately $17.2 million.
Effective July 1, 1998, LaBranche & Co. acquired the specialist operations
of Fowler, Rosenau & Geary, L.L.C. ("Fowler") for an aggregate purchase price of
approximately $45.0 million, representing a 22.4% total general and limited
partners' interest in LaBranche & Co. The excess purchase price over fair value
of net assets acquired was approximately $25.8 million.
Effective August 24, 1999, the limited partnership interests of
$37.1 million in LaBranche & Co. were acquired at an excess purchase price of
$127.4 million over the limited partners' capital balances. The redemption of
the limited partners' interests is accounted for as a step acquisition under the
purchase method of accounting. The excess of purchase price over the limited
partners' capital balances was allocated to intangible assets and assigned lives
as follows:
<TABLE>
<CAPTION>
ORIGINAL AMOUNT LIFE
------------------- --------
<S> <C> <C> <C>
Specialist Stock List............................... $ 93.6 million 40 years
Trade Name.......................................... 26.6 million 40 years
Goodwill............................................ 7.2 million 15 years
--------
$127.4 million
========
</TABLE>
8. COMMITMENTS
During 1998, LaBranche & Co. secured a $75.0 million committed line of
credit with a U.S. commercial bank. The agreement matured on June 25, 1999. In
June 1999, the Company amended and extended the committed line of credit to
$100.0 million through June 23, 2000.
Minimum rental commitments under existing noncancellable leases for office
space and equipment are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C> <C>
2000................................................... $ 673,006
2001................................................... 771,750
2002................................................... 801,750
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.
F-28
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBORDINATED LIABILITIES
LaBranche & Co. is a party to subordinated loan agreements under which it
has indebtedness approved by the NYSE for inclusion as net capital, as defined.
Interest is payable quarterly at various annual rates. Eleven of the agreements
representing $6,823,000 mature within the last six months of 2000 and seven
agreements representing $3,385,000 mature within the first six months of 2001.
These agreements all have automatic rollover provisions, and each scheduled
maturity date will be extended an additional year, unless the lender gives
LaBranche & Co. seven months' advance notice that the maturity date will not be
extended. Interest expense incurred for the years ended December 31, 1999, 1998
and 1997 on these agreements was approximately $1.1 million, $1.3 million and
$1.2 million, respectively. Two of the holders representing $850,000 of
subordinated loan agreements maturing in November 2000 have notified
LaBranche & Co. that the scheduled maturity date will not be extended.
LaBranche & Co. also issued seven notes representing aggregate indebtedness
of $20,000,000 which mature on September 15, 2002 and bear interest at an annual
rate of 8.17% payable on a quarterly basis. LaBranche & Co. also issued five
notes representing aggregate indebtedness of $15,000,000 which mature on
June 3, 2008 and bear 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.
Interest expense incurred for the years ended December 31, 1999, 1998 and 1997
on these notes was approximately $2.8 million, $2.3 million and $340,000,
respectively. The agreements covering these subordinated notes require the
Company to comply with certain covenants that, among other things, restrict the
type of business in which the Company may engage, sets certain net capital
levels and prohibits restricted payments.
LaBranche & Co. also issued a subordinated note for $1,300,000 due March 2,
2001 with an annual rate of 10.0%, payable on a quarterly basis. Interest
expense incurred for the year ended December 31, 1999 on the note was
approximately $123,333. This agreement has an automatic rollover provision, and
the scheduled maturity date will be extended an additional year, unless the
lender gives LaBranche & Co. seven months' advance notice that the maturity date
will not be extended.
Exchange memberships contributed pursuant to subordination agreements in the
amount of $20,700,000 comprise the remaining subordinated liabilities.
10. 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. 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.
F-29
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EARNINGS PER SHARE (CONTINUED)
The computations of basic and diluted EPS are set forth below (000's
omitted, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share-
net income....................................... $29,034 $ 2,660 $ 1,489
Denominator for basic and diluted earnings per
share-weighted-average number of common shares... 40,443 24,318 10,329
Basic and diluted earnings per share............... $ 0.72 $ 0.11 $ 0.14
</TABLE>
Under the treasury stock method of accounting, restricted stock units
representing 1,062,600 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.
11. EMPLOYEE INCENTIVE PLANS
EQUITY INCENTIVE PLAN
The Company has elected to account for stock-based employee compensation
plans in accordance with Accounting Principles Board Opinion ("APB") No. 25 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.
The Company sponsors an Equity Incentive Plan which provides for grants of
incentive stock options, nonqualified stock options, restricted shares of common
stock, restricted stock units, unrestricted shares and stock appreciation
rights.
A maximum of 4,687,500 shares of common stock has been reserved for issuance
under the Equity Incentive Plan. The maximum number of shares of common stock
with respect to which options, restricted stock, restricted stock units or other
equity-based awards may be granted under the Equity Incentive Plan during any
calendar year to any employee may not exceed 500,000 shares, subject to
adjustment upon certain corporate transactions.
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, restricted stock units for an additional 3,600 shares of common
stock were issued to an employee with an issue cost of $0. 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 year ended
December 31, 1999, the Company recorded compensation expense and a credit to
additional paid-in capital of approximately $1.1 million related to these
restricted stock units.
STOCK OPTIONS
On August 18, 1999, options to purchase an aggregate of 1,200,000 shares of
common stock were granted to executive officers of the Company at market value.
Of these options, options to purchase
F-30
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE INCENTIVE PLANS (CONTINUED)
1,000,000 shares, which are subject to continuing service with the Company and
other restrictions, will become exercisable in three equal annual installments
commencing on the first anniversary of the date of grant. The options to
purchase the remaining 200,000 shares vested on January 7, 2000 and 100,000
shares become exercisable on July 7, 2000 and 100,000 shares on July 7, 2001. As
of December 31, 1999, there were no options exercisable. 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 since,
on the date of grant, these options had no intrinsic value. As of December 31,
1999, the outstanding options had an exercise price of $14 and a remaining life
of approximately 10 years.
The estimated fair value of options granted was $4.97 per option. Fair value
is estimated as of the grant date based on a binomial option pricing model using
the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5.25%
Expected life............................................... 7 years
Expected volatility......................................... 40%
Dividend yield.............................................. 0%
</TABLE>
In accordance with SFAS No. 123, compensation expense was not recognized on
the date of the grant of the options since these options had no intrinsic value.
If the Company were to recognize compensation expense under the fair-value based
method of SFAS No. 123, the net income would have decreased by approximately
$843,000 resulting in pro forma net income and earnings per share as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
(000S OMITTED, EXCEPT
PER SHARE DATA)
<S> <C>
Net income, as reported................................... $29,034
Pro forma net income...................................... 28,191
EPS, as reported.......................................... $ 0.72
Pro forma EPS............................................. 0.70
</TABLE>
The effect of applying SFAS No. 123 in the pro forma disclosure above may
not be representative of the potential pro forma effect on net income in future
periods.
ANNUAL INCENTIVE PLAN
The Company also sponsors an Annual Incentive Plan. Managing directors and
other employees designated by management will be eligible to participate. Under
this plan, a compensation pool of up to 30% of the Company's pre-tax income, or
such lesser percentage determined by the compensation committee, will be set
aside for managing directors and other employees selected by the compensation
committee to participate in this plan. In determining the compensation pool, the
compensation expense relating to the grant of restricted stock units at the time
of the reorganization of the Company to corporate form is deducted. Under the
plan, no individual participant may receive more than 25% of the compensation
pool for any fiscal year.
F-31
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LONG TERM DEBT
Effective August 24, 1999, the Holding Company issued $100.0 million
aggregate principal amount of senior notes. The notes bear interest at a rate of
9.5% annually and mature on August 15, 2004. The carrying value of the senior
notes as of December 31, 1999 was $99.8 million. The discount on the bond is
being amortized as an adjustment to interest expense over the life of the senior
notes. Debt issuance costs incurred as a result of the senior note offering are
approximately $2.5 million, which are being amortized as on a straight line
basis over the life of the senior notes. Interest expense incurred for the year
ended December 31, 1999 was approximately $3.3 million. The indenture covering
the senior notes includes certain covenants that, among other things, limits 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, as defined.
In addition, in connection with the reorganization of the Company from
partnership to corporate form on August 24, 1999, the Holding Company issued a
note in an aggregate principal amount of $16.0 million as partial payment for
the acquisition of a limited partner interest. Of the $16.0 million total,
$6.0 million is payable on the first anniversary of issuance, $5.0 million is
payable on the second anniversary of issuance and $5.0 million is payable on the
third anniversary of issuance. The note bears interest at the annual rate of
9.5%. Interest expense incurred for the year ended December 31, 1999 was
approximately $538,000.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires companies to report the fair value of
financial instruments for certain assets and liabilities. Substantially all of
the Company's financial instruments are short-term in nature or carry market
interest rates and, accordingly, approximate fair value.
The fair value of the fixed rate debt at December 31, 1999, in millions, is
as follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
Senior Debt.......................................... $99.8 $97.0
Fixed Rate Note...................................... $16.0 $15.9
</TABLE>
The fair value of the senior notes was determined based upon its market
value as of December 31, 1999. The fair value of the fixed rate note was
determined using current market rates to discount its cash flows.
14. FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT AND OFF-BALANCE SHEET
RISK
As a specialist on the NYSE, LaBranche & Co. is engaged in various
securities trading and lending activities. In connection with its activities as
a specialist, LaBranche & Co. assumes positions in stocks for which it is
responsible. LaBranche & Co. is exposed to credit risk associated with the
nonperformance of counterparties in fulfilling their contractual obligations
pursuant to these securities transactions. LaBranche & Co. is exposed to market
risk associated with the sale of securities not yet purchased, which can be
directly impacted by volatile trading on the NYSE. Additionally, in the event of
nonperformance and unfavorable market price movements, LaBranche & Co. may be
required to purchase or sell financial instruments, which may result in a loss
to LaBranche & Co.
F-32
<PAGE>
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FINANCIAL INSTRUMENTS WITH CONCENTRATION OF CREDIT AND OFF-BALANCE SHEET
RISK (CONTINUED)
LaBranche & Co. enters into collateralized financing agreements in which it
extends short-term credit to major financial institutions. LaBranche & Co.
controls access to the collateral pledged by the counterparties, which generally
consists of U.S. equity and government securities. The value and adequacy of the
collateral are continually monitored. Consequently, the risk of credit loss from
counterparties' failure to perform in connection with collateralized lending
activities is minimal.
15. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The 1998 pro forma consolidated results give effect to LaBranche & Co.'s
July 1998 acquisition of Fowler and its reorganization from partnership to
corporate form and related transactions, which include the acquisition of
LaBranche & Co'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, 1998. The 1999 pro forma consolidated
results give effect to the Reorganization Transactions as if they occurred as of
January 1, 1999. The pro forma impact on revenues, pre-tax income and earnings
are as follows (000's omitted, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
(PRO FORMA) (PRO FORMA)
<S> <C> <C>
Revenues.............................................. $201,037 $137,850
Pre-Tax Income........................................ 100,153 59,429
Net Income............................................ 53,988 31,791
EPS................................................... $ 1.18 $ 0.69
</TABLE>
16. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to year-end the Company acquired Henderson Brothers
Holdings, Inc. ("Henderson"), a specialist firm on the NYSE. Under the terms of
the acquisition, the Company will acquire all of the outstanding capital stock
of Henderson for approximately $230 million in cash. In addition, the Company
has acquired Webco Securities Inc. ("Webco"), another specialist firm on the
NYSE. Under the terms of the acquisition, the Company acquired Webco for
$10.9 million in cash, an aggregate of approximately $3 million in senior
promissory notes and approximately 2.8 million shares of the Company's common
stock. Both of these acquisitions will be accounted for under the purchase
method.
During February 2000, a U.S. commercial bank increased and extended its
committed line of credit to LaBranche & Co. from $100.0 million to
$200.0 million through February 2, 2001.
F-33
<PAGE>
LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS................................... $ 46,872 $ 21
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL.............. 1,422 --
INVESTMENT IN SUBSIDIARIES, AT EQUITY VALUE................. 321,370 77,072
OTHER....................................................... 14,041 --
-------- -------
Total Assets............................................ $383,705 $77,093
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY/MEMBERS' CAPITAL
LIABILITIES:
Income taxes payable.................................... $ 7,960 $ --
Accounts payable and other liabilities.................. 7,951 --
-------- -------
15,911 --
-------- -------
LONG TERM DEBT.............................................. 115,822 --
-------- -------
STOCKHOLDERS' EQUITY/MEMBERS' CAPITAL:
Preferred stock ($.01 par value, 10,000,000 shares
authorized; none issued and outstanding).................. -- --
Common stock (par value $.01 per share; 200,000,000 shares
authorized, 45,875,000 shares issued and outstanding)..... 459 --
Additional paid-in-capital.................................. 228,771 --
Retained earnings........................................... 22,742 --
-------- -------
Stockholders' equity/members' capital....................... 251,972 77,093
-------- -------
Total liabilities and stockholders' equity/members'
capital................................................... $383,705 $77,093
======== =======
</TABLE>
See accompanying note to condensed financial statements.
F-34
<PAGE>
LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
(000'S OMITTED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
REVENUE:
Equity earnings from investment in subsidiaries........... $31,476 $2,663 $1,480
Investment income......................................... 910 -- --
------- ------ ------
Total revenue........................................... 32,386 2,663 1,480
------- ------ ------
EXPENSES:
Interest.................................................. 3,879 -- --
Employee compensation and related benefits................ 1,050 -- --
Other expenses............................................ 504 3 1
------- ------ ------
Total expenses.......................................... 5,433 3 1
------- ------ ------
Income before income tax benefit.......................... 26,953 2,660 1,479
------- ------ ------
INCOME TAX BENEFIT.......................................... (2,081) -- (10)
Net income................................................ $29,034 $2,660 $1,489
======= ====== ======
</TABLE>
See accompanying note to condensed financial statements.
F-35
<PAGE>
LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY/MEMBERS' CAPITAL
(000'S OMITTED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED MEMBERS'
SHARES AMOUNT CAPITAL EARNINGS CAPITAL TOTAL
-------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996................... -- $ -- $ -- $ -- $13,735 $ 13,735
Net income................................... -- -- -- -- 1,489 1,489
Contributions to capital..................... -- -- -- -- 28,574 28,574
Distributions of capital..................... -- -- -- -- (6,140) (6,140)
------ ------ -------- ------- ------- --------
BALANCE, December 31, 1997................... -- -- -- -- 37,658 37,658
Net income................................... -- -- -- -- 2,660 2,660
Contributions to capital..................... -- -- -- -- 66,563 66,563
Distributions of capital..................... -- -- -- -- (29,788) (29,788)
------ ------ -------- ------- ------- --------
BALANCE, December 31, 1998................... -- -- -- -- 77,093 77,093
Net income through August 23, 1999........... -- -- -- -- 6,292 6,292
Contributions to capital..................... -- -- -- -- 18,096 18,096
Distributions of capital..................... -- -- -- -- (8,095) (8,095)
------ ------ -------- ------- ------- --------
BALANCE, pre-reorganization.................. -- -- -- -- 93,386 93,386
Exchange of membership interest for shares of
common stock............................... 35,375 354 93,032 -- (93,386) --
Initial public offering of common stock...... 10,500 105 134,689 -- -- 134,794
------ ------ -------- ------- ------- --------
BALANCE post-reorganization and initial
public offering............................ 45,875 459 227,721 -- -- 228,180
Net income (August 24, 1999 through
December 31, 1999)......................... -- -- -- 22,742 -- 22,742
Compensation related to restricted stock
units granted.............................. -- -- 1,050 -- -- 1,050
------ ------ -------- ------- ------- --------
BALANCE, December 31, 1999................... 45,875 $ 459 $228,771 $22,742 $ -- $251,972
====== ====== ======== ======= ======= ========
</TABLE>
See accompanying note to condensed financial statements.
F-36
<PAGE>
LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOW
(000'S OMITTED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- ---------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 29,034 $ 2,660 $ 1,489
Adjustments to reconcile net income to net cash used in
operating activities
Amortization of debt issuance costs and bond discount... 203 -- --
Compensation expense related to restricted stock
units................................................. 1,050 -- --
Equity earnings from investment in subsidiaries......... (31,476) (19,477) (6,343)
Deferred tax benefit.................................... (2,081) -- --
Changes in assets and liabilities--
Securities purchased under agreements to resell......... (1,422) -- --
Other assets............................................ (11,559) 13 26
Accounts payable and other liabilities.................. 13,911 -- (10)
-------- ------- -------
Net cash used in operating activities....................... (2,340) (16,804) (4,838)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from contributions of capital.................... 20,000 46,598 10,948
Payments for distributions of capital..................... (51,199) (29,788) (6,140)
Payments to limited partners for redemption of interests
and repayment of subordinated debt upon
reorganization.......................................... (145,186) -- --
-------- ------- -------
Net cash provided by (used in) investing activities....... (176,385) 16,810 4,808
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of long term debt.............. 99,807 -- --
Net proceeds from the initial public offering............. 134,794 -- --
Payments to members upon reorganization................... (9,025) -- --
-------- ------- -------
Net cash provided by financing activities................. 225,576 -- --
-------- ------- -------
Net change in cash.......................................... 46,851 6 (30)
CASH AND CASH EQUIVALENTS, beginning of year................ 21 15 45
-------- ------- -------
CASH AND CASH EQUIVALENTS, end of year...................... $ 46,872 $ 21 $ 15
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:
Income taxes.............................................. $ 11,750 $ 3 $ 11
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Membership interests issued for acquisitions.............. $ -- $19,965 $17,626
Exchange of membership interests for shares of common
stock................................................... $ 93,386 $ -- $ --
Issuance of subordinated debt and shares of common stock
for redemption of limited partner interests upon
reorganization.......................................... $ 23,821 $ -- $ --
</TABLE>
See accompanying note to condensed financial statements.
F-37
<PAGE>
LABRANCHE & CO INC.
(PARENT COMPANY ONLY)
NOTE TO CONDENSED FINANCIAL STATEMENTS
1. NOTE TO CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of LaBranche & Co Inc. (Parent Company
Only) should be read in conjunction with the consolidated financial statements
of LaBranche & Co Inc. and Subsidiaries and the notes thereto contained
elsewhere in this prospectus.
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Henderson Brothers Holdings, Inc. and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Henderson Brothers Holdings, Inc. and Subsidiary (the "Company") as
of December 31, 1999 and 1998, and the related consolidated statements of
income, cash flows and changes in stockholders' equity for the years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated financial statements
of the Company for the year ended December 31, 1997 were audited by other
auditors whose report, dated February 16, 1998, expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1999 and 1998 consolidated financial statements present
fairly, in all material respects, the financial position of Henderson Brothers
Holdings, Inc. and Subsidiary at December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 11, on December 23, 1999 the stockholders of the
Company executed an agreement to sell all the outstanding capital stock of the
Company to LaBranche & Co Inc.
/s/ Deloitte & Touche LLP
New York, New York
January 28, 2000
F-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Henderson Brothers Holdings, Inc.
We have audited the accompanying consolidated statements of income, cash
flows and changes in stockholders' equity of Henderson Brothers Holdings, Inc.
and Subsidiary for the year ended December 31, 1997. These financial statements
and the condensed financial statements referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Henderson Brothers Holdings, Inc. and Subsidiary for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The condensed financial statements
(Parent Company Only) appearing on pages F-56 through F-59 are presented for the
purpose of complying with the Securities and Exchange Commission's rules and are
not part of the basic financial statements. Such statements have been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 16, 1998
F-40
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash........................................................ $ 3,396,238 $ 10,670,335
Cash deposited with clearing organizations or segregated in
compliance with federal regulations....................... 6,342,123 4,935,397
Securities purchased under agreement to resell.............. 19,500,000 --
Financial instruments owned--at fair value:
U.S. government obligations............................. 46,138,239 41,914,281
Equities................................................ 29,720,166 37,913,511
Receivables:
Brokers, dealers and clearing organizations............. 96,233,541 97,188,681
Customers............................................... 1,172,860 1,268,070
Income taxes............................................ 1,557,209 279,231
Exchange memberships:
Owned by the Company, at cost (market value, $43,700,000
and $23,275,000, respectively)......................... 8,835,620 8,835,620
Contributed by stockholders for the use of the Company,
at market value........................................ 4,600,000 2,450,000
Other assets................................................ 1,726,878 4,902,876
------------ ------------
TOTAL ASSETS................................................ $219,222,874 $210,358,002
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank loan................................................... $ 1,000 $ 1,000
Financial instruments (equities) sold, but not yet
purchased--at fair value.................................. 20,804,633 15,483,439
Payables:
Brokers, dealers and clearing organizations............. 68,702,105 78,364,047
Customers............................................... 6,551,799 4,567,875
Correspondents.......................................... 1,016,462 579,556
Deferred income taxes................................... 740,934 1,402,871
Former stockholders..................................... -- 6,442,368
Dividends............................................... 943,341 745,402
Accounts payable and accrued expenses....................... 7,832,593 6,508,734
------------ ------------
106,592,867 114,095,292
------------ ------------
Subordinated liabilities.................................... 58,669,100 56,252,100
------------ ------------
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $1 par value (stated value of
$1,000) 175.5 shares authorized, no shares outstanding.... -- --
Preferred stock, Series B, $1 par value (stated value of
$917.18) 84 shares authorized, no shares outstanding...... -- --
Preferred stock, $1 par value, 100,744 shares authorized, no
shares issued............................................. -- --
Preferred stock, Series C, $1 par value (stated value of
$137) 99,995 shares authorized, 68,857 shares outstanding
in 1999 and 1998.......................................... 9,433,409 9,433,409
Common stock, non-voting, $1 par value, 40,000 shares
authorized 4,260 shares outstanding in 1999 and 1998...... 4,260 4,260
Common stock, voting, $1 par value, 20,000 shares authorized
4,238 shares outstanding in 1999 and 1998................. 4,238 4,238
Additional paid-in-capital.................................. 11,964,776 11,964,776
Retained earnings........................................... 36,577,520 25,169,854
Notes receivable--stockholders.............................. (4,023,296) (6,565,927)
------------ ------------
Total stockholders' equity.................................. 53,960,907 40,010,610
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $219,222,874 $210,358,002
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Principal transactions as a specialist............ $52,469,688 $36,863,958 $37,978,596
Commissions....................................... 23,663,386 21,697,106 19,069,990
Dividends and interest............................ 5,012,169 4,614,675 3,393,502
Net gain from investment accounts................. 334,509 451,907 618,176
Other............................................. 609,190 716,903 543,577
----------- ----------- -----------
Total revenues................................ 82,088,942 64,344,549 61,603,841
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits................ 43,263,227 38,261,765 36,422,258
Stock exchange fees and clearance charges......... 1,765,338 1,230,554 1,159,328
Professional fees................................. 887,042 949,100 1,170,087
Contributions..................................... 463,695 346,530 322,036
Rent.............................................. 216,726 216,515 198,432
Interest expense.................................. 4,177,998 4,403,833 3,369,011
Travel and entertainment.......................... 864,458 781,458 711,422
Communications.................................... 137,430 137,101 121,528
Insurance......................................... 511,921 668,479 444,519
Other............................................. 5,132,947 2,226,495 2,430,278
----------- ----------- -----------
Total expenses................................ 57,420,782 49,221,830 46,348,899
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES.............. 24,668,160 15,122,719 15,254,942
PROVISION FOR INCOME TAXES............................ 12,317,153 7,195,641 6,982,480
----------- ----------- -----------
NET INCOME............................................ $12,351,007 $ 7,927,078 $ 8,272,462
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $12,351,007 $ 7,927,078 $ 8,272,462
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 256,365 182,115 205,159
Bad debt expense........................................ 1,321,684 42,102 --
Deferred income taxes................................... (661,937) 87,091 (251,713)
(Increase) decrease in operating assets:
Cash deposited with clearing organizations or
segregated in compliance with federal regulations.... (1,406,726) (4,294,711) 1,217,099
Securities purchased under agreement to resell........ (19,500,000) -- --
Financial instruments owned........................... 3,969,387 (5,900,114) (40,519,128)
Receivables from brokers, dealers and clearing
organizations........................................ 955,140 (14,245,199) (7,631,849)
Receivables from customers............................ 95,210 3,619,966 (2,710,919)
Income taxes receivable............................... (1,277,978) (33,013) 2,251,756
Other assets.......................................... 1,737,593 (590,083) (1,174,809)
Increase (decrease) in operating liabilities:
Financial instruments (equities) sold, not yet
purchased............................................ 5,321,194 783,667 4,252,228
Payables to brokers, dealers and clearing
organizations........................................ (9,661,942) 22,696,863 8,896,613
Payables to customers................................. 1,983,924 696,228 967,860
Payables to correspondents............................ 436,906 (8,995) (14,502,449)
Payables to former stockholders....................... (6,442,368) 6,442,368 --
Accounts payable and accrued expenses................. 1,323,859 799,127 1,131,423
----------- ----------- -----------
Net cash (used in) provided by operating
activities.......................................... (9,198,682) 18,204,490 (39,596,267)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................................. (139,644) (105,003) (88,503)
Purchase of exchange memberships.......................... -- -- (1,200,000)
----------- ----------- -----------
Cash used in investing activities................... (139,644) (105,003) (1,288,503)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subordinated liabilities.................... 1,373,000 3,714,100 39,325,000
Repayments of subordinated liabilities.................... (1,106,000) -- --
Dividends paid............................................ (745,402) (638,916) (638,916)
Decrease (increase) in notes receivable--stockholders..... 2,542,631 (4,953,178) 278,222
Retirement of common stock................................ -- (5,227,178) --
Issuance of common stock.................................. -- 5,227,178 386,227
Proceeds from bank loans.................................. -- -- 1,700,000
Repayment of bank loans................................... -- (4,701,000) --
Redemption of preferred stock............................. -- (1,215,190) --
----------- ----------- -----------
Net cash provided by (used in) financing
activities.......................................... 2,064,229 (7,794,184) 41,050,533
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH............................. (7,274,097) 10,305,303 165,763
CASH, BEGINNING OF YEAR..................................... 10,670,335 365,032 199,269
----------- ----------- -----------
CASH, END OF YEAR........................................... $ 3,396,238 $10,670,335 $ 365,032
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 4,233,744 $ 4,174,670 $ 2,774,815
=========== =========== ===========
Income taxes............................................ $14,264,331 $ 7,069,662 $ 6,010,000
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Decrease in secured demand notes receivable and
liabilities subordinated to the claims of general
creditors............................................... $ -- $(2,000,000) $(6,900,000)
=========== =========== ===========
Increase (decrease) in market value of exchange
memberships contributed by stockholders for use by the
Company and liabilities subordinated to the claims of
general creditors....................................... $ 2,150,000 $(1,050,000) $ 1,050,000
=========== =========== ===========
Return of exchange memberships contributed for the use of
the Company and liabilities subordinated to the claims
of general creditors.................................... $ -- $ -- $(1,225,000)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK ADDITIONAL NOTES
STOCK -------------------- PAID-IN RETAINED RECEIVABLE-
SERIES C NONVOTING VOTING CAPITAL EARNINGS STOCKHOLDERS TOTAL
----------- --------- -------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ $10,648,599 $4,209 $4,201 $ 6,677,650 $15,255,619 $(1,890,971) $30,699,307
Net income........................ -- -- -- -- 8,272,462 -- 8,272,462
Dividend declared................. -- -- -- -- (638,916) -- (638,916)
Loans to stockholders............. -- -- -- -- -- 278,222 278,222
Issuance of common stock--44
shares voting and 44 shares non-
voting.......................... -- 44 44 386,139 -- -- 386,227
----------- ------ ------ ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997........ $10,648,599 $4,253 $4,245 $ 7,063,789 22,889,165 (1,612,749) 38,997,302
Net income........................ -- -- -- -- 7,927,078 -- 7,927,078
Dividend declared................. -- -- -- -- (745,402) -- (745,402)
Reclassification of stock......... -- 7 (7) -- -- -- --
Loans to stockholders............. -- -- -- -- -- (4,953,178) (4,953,178)
Preferred stock retired--8,870
shares Series C................. (1,215,190) -- -- -- -- -- (1,215,190)
Purchase of common stock--396
shares voting and 397 shares
nonvoting....................... -- (397) (396) (325,398) (4,900,987) -- (5,227,178)
Reissuance of common stock--396
shares voting and 397 shares
nonvoting....................... -- 397 396 5,226,385 -- -- 5,227,178
----------- ------ ------ ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998........ 9,433,409 4,260 4,238 11,964,776 25,169,854 (6,565,927) 40,010,610
Net income........................ -- -- -- -- 12,351,007 -- 12,351,007
Dividend declared................. -- -- -- -- (943,341) -- (943,341)
Repayment of loans to
stockholders.................... -- -- -- -- -- 2,542,631 2,542,631
----------- ------ ------ ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999........ $ 9,433,409 $4,260 $4,238 $11,964,776 $36,577,520 $(4,023,296) $53,960,907
=========== ====== ====== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of Henderson Brothers Holdings, Inc. (the "Corporation"), its wholly
owned subsidiary, Henderson Brothers, Inc. (the "Subsidiary"), and the
Subsidiary's wholly owned subsidiary, Henderson Brothers Futures Corporation
("HBFC"), an inactive company (collectively the "Company"). All material
intercompany transactions and balances have been eliminated.
The Subsidiary is a broker-dealer registered with the Securities and
Exchange Commission (the "SEC") and a member of the New York Stock
Exchange, Inc. (the "NYSE"). Its primary business is to act as a specialist on
the NYSE. A specialist is required to maintain a fair and orderly market in
those securities which the specialist has been assigned. In its capacity as a
specialist, the Subsidiary deals only with other members of the NYSE.
Additionally, the Subsidiary executes certain transactions for its customers for
which it receives a commission. The Subsidiary receives, acquires and holds
funds and securities for its customers.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts in prior years were reclassified to conform with the current
year's presentation.
FINANCIAL INSTRUMENTS--The Company records proprietary transactions in
securities and the related commission revenues and expenses on a trade date
basis. Financial instruments owned and financial instruments sold, but not yet
purchased, have been valued at quoted market values with the resulting net
unrealized gains and losses reflected in operations. Securities borrowed are
recorded at the amount of cash collateral advanced to the lender. These
transactions require the Subsidiary to deposit cash or other collateral with the
lender. The Subsidiary monitors the market value of securities borrowed on a
daily basis with additional collateral provided or excess collateral refunded,
as necessary.
SECURITIES TRANSACTIONS--The Subsidiary records customers' securities
transactions on a settlement date basis with related commission revenues and
expenses recorded on a trade date basis. Receivables from and payables to
customers include amounts due on cash and margin transactions. Securities owned
by customers are held as collateral for receivables. Such collateral is not
reflected in the consolidated financial statements.
RESALE AGREEMENTS--Securities purchased under agreements to resell are
accounted for as collateralized financings and are carried at the amounts the
securities will subsequently be resold. It is the policy of the Company to
obtain possession or have a third party obtain possession on their behalf, of
collateral with a market value equal to or in excess of the principal amount
loaned under resale agreements. Collateral is valued daily, and the Company may
require counterparties to deposit additional collateral or return collateral
pledged when appropriate.
INCOME TAXES--The Company utilizes the asset and liability method to
calculate deferred tax assets and liabilities. Deferred taxes are recognized
based on the differences between financial reporting and income tax basis of
assets and liabilities using enacted income tax rates.
F-45
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
about Fair Value of Financial Instruments," requires the Company to report the
fair value of financial instruments, as defined. Substantially all of the
Company's assets and liabilities are carried at fair value or contracted amounts
which approximate fair value.
3. RECEIVABLES FROM BROKERS, DEALERS AND CLEARING ORGANIZATIONS
The balances presented as receivable from and payable to brokers, dealers
and clearing organizations consist of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Receivable from brokers, dealers and clearing organizations:
Unsettled trades.......................................... $77,213,008 $81,697,237
Securities borrowed....................................... 14,638,500 11,262,000
Receivable from clearing organizations.................... 2,014,185 1,785,795
Securities failed to deliver.............................. 245,820 357,825
Commissions receivable.................................... 2,122,028 2,085,824
----------- -----------
$96,233,541 $97,188,681
=========== ===========
Payable to brokers, dealers and clearing organizations:
Unsettled trades.......................................... $61,134,401 $76,012,373
Securities failed to receive.............................. 7,369,573 2,023,869
Commissions payable....................................... 198,131 327,805
----------- -----------
$68,702,105 $78,364,047
=========== ===========
</TABLE>
Unsettled trades are shown net by counterparty.
4. SUBORDINATED LIABILITIES
Subordinated liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Subordinated debentures..................................... $54,069,100 $53,802,100
NYSE memberships contributed by certain stockholders of the
Corporation............................................... 4,600,000 2,450,000
----------- -----------
$58,669,100 $56,252,100
=========== ===========
</TABLE>
The amounts and maturities of the subordinated debentures at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
MATURITY INTEREST RATE AMOUNT
-------- ---------------------------------- -----------
<S> <C> <C>
January 1, 2001................................... Broker call rate less 1% $ 1,700,000
November 18, 2004................................. 8.04% 32,000,000
January 31, 2005.................................. Broker call rate less 1% 20,369,100
-----------
$54,069,100
===========
</TABLE>
F-46
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
4. SUBORDINATED LIABILITIES (CONTINUED)
The Subsidiary's subordinated liabilities totaling $43,200,000 and
$41,050,000 in 1999 and 1998, respectively, which include $4,900,000 payable to
the Corporation in each year, have been approved by the NYSE and are thus
available to the Subsidiary in computing net capital pursuant to the SEC's
Uniform Net Capital Rule (15c3-1).
Subordinated liabilities are withdrawable by the lender at stated maturity
dates or withdrawal can be accelerated upon six month's notice. Subordinated
debt can be repaid only if, after giving effect to such repayment, the
Subsidiary meets the SEC's capital regulations governing withdrawal of
subordinated debt.
The subordinated debt maturing on January 31, 2005 is due to stockholders of
the Corporation. The outstanding balance at December 31, 1999 and 1998 was
$20,369,100 and $20,102,100, respectively.
Aggregate interest expense on subordinated liabilities was approximately
$3,938,000, $4,122,000 and $2,900,000 for the years ended December 31, 1999,
1998 and 1997, respectively, which includes $1,260,700, $1,316,447 and $0,
respectively, due to stockholders of the Corporation.
The subordinated debenture maturing on November 18, 2004 contains certain
restrictive covenants which require, among other things, that the Subsidiary
maintain specified levels of capital. At December 31, 1999 the Subsidiary was in
compliance with these restrictive covenants.
5. RELATED PARTY TRANSACTIONS
Notes receivable from stockholders are reflected as an offset to
stockholders' equity. Interest earned on these notes amounted to approximately
$151,000, $61,000 and $73,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Included in other assets are employee and affiliate loans and related
interest totaling approximately $412,150 and $2,000,000 in 1999 and 1998,
respectively. These receivables bear interest at 4.5% and are payable upon
demand.
6. COMMITMENTS
The Subsidiary has an operating lease for office space expiring on
December 31, 2002. The lease contains provisions for escalations based on
certain costs incurred by the lessor.
At December 31, 1999, minimum future lease payments were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
2000................................................. $224,900
2001................................................. 224,900
2002................................................. 224,900
--------
$674,700
========
</TABLE>
7. PROFIT-SHARING PLAN
The Subsidiary maintains a profit-sharing plan for all of its employees.
Contributions to the plan are based on compensation as defined in the plan and
are at the discretion of management. Profit-
F-47
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
7. PROFIT-SHARING PLAN (CONTINUED)
sharing contributions were $1,625,000, $1,448,000 and $1,374,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
In connection with the pending sale of the Company, as described in
Note 11, it is the intention of management to terminate the profit-sharing plan.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT
RISK
In the normal course of business, the Company enters into various
securities transactions as principal or agent. The execution, settlement and
financing of those transactions can result in off-balance sheet risk and
concentration of credit risk.
In connection therewith, the Subsidiary may be exposed to a risk of loss not
reflected on the accompanying consolidated statement of financial condition for
securities sold, not yet purchased, should the value of the securities rise.
In the normal course of business, the Subsidiary's clearing activities
involve settlement and financing of various customer securities transactions.
These activities may expose the Subsidiary to off-balance sheet risk in the
event the customer or other broker is unable to fulfill its contractual
obligations and the Subsidiary has to purchase or sell securities at a loss.
The Subsidiary's customer securities activities are transacted on either a
cash or margin basis. In connection with these activities, the Subsidiary
executes and clears customer transactions involving the sale of securities, not
yet purchased, substantially all of which are transacted on a delivery vs.
payment basis. For margin transactions, the Subsidiary 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 the event the
customer fails to satisfy its obligations, the Subsidiary may be required to
purchase or sell financial instruments at prevailing market prices to fulfill
customer obligations.
The Subsidiary seeks to control the risks associated with customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Subsidiary monitors margin
levels daily and, pursuant to such guidelines, requires customers to deposit
additional collateral or to reduce positions, when necessary.
The Subsidiary is engaged in various brokerage activities whose
counterparties primarily include broker-dealers, banks and other financial
institutions. The Subsidiary may be exposed to the risk of default which depends
on the creditworthiness of the counterparty. It is the Subsidiary's policy to
review, as necessary, the credit standing of each counterparty with which it
conducts business.
9. REGULATORY REQUIREMENTS
As a registered broker-dealer and member firm of the NYSE, the Subsidiary is
subject to the SEC's Uniform Net Capital Rule 15c3-1. The Subsidiary computes
its net capital under the alternative method permitted by the rule, which
requires that minimum net capital be equal to the greater of $250,000 or 2% of
the Rule 15c3-3 aggregate debit items, as defined. At December 31, 1999 and
1998, the Subsidiary had net capital of $72,306,426 and $76,624,072,
respectively, which exceeded the minimum requirement by $72,056,426 and
$76,374,072, respectively.
F-48
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (CONTINUED)
9. REGULATORY REQUIREMENTS (CONTINUED)
The NYSE also requires certain specialists to maintain a minimum amount of
net liquid assets, as defined, which shall be the greater of $1,000,000 or 25%
of their position requirement ("Rule 104.2"). At December 31, 1999 and 1998, the
Subsidiary's NYSE minimum required dollar amount of net liquid assets, as
defined, was $23,970,445 and $27,699,242, respectively, compared to actual net
liquid assets, as defined, of $75,322,599 and $79,907,493, respectively.
10. INCOME TAXES
The Company's federal income tax return is filed on a consolidated basis.
The Company's state and local income tax returns are filed on a combined basis.
The provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.......................... $ 8,084,981 $4,444,872 $4,648,000
State and local.................. 4,894,109 2,663,678 2,586,193
----------- ---------- ----------
12,979,090 7,108,550 7,234,193
----------- ---------- ----------
Deferred:
Federal.......................... (384,784) 50,626 (146,320)
State and local.................. (277,153) 36,465 (105,393)
----------- ---------- ----------
(661,937) 87,091 (251,713)
----------- ---------- ----------
Income tax expense................... $12,317,153 $7,195,641 $6,982,480
=========== ========== ==========
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between the financial reporting and tax basis of assets and liabilities.
Included in deferred income taxes payable is the remaining tax effect of the
Company's change to market value from LIFO cost for certain marketable
securities, which is being recognized over a 15 year period.
A reconciliation of the difference between the expected income tax expense
on income computed at the U.S. statutory income tax rate and the Company's
actual income tax expense is shown in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Book income at federal statutory rate.............. 35.0% 35.0% 35.0%
State and local taxes (net of federal benefit)..... 11.9% 11.8% 10.6%
Non-deductible expenses............................ 3.0% .8% .2%
---- ---- ----
Income tax expense................................. 49.9% 47.6% 45.8%
==== ==== ====
</TABLE>
11. PENDING SALE OF THE COMPANY
On December 23, 1999 the Stockholders' of the Company entered into an
agreement with LaBranche & Co Inc. to sell all the outstanding capital stock of
the Company for approximately $230 million in cash. Pursuant to the agreement,
the Company is required to deliver at the closing, working capital, as defined
in the agreement, of $49 million and 19 NYSE memberships. The closing is
contingent on LaBranche & Co Inc.'s ability to obtain financing for the
transaction.
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Henderson Brothers Holdings, Inc. and Subsidiary:
We have audited the consolidated financial statements of Henderson Brothers
Holdings, Inc. and Subsidiary (the "Company") as of December 31, 1999 and 1998,
and for the years then ended, and have issued our report thereon dated
January 28, 2000, which report expresses an unqualified opinion and included an
emphasis of a matter relating to the pending sale of the Company to LaBranche &
Co Inc. Such consolidated financial statements and our report are included
elsewhere in this prospectus. (The consolidated financial statements of the
Company for the year ended December 31, 1997 were audited by other auditors
whose report, dated February 16, 1998, expressed an unqualified opinion on those
statements.) Our audits also include the financial statement schedule of the
Company, listed elsewhere in this prospectus. Such financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
January 28, 2000
F-50
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash........................................................ $ 2,578,443 $ 80,229
Financial instruments owned--U.S. government obligations.... 15,001,441 --
Investment in subsidiary, at equity......................... 51,541,438 56,807,581
Receivables:
Subordinated loans........................................ 4,900,000 4,900,000
Receivable from subsidiary................................ 2,412,795 6,062,398
Income taxes.............................................. -- 22,397
Other assets................................................ 99,930 744,322
----------- -----------
TOTAL ASSETS................................................ $76,534,047 $68,616,927
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Dividends payable......................................... $ 943,341 $ 745,402
Due to former stockholders................................ -- 6,442,368
Accounts payable and accrued expenses..................... 1,260,699 1,316,447
----------- -----------
2,204,040 8,504,217
----------- -----------
Subordinated notes.......................................... 20,369,100 20,102,100
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, Series A, $1 par value (stated value of
$1,000) 175.5 shares authorized, no shares
outstanding............................................. -- --
Preferred stock, Series B, $1 par value (stated value of
$917.18) 84 shares authorized, no shares outstanding.... -- --
Preferred stock, $1 par value, 100,744 shares authorized,
no shares issued........................................ -- --
Preferred stock, Series C, $1 par value (stated value of
$137) 99,995 shares authorized, 68,857 shares
outstanding in 1999 and 1998............................ 9,433,409 9,433,409
Common stock, non-voting, $1 par value, 40,000 shares
authorized 4,260 shares outstanding in 1999 and 1998.... 4,260 4,260
Common stock, voting, $1 par value, 20,000 shares
authorized 4,238 shares outstanding in 1999 and 1998.... 4,238 4,238
Additional paid-in capital................................ 11,964,776 11,964,776
Retained earnings......................................... 36,577,520 25,169,854
Notes receivable--stockholders............................ (4,023,296) (6,565,927)
----------- -----------
Total stockholders' equity.............................. 53,960,907 40,010,610
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $76,534,047 $68,616,927
=========== ===========
</TABLE>
See notes to condensed financial statements.
F-51
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
REVENUES:
Dividends and interest.................................... $ 618,606 $ 801,960
Management fees........................................... 2,100,000 2,100,000
----------- ----------
Total revenues.......................................... 2,718,606 2,901,960
----------- ----------
EXPENSES:
Employee compensation and benefits........................ 625,050 767,400
Interest expense.......................................... 1,260,700 1,316,447
Other..................................................... 715,706 26,670
----------- ----------
Total expenses.......................................... 2,601,456 2,110,517
----------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EQUITY IN
EARNINGS OF SUBSIDIARY.................................... 117,150 791,443
Provision for income taxes.................................. 55,050 371,910
----------- ----------
INCOME BEFORE EQUITY IN EARNINGS OF SUBSIDIARY.............. 62,100 419,533
Equity in earnings of subsidiary, net of tax................ 12,288,907 7,507,545
----------- ----------
NET INCOME.................................................. $12,351,007 $7,927,078
=========== ==========
</TABLE>
See notes to condensed financial statements.
F-52
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $12,351,007 $7,927,078
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Equity in subsidiary's earnings......................... (12,288,907) (7,507,545)
(Increase) decrease in operating assets:
Financial instruments owned............................. (15,001,441) --
Receivables from related parties........................ 3,704,653 (3,994,543)
Income taxes receivable................................. 22,397 (22,397)
Other assets............................................ 644,392 40,872
Increase (decrease) in operating liabilities:
Due to former stockholders.............................. (6,442,368) 6,442,368
Accounts payable and accrued expenses................... (55,748) 229,163
----------- ----------
Net cash (used in) provided by operating activities... (17,066,015) 3,114,996
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from subsidiary........................ 17,500,000 --
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subordinated note........................... 1,373,000 3,714,100
Repayment of subordinated liabilities..................... (1,106,000) --
Redemption of preferred stock............................. -- (1,215,190)
Decrease (increase) in notes receivable--stockholders..... 2,542,631 (4,953,178)
Dividends paid............................................ (745,402) (638,916)
Retirement of common stock................................ -- (5,227,178)
Issuance of common stock.................................. -- 5,227,178
----------- ----------
Cash provided by (used in) financing activities....... 2,064,229 (3,093,184)
----------- ----------
NET INCREASE IN CASH........................................ 2,498,214 21,812
CASH, BEGINNING OF YEAR..................................... 80,229 58,417
----------- ----------
CASH, END OF YEAR........................................... $ 2,578,443 $ 80,229
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 1,316,447 $1,087,284
=========== ==========
Taxes settled with the Subsidiary through the
intercompany accounts................................. $ 55,050 $ 371,910
=========== ==========
</TABLE>
See notes to condensed financial statements.
F-53
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK ADDITIONAL NOTES
STOCK -------------------- PAID-IN RETAINED RECEIVABLE-
SERIES C NONVOTING VOTING CAPITAL EARNINGS STOCKHOLDERS TOTAL
----------- --------- -------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997.... $10,648,599 $4,253 $4,245 $ 7,063,789 $22,889,165 $(1,612,749) $38,997,302
Net income.................... -- -- -- -- 7,927,078 -- 7,927,078
Dividend declared............. -- -- -- -- (745,402) -- (745,402)
Reclassification of stock..... -- 7 (7) -- -- -- --
Loans to stockholders......... -- -- -- -- -- (4,953,178) (4,953,178)
Preferred stock retired--8,870
shares Series C............. (1,215,190) -- -- -- -- -- (1,215,190)
Purchase of common stock--396
shares voting and 397 shares
nonvoting................... -- (397) (396) (325,398) (4,900,987) -- (5,227,178)
Reissuance of common stock--
396 shares voting and 397
shares nonvoting............ -- 397 396 5,226,385 -- -- 5,227,178
----------- ------ ------ ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998.... 9,433,409 4,260 4,238 11,964,776 25,169,854 (6,565,927) 40,010,610
Net income.................... -- -- -- -- 12,351,007 -- 12,351,007
Dividend declared............. -- -- -- -- (943,341) -- (943,341)
Payment of loans to
stockholders................ -- -- -- -- -- 2,542,631 2,542,631
----------- ------ ------ ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999.... $ 9,433,409 $4,260 $4,238 $11,964,776 $36,577,520 $(4,023,296) $53,960,907
=========== ====== ====== =========== =========== =========== ===========
</TABLE>
See notes to condensed financial statements.
F-54
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. BASIS OF PRESENTATION
The condensed unconsolidated financial statements of Henderson Brothers
Holdings, Inc. (the "Parent") should be read in conjunction with the
Consolidated Financial Statements of Henderson Brothers Holdings, Inc. and
Subsidiary and the notes thereto.
2. SUBORDINATED NOTES
The amounts and maturities of the subordinated notes at December 31, 1999
are as follows:
<TABLE>
<CAPTION>
MATURITY INTEREST RATE AMOUNT
-------- ------------- -----------
<S> <C> <C>
January 31, 2005 Broker call rate less 1% $20,369,100
</TABLE>
These notes are due to stockholders.
3. RELATED PARTY TRANSACTIONS
The Parent charges Henderson Brothers, Inc. (the "Subsidiary") a management
fee for services performed by the Parent. Additionally, the Parent is allocated
a portion of employee compensation and benefits expense from the Subsidiary.
The Parent loaned the Subsidiary $4,900,000 in the form of a subordinated
debenture. This amount is due from the Subsidiary on February 28, 2001 and bears
interest at the broker call rate. Interest income was $350,216 for year ended
December 31, 1999.
4. DIVIDENDS RECEIVED FROM SUBSIDIARY
For the year ended December 31, 1999, the Parent received dividends of
$17,500,000 from its subsidiary.
F-55
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Interest.................................................. $ 464,603
Management fees........................................... 2,100,000
----------
Total revenue............................................... 2,564,603
----------
Expenses:
Employee compensation and benefits........................ 773,775
Interest.................................................. 1,087,283
Other..................................................... 26,424
----------
Total expenses.............................................. 1,887,482
Income before provision for income taxes and equity in
earnings of subsidiary.................................... 677,121
Provision for income taxes.................................. 333,000
----------
Income before equity in earnings of subsidiary.............. 344,121
Equity in earnings of subsidiary net of tax................. 7,928,341
----------
Net income.................................................. $8,272,462
==========
</TABLE>
See note to condensed financial statements.
F-56
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $8,272,462
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization............................................ 25,000
Equity in subsidiary's earnings......................... (7,928,341)
(Increase) decrease in operating assets:
Interest receivable................................... 21,172
Receivables from subsidiary........................... (1,804,558)
Increase (decrease) in operating liabilities:
Dividend payable...................................... 106,486
Payable to subsidiary................................. (72,723)
Taxes payable......................................... 333,000
Bond interest payable................................. 287,482
----------
Net cash used in operating activities............... (760,020)
----------
Cash flows from investing activities:
Investment in subordinated note........................... (4,900,000)
----------
Cash used in investing activities................... (4,900,000)
----------
Cash flows from financing activities:
Decrease in notes receivable--stockholders................ 278,222
Issuance of common stock.................................. 386,227
Proceeds from subordinated liabilities.................... 5,625,000
Dividends paid............................................ (638,916)
----------
Net cash provided by financing activities........... 5,650,533
Net decrease in cash........................................ (9,487)
Cash, beginning of year..................................... 67,904
----------
Cash, the end of the year................................... $ 58,417
==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 104,297
==========
</TABLE>
See note to condensed financial statements.
F-57
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK ADDITIONAL NOTES
STOCK -------------------- PAID-IN RETAINED RECEIVABLE-
SERIES C NONVOTING VOTING CAPITAL EARNINGS STOCKHOLDERS TOTAL
----------- --------- -------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........... $10,648,599 $4,209 $4,201 $6,677,650 $15,255,619 $(1,890,971) $30,699,307
Net income........................... -- -- -- -- 8,272,462 -- 8,272,462
Dividend declared.................... -- -- -- -- (638,916) -- (638,916)
Loans to stockholders................ -- -- -- -- -- 278,222 278,222
Issuance of common stock--44 shares
voting and 44 shares non-voting.... -- 44 44 386,139 -- -- 386,227
----------- ------ ------ ---------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1997........... $10,648,599 $4,253 $4,245 $7,063,789 $22,889,165 $(1,612,749) $38,997,302
=========== ====== ====== ========== =========== ============ ===========
</TABLE>
See note to condensed financial statements.
F-58
<PAGE>
HENDERSON BROTHERS HOLDINGS, INC.
(PARENT COMPANY ONLY)
NOTE TO CONDENSED FINANCIAL STATEMENTS
1. NOTE TO CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Henderson Brothers Holdings, Inc.
(Parent Company Only) should be read in conjunction with the consolidated
financial statements of Henderson Brothers Holdings, Inc. and Subsidiary and the
notes thereto contained elsewhere in this prospectus.
F-59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of Webco Securities, Inc.
We have audited the accompanying balance sheets of Webco Securities, Inc. as
of October 31, 1999 and 1998, and the related statements of income and retained
earnings, changes in stockholders' equity and cash flows for each of the three
years in the period ended October 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Webco Securities, Inc. as of
October 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended October 31, 1999 in conformity
with generally accepted accounting principles.
/s/ Glasser & Haims, PC
Valley Stream, N.Y.
November 29, 1999
F-60
<PAGE>
WEBCO SECURITIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash........................................................ $ 1,574,392 $ 556,068
Receivables from brokers and dealers........................ 11,848,466 13,764,030
U.S. Treasury obligations--at market........................ 7,207,243 1,800,983
Securities owned--at market value........................... 3,221,788 5,452,404
Exchange memberships owned, at cost (market value of
$7,650,000 and $3,825,000, respectively).................. 1,301,362 1,301,362
Exchange memberships contributed for the use of the
Corporation--at market.................................... 2,550,000 1,275,000
Other assets................................................ 14,021 126,718
----------- -----------
TOTAL ASSETS........................................ $27,717,272 $24,276,565
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold, but not yet purchased, at market value,
primarily common and preferred stock.................... $ 1,376,846 $ 3,464,388
Accounts payable and accrued liabilities.................. 4,031,403 2,327,837
Subordinated borrowings................................... 2,550,000 1,275,000
----------- -----------
TOTAL LIABILITIES................................... 7,958,249 7,067,225
Stockholders' equity........................................ 19,759,023 17,209,340
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $27,717,272 $24,276,565
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
WEBCO SECURITIES, INC.
STATEMENTS OF REVENUE AND EXPENSES AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Commissions......................................... $ 5,713,780 $ 5,025,275 $ 4,288,094
Trading Gains....................................... 7,473,501 1,693,407 3,862,445
Other............................................... 555,481 679,876 571,375
----------- ----------- -----------
Total Revenues.................................... 13,742,762 7,398,558 8,721,914
----------- ----------- -----------
Expenses:
Compensation and benefits........................... 7,912,089 4,257,499 5,246,863
Clearance fees...................................... 165,000 100,835 96,549
Occupancy, equipment rental and communications...... 118,687 104,324 95,921
Regulatory fees..................................... 444,376 359,658 196,043
Leased exchange memberships......................... 391,667 341,935 155,000
Other............................................... 537,242 522,291 548,810
----------- ----------- -----------
9,569,061 5,686,542 6,339,186
----------- ----------- -----------
Net income before taxes........................... 4,173,701 1,712,016 2,382,728
Provision for income taxes............................ 1,914,021 766,527 1,085,152
----------- ----------- -----------
NET INCOME............................................ 2,259,680 945,489 1,297,576
RETAINED EARNINGS, beginning of year.................. 10,992,245 10,046,756 8,749,180
----------- ----------- -----------
RETAINED EARNINGS, end of year........................ $13,251,925 $10,992,245 $10,046,756
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
WEBCO SECURITIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $2,259,680 $ 945,489 $1,297,576
Changes in assets....................................... (1,147,383) 888,298 (6,325,079)
Changes in liabilities.................................. (383,976) (2,197,496) 4,151,341
---------- ---------- ----------
Net cash provided by operations......................... 728,321 (363,709) (876,162)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock.................. 290,003 779,339 624,392
---------- ---------- ----------
Net change in cash........................................ 1,018,324 415,630 (251,770)
Cash at beginning of fiscal year.......................... 556,068 140,438 392,208
---------- ---------- ----------
Cash at end of fiscal year................................ $1,574,392 $ 556,068 $ 140,438
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE>
WEBCO SECURITIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year.......................... $17,209,340 $15,484,512 $13,562,544
Net income for year................................... 2,259,680 945,489 1,297,576
Proceeds from issuance of common stock................ 290,003 779,339 624,392
----------- ----------- -----------
Balance at end of year................................ $19,759,023 $17,209,340 $15,484,512
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
WEBCO SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Corporation conducts its business as a specialist on the floor of the
New York Stock Exchange.
All specialist trading is recorded to the last trade date of its fiscal
year.
Securities owned, or sold but not yet purchased by the Corporation are
recorded at market value.
Memberships in the New York Stock Exchange owned by the Corporation are
stated at cost. The Corporation owns three memberships.
Memberships contributed for the use of the Corporation are stated at market
value. One such membership is contributed.
2. EMPLOYEE STOCK OPTION PLAN
As of November 1, 1985, the Corporation established two Employee Stock
Ownership Plans. One such plan is a defined contribution plan set at ten (10%)
percent of covered salaries. The Corporation's management has indicated that it
has made all such mandated contributions. The second such plan is at the
discretion of management.
3. COMMITMENTS
The Corporation has contractual commitments arising in the normal course of
business, the consummation of which would have no material impact on financial
position.
The Corporation conducts its operations in lease premises under a lease
expiring October 31, 2001.
4. CONTINGENCIES
The Corporation is currently undergoing an audit by the Internal Revenue
Service for fiscal year ended October 31, 1996. Management believes that any
adjustment that the Internal Revenue Service may propose would have no material
impact on financial position.
5. CAPITAL REQUIREMENTS
The Corporation as a registered broker dealer is required to maintain a
minimum net capital. The Corporation as a specialist is also subject to
Rule 104.2 which specifies the minimum capital necessary for its specialist
securities. The Corporation's net capital exceeds these basic requirements.
F-65
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[LOGO]
EXCHANGE OFFER FOR
$250,000,000
12% EXCHANGE NOTES DUE 2007
---------------------
PROSPECTUS
---------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in the prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create and
implication that the information contained herein or our affairs have not
changed since the date hereof.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
June 16, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the General Corporation Law of the State of Delaware
("DGCL") provides that a Delaware corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
acted in any of the capacities set forth above, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted under similar
standards, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the court in which such
action or suit was brought shall determine that despite the adjudication of
liability, such person is fairly and reasonably entitled to be indemnified for
such expenses which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled; and that the
corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or enterprise, against any liability asserted
against him or incurred by him in any such capacity or arising out of his status
as such whether or not the corporation would have the power to indemnify him
against such liabilities under such Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director provided that such provision shall not eliminate
or limit the liability of a director: (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders; (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the DGCL, or (iv) for any transaction from
which the director derived an improper personal benefit.
Article Tenth of the certificate of incorporation of LaBranche & Co Inc.
(the "Company"), states that to the fullest extent permitted by the DGCL, no
director of the Company shall be personally liable to the Company, any of its
stockholders or any other person or entity for monetary damages for breach of
fiduciary duty owed to the Company, its stockholders or such other person or
entity owing to such director's position as a director of the Company.
II-1
<PAGE>
Article Eleventh of the Company's certificate of incorporation, contains
substantially the same provisions for indemnification as those contained in
Section 145 of the DGCL.
The Company has entered into indemnification agreements with its current
directors and executive officers. The Company has agreed to insure its directors
and officers against losses arising from any claim against them as such for
wrongful acts or omission, subject to certain limitations.
Under the purchase agreement, the initial purchasers are obligated, under
certain circumstances, to indemnify officers, directors and controlling persons
of the Company against certain liabilities, including liabilities under the
Securities Act of 1933. Reference is made to the purchase agreement filed as
Exhibit 10.18 hereto.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
2.1 Plan of Incorporation of LaBranche & Co.*
2.2 Exchange Agreement by and among LaBranche & Co Inc., LaB
Investing Co., L.L.C. and the members of LaB Investing Co.
L.L.C. listed on Schedule A thereto. *
3.1 Amended and Restated Certificate of Incorporation of
LaBranche & Co Inc.*
3.2 Amended and Restated Bylaws of LaBranche & Co Inc.*
4.1 Specimen Stock Certificate.*
4.2 Indenture, dated as of March 2, 2000, among LaBranche & Co.,
as issuer, and Firstar Bank, N.A., as trustee, relating to
the 12% Senior Subordinated Notes due 2007.**
4.3 Form of 12% Senior Subordinated Notes due 2007 of LaBranche
& Co Inc. (included as Exhibit A to the Indenture filed as
Exhibit 4.5).**
4.4 Registration Rights Agreement, dated as of March 2, 2000, by
and among LaBranche & Co Inc., as issuer, and Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Smith
Barney Inc. and ABN AMRO Incorporated, as initial
purchasers.**
5.1 Opinion of Fulbright & Jaworski L.L.P.+
10.1 Agreement of Lease between Aetna Life Insurance Company and
LaBranche & Co., dated January 6, 1984, as amended to date.*
10.2 Second Amendment to Lease Agreement by and between Bank of
Communications and LaBranche & Co. dated July 1995, as
amended to date.*
10.3 LaBranche & Co Inc. Equity Incentive Plan.*
10.4 LaBranche & Co Inc. Annual Incentive Plan.*
10.5 Form of Employment Letter between the Company and its
executive officers.*
10.6 Form of Agreement Relating to Noncompetition and Other
Covenants.*
10.7 Form of Pledge Agreement.*
10.8 Stockholders' Agreement by and among LaBranche & Co Inc. and
the Stockholders listed on Schedule I thereto.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.9 LaBranche & Co. Note Purchase Agreement, dated September 15,
1997, relating to the issuance of $20,000,000 aggregate
principal amount of 8.17% Subordinated Notes, as amended.*
10.10 LaBranche & Co. Note Purchase Agreement, dated June 3, 1998,
relating to the issuance of $15,000,000 aggregate principal
amount of 7.69% Subordinated Notes.*
10.11 Amendment to Note Purchase Agreements, dated as of August
23, 1999, relating to the issuance of $20,000,000 aggregate
principal amount of 8.17% Subordinated Notes and $15,000,000
aggregate principal amount of 7.69% Subordinated Notes.***
10.12 Form of Subordinated Note.*
10.13 Credit Agreement, dated as of June 26, 1998, by and among
LaBranche & Co. and The Bank of New York.*
10.14 Amendment No. 1 to Credit Agreement, dated as of June 23,
1999, by and among LaBranche & Co. and The Bank of New
York.***
10.15 Amendment No. 2 to Credit Agreement, dated as of August 24,
1999, by and among LaBranche & Co. and The Bank of New
York.***
10.16 Amendment No. 3 to Credit Agreement, dated as of February 4,
2000, by and among LaBranche & Co. and The Bank of New
York.****
10.17 Form of Indemnification Agreement.*
10.18 Purchase Agreement, dated February 24, 2000, by and among
LaBranche & Co Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, Salomon Smith Barney Inc. and ABN
AMRO Incorporated, as initial purchasers, relating to the
issuance of $250,000,000 aggregate principal amount of 12%
Senior Subordinated Notes due 2007.**
10.19 Indenture, dated as of August 24, 1999, among LaBranche & Co
Inc., as issuer, and Firstar Bank, N.A., as trustee,
relating to the 9 1/2% Senior Notes due 2004.***
10.20 Form of 9 1/2% Senior Notes due 2004 of LaBranche & Co Inc.
(included as Exhibit A to the Indenture filed as Exhibit
4.2).***
10.21 Registration Rights Agreement, dated as of August 24, 1999,
by and among LaBranche & Co Inc., as issuer, and Salomon
Smith Barney Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as initial purchasers.***
10.22 Amended and Restated Articles of Partnership of LaBranche &
Co.***
10.23 LaB Investing Co., L.L.C. Amended and Restated Operating
Agreement.***
10.24 Acquisition Agreement, dated August 16, 1999, by and between
Ernst & Company and LaBranche & Co.***
10.25 Acquisition Agreement, dated August 16, 1999, by and between
Mill Bridge Inc., LaB Investing Co. L.L.C., LaBranche & Co
Inc. and LaBranche & Co.***
10.26 Stock Purchase Agreement, dated as of December 23, 1999,
among LaBranche & Co Inc., Henderson Brothers Holdings, Inc.
and the stockholders listed on Schedule A thereto.*****
10.27 Amendment to Stock Purchase Agreement, dated as of February
1, 2000, by and among LaBranche & Co Inc., Henderson
Brothers Holdings, Inc., and the authorized representatives
of the persons listed on Schedule A thereto.*****
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.28 Agreement and Plan of Merger by and among LaBranche & Co
Inc., Webco Securities, Inc. and the Stockholders of Webco
Securities, Inc., dated as of January 26, 2000.******
10.29 Employment Agreement between LaBranche & Co Inc. and Harvey
Traison, dated January 6, 2000.******
12.1 Computation of Ratio of Earnings to Fixed Charges.*
21 List of Subsidiaries.**
23.1 Consent of Fulbright & Jaworski L.L.P. (included in Exhibit
5.1).+
23.2 Consent of Arthur Andersen LLP.+
23.3 Consent of Deloitte & Touche LLP.+
23.4 Consent of Glasser & Haims, P.C.+
23.5 Consent of Goldstein Golub Kessler & Company, P.C.+
24.1 Power of attorney (included on signature page).+
25.1 Form T-1.+
99.1 Letter of Transmittal.+
99.2 Notice of Guaranteed Delivery.+
</TABLE>
------------------------
+ Filed herewith.
* Incorporated by reference to our Registration Statement on Form S-1
(Registration No. 333-81079), as amended, effective August 18, 1999.
** Incorporated by reference to our Annual Report on Form 10-K/A, filed
April 4, 2000.
*** Incorporated by reference to our Registration Statement on Form S-4
(Registration No. 333-88119), as amended, effective November 3, 1999.
**** Incorporated by reference to our Current Report on Form 8-K, filed
February 8, 2000.
***** Incorporated by reference to our Current Report on Form 8-K, filed
March 17, 2000.
****** Incorporated by reference to our Registration Statement on Form S-4
(Registration No. 333-35922), filed April 28, 2000.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers, and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York on June 16, 2000.
<TABLE>
<S> <C> <C>
LABRANCHE & CO INC.
By: /s/ GEORGE M.L. LABRANCHE, IV
-----------------------------------------
George M.L. LaBranche, IV
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
*By: /s/ GEORGE M.L. LABRANCHE, IV Chairman, Chief Executive
-------------------------------------- Officer, and President
George M.L. LaBranche, IV (Principal Executive Officer) June 16, 2000
As Attorney-in-fact
</TABLE>
<TABLE>
<C> <S> <C>
* Executive Vice President,
------------------------------------------- Finance and Director June 16, 2000
S. Lawrence Prendergast
Senior Vice President, Chief
* Financial Officer and
------------------------------------------- Director (Principal Financial June 16, 2000
Harvey S. Traison Officer)
* Director
------------------------------------------- June 16, 2000
Thomas E. Dooley
* Director
------------------------------------------- June 16, 2000
E. Margie Filter
* Director
------------------------------------------- June 16, 2000
James G. Gallagher
* Director
------------------------------------------- June 16, 2000
Alfred O. Hayward, Jr.
* Controller (Principal
------------------------------------------- Accounting Officer) June 16, 2000
Todd Graber
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
2.1 Plan of Incorporation of LaBranche & Co.*
2.2 Exchange Agreement by and among LaBranche & Co Inc., LaB
Investing Co., L.L.C. and the members of LaB Investing Co.
L.L.C. listed on Schedule A thereto.*
3.1 Amended and Restated Certificate of Incorporation of
LaBranche & Co Inc.*
3.2 Amended and Restated Bylaws of LaBranche & Co Inc.*
4.1 Specimen Stock Certificate.*
4.2 Indenture, dated as of March 2, 2000, among LaBranche & Co.,
as issuer, and Firstar Bank, N.A., as trustee, relating to
the 12% Senior Subordinated Notes due 2007.**
4.3 Form of 12% Senior Subordinated Notes due 2007 of LaBranche
& Co Inc. (included as Exhibit A to the Indenture filed as
Exhibit 4.5).**
4.4 Registration Rights Agreement, dated as of March 2, 2000, by
and among LaBranche & Co Inc., as issuer, and Donaldson,
Lufkin & Jenrette Securities Corporation, Salomon Smith
Barney Inc. and ABN AMRO Incorporated, as initial
purchasers.**
5.1 Opinion of Fulbright & Jaworski L.L.P. +
10.1 Agreement of Lease between Aetna Life Insurance Company and
LaBranche & Co., dated January 6, 1984, as amended to date.*
10.2 Second Amendment to Lease Agreement by and between Bank of
Communications and LaBranche & Co. dated July 1995, as
amended to date.*
10.3 LaBranche & Co Inc. Equity Incentive Plan.*
10.4 LaBranche & Co Inc. Annual Incentive Plan.*
10.5 Form of Employment Letter between the Company and its
executive officers.*
10.6 Form of Agreement Relating to Noncompetition and Other
Covenants.*
10.7 Form of Pledge Agreement.*
10.8 Stockholders' Agreement by and among LaBranche & Co Inc. and
the Stockholders listed on Schedule I thereto.*
10.9 LaBranche & Co. Note Purchase Agreement, dated September 15,
1997, relating to the issuance of $20,000,000 aggregate
principal amount of 8.17% Subordinated Notes, as amended.*
10.10 LaBranche & Co. Note Purchase Agreement, dated June 3, 1998,
relating to the issuance of $15,000,000 aggregate principal
amount of 7.69% Subordinated Notes.*
10.11 Amendment to Note Purchase Agreements, dated as of August
23, 1999, relating to the issuance of $20,000,000 aggregate
principal amount of 8.17% Subordinated Notes and $15,000,000
aggregate principal amount of 7.69% Subordinated Notes.***
10.12 Form of Subordinated Note.*
10.13 Credit Agreement, dated as of June 26, 1998, by and among
LaBranche & Co. and The Bank of New York.*
10.14 Amendment No. 1 to Credit Agreement, dated as of June 23,
1999, by and among LaBranche & Co. and The Bank of New
York.***
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.15 Amendment No. 2 to Credit Agreement, dated as of August 24,
1999, by and among LaBranche & Co. and The Bank of New
York.***
10.16 Amendment No. 3 to Credit Agreement, dated as of February 4,
2000, by and among LaBranche & Co. and The Bank of New
York.****
10.17 Form of Indemnification Agreement.*
10.18 Purchase Agreement, dated February 24, 2000, by and among
LaBranche & Co Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, Salomon Smith Barney Inc. and ABN
AMRO Incorporated, as initial purchasers, relating to the
issuance of $250,000,000 aggregate principal amount of 12%
Senior Subordinated Notes due 2007.**
10.19 Indenture, dated as of August 24, 1999, among LaBranche & Co
Inc., as issuer, and Firstar Bank, N.A., as trustee,
relating to the 9 1/2% Senior Notes due 2004.***
10.20 Form of 9 1/2% Senior Notes due 2004 of LaBranche & Co Inc.
(included as Exhibit A to the Indenture filed as Exhibit
4.2).***
10.21 Registration Rights Agreement, dated as of August 24, 1999,
by and among LaBranche & Co Inc., as issuer, and Salomon
Smith Barney Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as initial purchasers.***
10.22 Amended and Restated Articles of Partnership of LaBranche &
Co.***
10.23 LaB Investing Co., L.L.C. Amended and Restated Operating
Agreement.***
10.24 Acquisition Agreement, dated August 16, 1999, by and between
Ernst & Company and LaBranche & Co.***
10.25 Acquisition Agreement, dated August 16, 1999, by and between
Mill Bridge Inc., LaB Investing Co. L.L.C., LaBranche & Co
Inc. and LaBranche & Co.***
10.26 Stock Purchase Agreement, dated as of December 23, 1999,
among LaBranche & Co Inc., Henderson Brothers Holdings, Inc.
and the stockholders listed on Schedule A thereto.*****
10.27 Amendment to Stock Purchase Agreement, dated as of February
1, 2000, by and among LaBranche & Co Inc., Henderson
Brothers Holdings, Inc., and the authorized representatives
of the persons listed on Schedule A thereto.*****
10.28 Agreement and Plan of Merger by and among LaBranche & Co
Inc., Webco Securities, Inc. and the Stockholders of Webco
Securities, Inc., dated as of January 26, 2000. ******
10.29 Employment Agreement between LaBranche & Co Inc. and Harvey
Traison, dated January 6, 2000. ******
12.1 Computation of Ratio of Earnings to Fixed Charges.*
21 List of Subsidiaries.**
23.1 Consent of Fulbright & Jaworski L.L.P. (included in Exhibit
5.1).+
23.2 Consent of Arthur Andersen LLP.+
23.3 Consent of Deloitte & Touche LLP. +
23.4 Consent of Glasser & Haims, P.C.+
23.5 Consent of Goldstein Golub Kessler & Company, P.C.+
24.1 Power of attorney (included on signature page).+
25.1 Form T-1.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
99.1 Form of Letter of Transmittal.+
99.2 Form of Notice of Guaranteed Delivery.+
</TABLE>
------------------------
+ Filed herewith.
* Incorporated by reference to our Registration Statement on Form S-1
(Registration No. 333-81079), as amended, effective August 18, 1999.
** Incorporated by reference to our Annual Report on Form 10-K/A, filed
April 4, 2000.
*** Incorporated by reference to our Registration Statement on Form S-4
(Registration No. 333-88119), as amended, effective November 3, 1999.
**** Incorporated by reference to our Current Report on Form 8-K, filed
February 8, 2000.
***** Incorporated by reference to our Current Report on Form 8-K, filed
March 17, 2000.
****** Incorporated by reference to our Registration Statement on Form S-4
(Registration No. 333-35922), filed April 28, 2000.
