SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 001-15251
LABRANCHE & CO INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-4064735
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE EXCHANGE PLAZA, NEW YORK, NEW YORK 10006
(Address of principal executive offices)
(212) 425-1144
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding as of May 14,
2001 was 57,363,060.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION................................................................................3
Item 1. Financial Statements.................................................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS..............................................................3
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION....................................................................................................4
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY.........................................................................................6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS..............................................................7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.........................................................9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................................21
PART II OTHER INFORMATION...................................................................................23
Item 6. Exhibits and Reports on Form 8-K....................................................................23
SIGNATURES..................................................................................................24
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(000'S OMITTED EXCEPT PER SHARE DATA)
For the Three Months Ended
March 31,
---------------------------------------
2001 2000
----------------- ------------------
REVENUES:
Net gain on principal transactions $ 81,460 $ 65,391
Commissions 11,820 9,185
Other 4,480 4,114
--------------- ---------------
Total revenues 97,760 78,690
--------------- ---------------
EXPENSES:
Employee compensation and related benefits 24,592 22,782
Interest 12,145 6,447
Depreciation and amortization of intangibles 6,133 2,754
Lease of exchange memberships 3,855 2,557
Exchange, clearing and brokerage fees 3,037 1,033
Other 3,314 2,684
--------------- ---------------
Total expenses 53,076 38,257
--------------- ---------------
Income before provision for income taxes 44,684 40,433
PROVISION FOR INCOME TAXES 23,760 19,878
--------------- ---------------
Net income $ 20,924 $ 20,555
Weighted-average shares outstanding:
Basic 50,266 46,552
Diluted 51,177 46,640
Earnings per share
Basic $ 0.41 $ 0.44
Diluted $ 0.40 $ 0.44
The accompanying notes are an integral part of these condensed
consolidated statements.
-3-
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(000'S OMITTED, EXCEPT SHARE DATA)
As of
------------------------------------
ASSETS MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
(unaudited)
CASH AND CASH EQUIVALENTS $ 174,551 $ 152,220
CASH SEGREGATED UNDER FEDERAL REGULATIONS 91,554 3,610
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 101,793 134,111
RECEIVABLE FROM BROKERS, DEALERS AND CLEARING ORGANIZATIONS 214,222 63,468
RECEIVABLE FROM CUSTOMERS 11,401 912
SECURITIES OWNED, at market value:
Corporate equities 102,297 132,389
Other 6,511 8,664
EXCHANGE MEMBERSHIPS CONTRIBUTED FOR USE, at market value 28,000 24,000
EXCHANGE MEMBERSHIPS OWNED, at cost (market value of $76,000 and $52,000) 75,315 50,300
OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,
less accumulated depreciation and amortization of $3,265 and $2,622, 5,683 3,371
respectively
INTANGIBLE ASSETS, net of accumulated amortization
Specialist Stock List 364,593 185,982
Trade Name 25,510 25,676
Goodwill 448,744 191,235
OTHER ASSETS 72,787 28,184
---------- ----------
Total assets $1,722,961 $1,004,122
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable to brokers and dealers $ 16,162 $ 4,068
Payable to customers 83,073 4,051
Securities sold, but not yet purchased, at market value 70,288 60,726
Accounts payable and other accrued expenses 83,330 57,559
Income taxes payable -- 10,329
---------- ----------
252,853 136,733
---------- ----------
-4-
DEFERRED TAX LIABILITIES 172,540 74,660
--------------- -----------------
LONG TERM DEBT 370,304 355,893
--------------- -----------------
SUBORDINATED LIABILITIES
Exchange memberships, at market value 28,000 24,000
Other subordinated indebtedness 50,935 41,935
--------------- -----------------
78,935 65,935
--------------- -----------------
PREFERRED STOCK, at carrying value, liquidation value of $1,000 per share;
10,000,000 shares authorized; 100,000 and 0 shares issued and outstanding
as of March 31, 2001 and December 31, 2000 respectively 93,481 --
COMMON STOCK, $.01 par value, 200,000,000 shares authorized;
57,363,060 and 49,069,521 shares issued and outstanding as of March 31, 2001
and December 31, 2000 respectively 574 491
OPTIONS ON COMMON STOCK 51,812 --
ADDITIONAL PAID-IN-CAPITAL 586,582 273,347
RETAINED EARNINGS 125,201 104,665
UNEARNED COMPENSATION (9,321) (7,602)
--------------- -----------------
848,329 370,901
--------------- -----------------
Total liabilities and stockholders' equity
$ 1,722,961 $ 1,004,122
=============== =================
The accompanying notes are an integral part of these condensed
consolidated statements.
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LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(000'S OMITTED)
Common Stock
------------
Additional
Shares Amount Preferred Stock Paid-in Capital
------ ------ --------------- ---------------
Balance at December 31, 2000 49,070 $ 491 $ -- $ 273,347
Net income -- -- -- --
Grant of stock options to former RPM option
holders -- -- -- --
Issuance of stock for option exercises by former
RPM option holders 1,145 11 -- 45,889
Issuance of stock to former RPM stockholders 6,924 69 -- 260,463
Issuance of preferred stock for RPM acquisition -- -- 93,481 --
Recognition of a tax benefit related to employee
option exercises -- -- -- 2,443
Issuance of restricted stock, shares for option
exercises and related compensation 225 3 -- 4,440
---------- ------- --------------- ---------------
Balance at March 31, 2001 57,363 $ 574 93,481 $ 586,582
========== ======= =============== ===============
Options On Retained Unearned
Common Stock Earnings Compensation Total
------------ -------- ------------ -----
Balance at December 31, 2000 -- $ 104,665 $ (7,602) $ 370,901
Net income -- 20,924 -- 20,924
Grant of stock options to former RPM option
holders 89,623 -- -- 89,623
Issuance of stock for option exercises by former
RPM option holders (37,811) -- -- 8,089
Issuance of stock to former RPM stockholders -- -- -- 260,532
Issuance of preferred stock for RPM acquisition -- (388) -- 93,093
Recognition of a tax benefit related to employee
option exercises -- -- -- 2,443
Issuance of restricted stock, shares for option
exercises and related compensation -- -- (1,719) 2,724
--------- --------- --------- ---------
Balance at March 31, 2001 $ 51,812 $ 125,201 $ (9,321) $ 848,329
========= ========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated statements.
-6-
LABRANCHE & CO INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000'S OMITTED)
Three Months Ended
------------------------------------------
March 31, 2001 March 31, 2000
------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,924 $ 20,555
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of intangibles 6,133 2,754
Amortization of debt issuance costs and bond discount 422 230
Compensation expense related to stock-based compensation 2,227 750
Deferred tax provision 1,803 144
Tax benefit related to employee stock transactions 17,479 --
Change in assets and liabilities:
Cash segregated under federal regulations (12,967) --
Securities purchased under agreements to resell 32,318 (34,178)
Receivable from brokers, dealers and clearing organizations (120,439) (81,881)
Receivable from customers 9,181 (1,465)
Corporate equities 47,661 (15,522)
United States Government obligations -- (17)
Other securities owned 6,032 (2,090)
Other assets 2,658 (11,611)
Payable to brokers and dealers (19,664) 9,140
Payable to customers (8,441) 6,094
Securities sold, but not yet purchased 1,386 22,157
Accounts payable and other accrued expenses (12,763) 18,288
Taxes payable (10,329) 18,288
---------------- ----------------
Net cash provided by (used in) operating activities (36,379) 9,268
---------------- ----------------
(57,384)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received from (paid for) acquisitions 52,473 (184,052)
Payment for purchase of an exchange seat (2,000) --
Payments for office equipment and leasehold improvements (319) (498)
----------------- -----------------
Net cash provided by (used in) investing activities 50,154 (184,550)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash received from issuance of senior subordinated debt -- 245,693
Proceeds from exercise of stock options 8,556 --
----------------- -----------------
Net cash provided by financing activities 8,556 245,693
----------------- -----------------
Increase/(Decrease) in cash and cash equivalents 22,331 3,759
----------------- -----------------
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CASH AND CASH EQUIVALENTS, beginning of period 152,220 83,774
CASH AND CASH EQUIVALENTS, end of the period $174,551 $ 87,553
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 20,961 $ 5,493
Income taxes 13,900 13,000
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES:
Acquisitions:
Intangibles assets
Fair value of tangible assets acquired, other than cash $452,488 $171,936
Deferred tax liabilities related to intangible assets 71,555 33,863
Other liabilities 95,995 61,774
Common stock issuance 38,950 --
Exercise of options granted to former RPM stockholders 260,463 32,313
37,811 --
The accompanying notes are an integral part of these condensed
consolidated statements.
-8-
LABRANCHE & CO INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The condensed consolidated financial statements include the accounts of
LaBranche & Co Inc., a Delaware corporation (the "Holding Company"), and its
subsidiaries, LaBranche & Co. LLC, a New York limited liability company
("LaBranche"), Henderson Brothers, Inc., a Delaware corporation ("Henderson
Brothers"), Robb Peck McCooey Clearing Corporation, a New York corporation ("RPM
Clearing Corporation"), and Internet Trading Technologies, Inc., a Delaware
corporation ("ITTI" and, collectively with the Holding Company, LaBranche,
Henderson Brothers and RPM Clearing Corporation the "Company"). The Holding
Company is the sole member of LaBranche and 100% stockholder of Henderson
Brothers, RPM Clearing Corporation and ITTI. LaBranche is a registered
broker-dealer and operates primarily as a specialist in equity securities listed
on the New York Stock Exchange, Inc. (the "NYSE") and as a specialist in options
on the American Stock Exchange (the "AMEX"). Henderson Brothers is also a
registered broker-dealer and a member of the NYSE and primarily provides
clearance services to customers of several introducing brokers and provides
direct access floor brokerage to institutional customers. RPM Clearing
Corporation is a registered broker-dealer, and a member of the NYSE and other
exchanges and provides clearing, prime brokerage and execution services. ITTI
provides front-end order execution, analysis and reporting solutions for the
wholesale securities dealer market.
2. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
INFORMATION
The unaudited interim condensed consolidated financial information as of
March 31, 2001 and for the three months ended March 31, 2001 and 2000 are
presented in the accompanying condensed consolidated financial statements. The
unaudited interim condensed consolidated financial statements have been prepared
in accordance with 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, 2001 should be read
in conjunction with the audited consolidated financial statements and notes
thereto as of December 31, 2000 included in the Company's Form 10-K filed with
the Securities and Exchange Commission ("SEC") on March 30, 2001. Results of the
interim periods are not necessarily indicative of results to be obtained for a
full fiscal year.
3. 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
-9-
tax benefits or expenses on temporary differences between the financial
reporting and tax bases of its assets and liabilities. Deferred tax assets and
liabilities relate to stock-based compensation, amortization periods of certain
intangibles and differences between the financial and tax basis of assets
acquired. The Company's effective tax rate differs from the federal statutory
rate primarily due to its non-deductible amortization of intangible assets in
2000 and 2001. The components of provision for income taxes reflected on the
condensed consolidated statements of operations are set forth below (000's
omitted):
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
-------------- --------------
Current federal, state and local taxes $21,957 $18,634
Deferred tax provision 1,803 144
Unincorporated business tax -- 1,100
------- -------
Total provision for income taxes $23,760 $19,878
======= =======
4. REGULATORY REQUIREMENTS
LaBranche, a specialist and member of the NYSE is subject to SEC Rule
15c3-1 adopted and administered by the NYSE. LaBranche is required to maintain
minimum net capital, as defined, equivalent to the greater of $100,000 or 1/15
of aggregate indebtedness, as defined.
As of March 31, 2001 and as of December 31, 2000, LaBranche's net capital,
as defined under SEC Rule 15c3-1, was $430.9 million and $293.4 million,
respectively. As of those dates LaBranche exceeded the minimum requirements by
$429.5 million and $290.3 million, respectively. LaBranche's aggregate
indebtedness to net capital ratio on those dates was .05 to 1 and .16 to 1,
respectively.
The NYSE generally requires members registered as specialists to maintain
a minimum dollar regulatory capital amount in order to establish that they can
meet, with their own net liquid assets, their position requirement.
As of March 31, 2001 and as of December 31, 2000, LaBranche's NYSE minimum
required dollar amount of net liquid assets, as defined, was $405.0 million and
$284.3 million, respectively, compared to actual net liquid assets, as defined,
of $442.0 million and $305.0 million, respectively.
As registered broker-dealers and NYSE member firms Henderson Brothers and
RPM Clearing Corporation are also subject to SEC Rule 15c3-1 as adopted and
administered by the NYSE. Under the alternative method permitted by the rule,
the minimum required net capital for each of such subsidiaries is equal to the
greater of $250,000 or 2% of aggregate debit items as defined.
-10-
As of March 31, 2001 Henderson Brothers' and RPM Clearing Corporation's
combined net capital as defined under SEC Rule 15c3-1 was $21.1 million and
exceeded minimum requirements by $20.4 million.
5. ACQUISITIONS DURING FIRST QUARTER 2001
On March 15, 2001, the Company acquired, through a merger, ROBB PECK
McCOOEY Financial Services, Inc. ("RPM") for an aggregate of approximately 6.9
million shares of the Company's common stock and shares of the Company's
nonconvertible preferred stock having an aggregate face and liquidation value of
approximately $100.0 million and a fair value of approximately $93.4 million.
Each share of the Series A preferred stock entitles the holder thereof to
cumulative preferred cash dividends at an annual rate of 8% for the first four
years, 10% for the fifth year and 10.8% thereafter, certain voting rights and
preferred distributions upon liquidation. In addition, the Company assumed RPM's
obligations under RPM's outstanding option agreements with its employees. Thus,
each option to purchase RPM common stock was converted into a vested option to
purchase 98.778 shares of the Company's common stock. The acquisition was
accounted for under the purchase method and the results of RPM's operations have
been included in the Company's consolidated financial statements since March 16,
2001 and does not expect any significant adjustment to the allocation of
purchase price. The Company intends to finalize its purchase accounting during
the second quarter of 2001. The excess of purchase price over fair value of
tangible assets of approximately $452.5 million was allocated to intangible
assets with corresponding respective lives as follows:
ORIGINAL
AMOUNT LIFE
--------- --------
Specialist Stock List $ 180.0 million 40 years
Goodwill 272.5 million 15 years
--------
$ 452.5 million
========
The allocation of purchase price and determination of useful lives for the
acquisition 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.
Effective March 13, 2001, the Company acquired all the outstanding capital
stock of ITTI, a company that provides front-end order execution, analysis and
reporting solutions for the wholesale securities dealer market. ITTI is operated
by the Company as a separate subsidiary. The excess of purchase price over fair
value of net tangible assets of approximately $4.3 million was allocated to
goodwill.
6. COMMITMENTS
During January 2001, LaBranche extended its $200 million committed line of
credit with a U.S. commercial bank through February 1, 2002.
-11-
Minimum rental commitments under existing non-cancelable leases for office
space and equipment are as follows:
YEAR ENDING DECEMBER 31:
-----------------------
2001 2,044,917
2002 1,835,813
2003 1,586,569
2004 1,272,125
2005 1,238,650
Thereafter 2,648,488
These leases contain escalation clauses providing for increased rentals
based upon maintenance and tax increases.
7. EARNINGS PER SHARE
Earnings per share ("EPS") are computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic EPS is calculated by dividing net income available
to common shareholders by the weighted-average number of common shares
outstanding. Diluted EPS includes the determinants of basic EPS and, in
addition, gives effect to dilutive potential common shares.
The computations of basic and diluted EPS are set forth below (000's
omitted, except per share data):
Three Months Three Months
Ended Ended
March 31, 2001 March 31, 2000
-------------- --------------
Net income $ 20,924 $ 20,555
Less preferred dividends 388 --
-------------- --------------
Numerator for basic and
diluted earnings per common
share - net income $ 20,536 $ 20,555
Denominator for basic
earnings per share -
weighted-average number
of common shares 50,240 46,552
Dilutive Shares
Stock options 509 --
Restricted stock 80 --
Restricted stock units 348 88
-------------- --------------
Denominator for diluted
earnings per share -
weighted-average number
of common shares 51,177 46,640
Basic earnings per share $0.41 $0.44
Diluted earnings per share $0.40 $0.44
-12-
8. EMPLOYEE INCENTIVE AWARDS
On March 13, 2001 the Company issued to certain newly hired employees an
aggregate of 60,000 shares of restricted stock with an issue cost of $.01 and a
fair market value of $38.87 per share. The restricted stock, which is subject to
continuing service with the Company, will vest in three annual installments on
each anniversary of the grant date. For purposes of determining compensation
expense, the total expense of approximately $2.3 million is being recognized
over the three-year vesting period on a straight-line basis.
On January 19, 2001 options to purchase an aggregate of 250,000 shares of
common stock were granted to employees of the Company at market value. On March
12, 2001 options to purchase an aggregate of 12,500 shares of common stock were
granted to an employee of the Company at market value. All of these options,
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. 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 part of the acquisition of RPM, the Company assumed RPM's obligations
under the outstanding option agreements with RPM's employees. Thus, each option
to purchase RPM common stock was replaced with a vested option to purchase
98.778 shares of the Company's common stock. After the initial grant certain
option holders exercised their options as follows:
As of March 31, 2001
--------------------
(Shares)
--------
Initial grant of stock options on the Company's
common stock to former RPM employees 2,775,662
Exercise of options on March 19, 2001 1,144,658
---------
Remaining options issued from the RPM acquisition 1,631,004
=========
The tax benefit associated with the exercise of replacement options has
been recorded as an adjustment to goodwill, resulting in a decrease in the
amount of $15.0 million.
9. PROMISSORY NOTES PAYABLE
In connection with the acquisition of RPM, the Company assumed
promissory notes payable to former RPM employees totaling approximately $17.4
million. Interest is paid quarterly at various annual rates. Three notes
representing $3.3 million are payable upon maturity, with dates ranging from the
first half of 2002 through the first half of 2006. One of these agreements,
representing $295,000, has an automatic rollover provision that extends the
maturity for an additional year, unless the lender provides notice at least 30
days prior to maturity. Ten additional notes representing $11.4 million are
payable in equal annual installments on the anniversaries of issuance, with
maturity dates ranging from the second half of 2002 through the second half of
2005. One note representing $2.0 million is payable in three
-13-
annual installments on the anniversary of issuance and matures in December 2003.
Another note representing approximately $664,000 is payable in equal annual
installments on the anniversary of the closing date and matures in 2005.
LaBranche also assumed two subordinated demand notes for $1.0 million and
$8.0 million with maturity dates of October and December 2001, respectively, as
a result of the RPM acquisition. Interest is payable monthly at adjusting
variable rates. These agreements have automatic rollover provisions, and the
scheduled maturity date will be extended an additional six months, unless the
lender gives LaBranche six months' advance notice that the maturity date will
not be extended.
10. PRO FORMA FINANCIAL INFORMATION
The following 2000 pro forma consolidated results give effect to the
Company's acquisition of all the outstanding capital stock of Henderson
Brothers, the acquisition of Webco Securities, Inc. ("Webco") and the issuance
of $250.0 million of Senior Subordinated Notes as if they occurred on January 1,
2000. In addition, the 2000 pro forma consolidated results give effect to the
acquisition of RPM, including the issuance of common stock, the issuance of
preferred stock, the assumption of all obligations under RPM's option agreements
and the reversal of the historical results of operations for certain business
lines (the "Acquisition Transactions"), as if they occurred on January 1, 2000.
The 2001 pro forma consolidated results give effect to the March 2001
Acquisition Transactions as if they all occurred on January 1, 2001. The pro
forma impact on revenues, pre-tax income and earnings are as follows (000's
omitted, except per share data):
PERIODS ENDED
MARCH 31,
---------------------
2001 2000
---- ----
(PRO-FORMA) (PRO-FORMA)
Revenues $ 124,558 $134,551
Pre-Tax Income 25,835 50,247
Net Income 9,953 23,036
EPS $ 0.13 $ 0.37
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY," "LABRANCHE" OR "WE"
SHALL MEAN LABRANCHE & CO INC. AND ITS WHOLLY-OWNED SUBSIDIARIES.
LABRANCHE'S QUARTERLY AND ANNUAL OPERATING RESULTS ARE AFFECTED BY A WIDE
VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL RESULTS,
INCLUDING: A DECREASE IN TRADING VOLUME ON THE NEW YORK STOCK EXCHANGE,
VOLATILITY IN THE EQUITY SECURITIES MARKET AND CHANGES IN THE VALUE OF OUR
SECURITIES POSITIONS. AS A RESULT OF THESE AND OTHER FACTORS, LABRANCHE MAY
EXPERIENCE MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR
ANNUAL BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS,
FINANCIAL CONDITION, OPERATING RESULTS, AND STOCK PRICE. AN INVESTMENT IN
LABRANCHE INVOLVES VARIOUS RISKS, INCLUDING THOSE MENTIONED ABOVE AND THOSE THAT
ARE DETAILED FROM TIME TO TIME IN LABRANCHE'S SEC FILINGS.
CERTAIN STATEMENTS CONTAINED IN THIS REPORT, INCLUDING WITHOUT LIMITATION,
STATEMENTS CONTAINING THE WORDS "BELIEVES", "INTENDS", "EXPECTS", "ANTICIPATES"
AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. READERS ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE, AND SINCE SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THE
ACTUAL RESULTS AND PERFORMANCE OF LABRANCHE AND THE SPECIALIST INDUSTRY MAY TURN
OUT TO BE MATERIALLY DIFFERENT FROM THE RESULTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. GIVEN THESE UNCERTAINTIES, READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. LABRANCHE ALSO
DISCLAIMS ANY OBLIGATION TO UPDATE ITS VIEW OF ANY SUCH RISKS OR UNCERTAINTIES
OR TO PUBLICLY ANNOUNCE THE RESULT OF ANY REVISIONS TO THE FORWARD-LOOKING
STATEMENTS MADE IN THIS REPORT.
THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH LABRANCHE'S CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED IN THIS
REPORT.
REVENUES
Our revenues consist primarily of net gain earned from principal
transactions in securities for which we act as specialist, and commissions
revenue earned from specialist activities. Net gain on principal transactions
represents trading gains net of trading losses and transaction fees, and are
earned by us when we act as principal buying and selling our specialist stocks
and options. Commissions revenue primarily consists of commissions we earn when
acting as agent to match buyers and sellers for limit orders executed by us on
behalf of brokers after a specified period of time; we do not earn commissions
when we match market orders. Other revenue consists of proprietary trading
revenue, fees from clearance operations, an investment in a hedge fund and
interest income. For the three months ended March 31, 2001, net gain on
principal transactions represented 83.3% of our total revenues, commissions
revenue represented 12.1% of our total revenues, and other revenues represented
4.6% of our total revenues.
-15-
EXPENSES
Our largest operating expense is employee compensation and related
benefits, which primarily consist of salaries and wages and profitability-based
compensation. Profitability-based compensation includes compensation and
benefits paid to managing directors, trading professionals and other employees
based on our profitability and each employee's overall performance.
ACQUISITIONS DURING THE THREE MONTHS ENDED MARCH 31, 2001
On March 13, 2001, we acquired all the outstanding capital stock of
Internet Trading Technologies, Inc. ("ITTI"), a company that provides front-end
order execution, analysis and reporting solutions for the wholesale securities
dealer market. We operate ITTI as a separate subsidiary. The excess of purchase
price over fair value of tangible assets of approximately $4.3 million was
allocated to goodwill.
On March 15, 2001, we acquired ROBB PECK McCOOEY Financial Services, Inc.
("RPM") for an aggregate of approximately 6.9 million shares of our common stock
and shares of nonconvertible preferred stock having an aggregate face and
liquidation value of approximately $100.0 million and a fair value of
approximately $93.4 million. In addition, we assumed all obligations under RPM's
outstanding option agreements with its employees, with each option to purchase
RPM common stock having been converted into an immediately exercisable option to
purchase 98.778 shares of our common stock. The excess of purchase price over
fair value of net tangible assets of approximately $452.5 million was allocated
to intangible assets. The results of the operations of RPM have been included in
our financial statements beginning on the date after completion of its
acquisition. As a result of the exercise of replacement options granted to
former RPM employees, we recorded a tax benefit not reflected through the
results of operations of $15.0 million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
REVENUES
Total revenues increased 24.3% to $97.8 million for the three months ended
March 31, 2001, from $78.7 million for the same period in 2000, principally due
to the increase in revenue from net gain on principal transactions. Net gain on
principal transactions increased 24.6% to $81.5 million for the three months
ended March 31, 2001, from $65.4 million for the same period in 2000. 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 RPM
acquisition, which we consummated on March 15, 2001, as well as a full quarter
of revenues from the Henderson Brothers and Webco acquisitions on March 2, 2000
and March 9, 2000, respectively. As a result of the RPM acquisition we became
the specialist for 129 additional common stock listings. Our
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share volume as principal increased 35.7% to 5.7 billion shares for the three
months ended March 31, 2001, from 4.2 billion shares for the same period in
2000.
Commissions revenue increased 28.3% to $11.8 million for the three months
ended March 31, 2001, from $9.2 million for the same period in 2000. 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 RPM, acquisition on March 15, 2001, a
full quarter of commissions revenue from the Henderson Brothers and Webco
acquisitions, as well as the commissions earned by our clearing subsidiaries for
execution services. The share volume executed by us as agent in our specialist
stocks increased 45.5% to 1.6 billion shares for the three months ended March
31, 2001, from 1.1 billion shares for the same period in 2000.
Other revenue increased 9.8% to $4.5 million for the three months ended
March 31, 2001, from $4.1 million for the same period in 2000. This increase was
primarily due to an increase in our fees from clearance activities and
short-term interest income, which was offset by a decrease in our proprietary
trading revenues and other investments.
EXPENSES
Total expenses before provision for income taxes increased 38.6% to $53.1
million for the three months ended March 31, 2001 from $38.3 million for the
same period in 2000.
Employee compensation and related benefits increased 7.9% to $24.6 million
for the three months ended March 31, 2001, from $22.8 million for the same
period in 2000. The increase was due to the consummation of the RPM acquisition
that resulted in our employment of 215 additional individuals on March 15, 2001.
A full quarter of employee compensation and related benefits expense as a result
of the acquisitions of Henderson Brothers and Webco, which resulted in our
employment of 97 additional individuals, also contributed to the increase. As a
percentage of total revenues, employee compensation decreased to 25.2% of total
revenues for the three months ended March 31, 2001, from 29.0% of total revenues
for the same period in 2000.
Interest expense increased 89.1% to $12.1 million for the three months
ended March 31, 2001, from $6.4 million for the same period in 2000. The
increase was due to a full quarter of interest expense on $250.0 million of
senior subordinated indebtedness, incurred in connection with the Henderson
Brothers and Webco acquisitions. As a percentage of total revenues, interest
expense increased to 12.4% for the three months ended March 31, 2001, from 8.2%
for the same period in 2000.
Depreciation and amortization of intangibles expense increased 117.9% to
$6.1 million for the three months ended March 31, 2001, from $2.8 million for
the same period in 2000. The increase was due to the full quarter of
amortization on the $233.7 million of intangible assets recorded as a result of
our acquisitions of Henderson Brothers and Webco. In addition, the increase was
due to the $452.5 million of intangible assets recorded as a result of our
acquisition of RPM on March 15, 2001. As a percentage of total revenues,
depreciation and amortization of
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intangibles expense increased to 6.3% for the three months ended March 31, 2001,
from 3.5% for the same period in 2000.
Lease of exchange memberships expense increased 50.0% to $3.9 million for
the three months ended March 31, 2001, from $2.6 million for the same period in
2000. This increase was due to the increase in the number of leased memberships
from 46 to 64, and was also due to an increase in the average annual leasing
cost of the memberships from approximately $276,000 to $312,000 per membership.
As a percentage of total revenues, lease of exchange memberships expense
increased to 3.9% for the three months ended March 31, 2001, from 3.2% for the
same period in 2000.
Exchange, clearing and brokerage fees consist primarily of fees paid by us
as a specialist to the NYSE and to clearing houses. Fees paid by us to the NYSE
primarily include fees based on the volume of transactions executed as principal
and as agent, as well as a flat annual fee. Exchange, clearing and brokerage
fees expense increased 200.0% or $3.0 million for the three months ended March
31, 2001, from $1.0 million for the same period in 2000. This increase was due
to an increase in fees charged by the NYSE for new listing allocations and fees
based upon exchange seat use. Increased trading volumes as a result of the RPM
acquisition and a full quarter of increased volume from the Henderson Brothers
and Webco acquisitions also contributed to the increase.
Other expenses increased 22.2% to $3.3 million for the three months ended
March 31, 2001, from $2.7 million for the same period in 2000. This increase was
primarily the result of additional data retrieval and informational services, an
increase in advertising and promotional costs and legal and professional fees
associated with the expansion of our business.
INCOME BEFORE PROVISION FOR INCOME TAXES
Income before provision for income taxes increased 10.6% to $44.7 million
for the three months ended March 31, 2001, from $40.4 million for the same
period in 2000. This increase was primarily due to the increase in our total
revenues which is offset by the increase in interest, depreciation and
amortization of intangibles and exchange clearing and brokerage fees as the
result of our acquisition of RPM and the effect of a full quarter of the
Henderson Brothers and Webco acquisitions.
INCOME TAXES
Provision for income taxes increased 19.6% to $23.8 million for the three
months ended March 31, 2001, from $19.9 million for the same period in 2000, as
a result of the increase in nondeductibible amortization of intangible expense
as result of our acquisitions and our increased profitability.
LIQUIDITY
As of March 31, 2001, we had $1,723.0 million in assets, of which $266.1
million consisted of cash and short-term investments, which primarily consist of
commercial paper maturing within 180 days.
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In January 2001, we extended our $200 million line-of-credit with a U.S.
commercial bank until February 1, 2002. Amounts outstanding under the U.S.
commercial bank credit facility are secured by our inventory of specialist
stocks and bear interest at U.S. commercial banks' broker loan rate. To date, we
have not utilized this facility.
As of March 31, 2001, the subordinated debt of LaBranche & Co. LLC totaled
$50.9 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. LLC. As of March 31, 2001 subordinated debt totaling
$6.9 million represented junior subordinated debt of LaBranche & Co. LLC placed
with former limited partners, their family members and our employees. This debt
has maturities ranging from the second half of 2001 through the second half of
2002, and bears interest at an annual rate between 8.0% and 10.0%, payable on a
quarterly basis. The agreements relating to the junior subordinated debt
generally have automatic rollover provisions that extend the maturities for an
additional year, unless the lender provides notice at least seven months prior
to maturity.
As a result of our acquisition of RPM, LaBranche & Co. LLC acquired
subordinated demand notes for $1.0 million and $8.0 million with maturity dates
of October and December 2001 respectively. Interest is payable monthly at
adjusting variable rates. These agreements have automatic rollover provisions,
and the scheduled maturity date will be extended an additional six months,
unless the lender gives LaBranche & Co. LLC six months' advance notice that the
maturity date will not be extended.
As of March 31, 2001 the Company also assumed $17.4 million of promissory
notes payable as a result of the RPM acquisition. Three of these notes,
representing approximately $3.3 million, are subordinated debt placed with
family members of former employees of RPM. This debt has maturities ranging from
the first half of 2002 through the first half of 2006, and bears interest at an
annual rate between 9.0% and 12.5%, payable on a quarterly basis. One of these
agreements, representing $295,000, has an automatic rollover provision that
extends the maturity for an additional year, unless the lender provides notice
at least 30 days prior to maturity. Ten additional notes representing $11.4
million, are promissory notes placed with former RPM employees and their family
members. These notes are payable in equal annual installments on the
anniversaries of issuance, with maturity dates ranging from the second half of
2002 through the second half of 2005, and bear interest at annual rates ranging
from 9.5% to 10.0%, payable on a quarterly basis. Another promissory note,
representing $2.0 million, is payable in three annual installments on the
anniversary of issuance, matures in December 2003 and bears interest at an
annual rate of 12.0%, payable on a quarterly basis. One promissory note,
representing approximately $664,000 is payable in equal annual installments on
the anniversary of the closing date, matures in May 2005 and bears interest at
an annual rate of 7.0%, payable on a quarterly basis commencing in May 2001.
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As a result of our acquisition of RPM, we issued 100,000 shares of our
Series A preferred stock. Each outstanding share of our Series A preferred stock
entitles the holder thereof to cumulative preferred cash dividends at an annual
rate of 8% of the liquidation preference per share until the fourth anniversary
of the closing of the merger, 10% until the fifth anniversary of the closing,
and 10.8% thereafter. Dividends are payable on the first day of January and the
first day of July of each year (or if such date is not a regular business day,
then the next business day thereafter), commencing on July 1, 2001. Dividends on
the issued and outstanding shares of Series A preferred stock will be preferred
and cumulative and accrue from day to day from the date on which they are
originally issued.
On March 2, 2000, we issued $250.0 million aggregate principal amount of
Senior Subordinated Notes. These Senior Subordinated Notes bear interest at a
rate of 12.0% annually and mature in March 2007. The indenture covering these
notes includes certain covenants that, among other things, limit our ability to
borrow money, pay dividends or purchase our stock, make investments, engage in
transactions with stockholders and affiliates, create liens on our assets, and
sell assets or engage in mergers and consolidations, except in accordance with
certain specified conditions.
The Senior Subordinated Notes also require the Company, within 150 days
after the end of each fiscal year, to offer to redeem from all holders of the
Notes a principal amount equal to the Excess Cash Flow for such fiscal year at a
price equal to 103% of the principal amount being offered for purchase plus
accrued and unpaid interest, if any, to the date of redemption. Each holder is
entitled to be offered his pro rata share based upon his ownership percentage of
the outstanding Notes. Excess Cash Flow is defined for this purpose as 40% of
the amount by which our consolidated EBITDA exceeds the sum of our interest
expense, tax expense, increase in net capital or net liquid asset requirements,
capital expenditures, any cash amounts related to acquisitions of NYSE
specialists or any cash payments related to our payment at maturity of the
principal amount of our existing or certain other indebtedness.
In connection with the Webco acquisition, we issued unsecured senior
promissory notes in the aggregate principal amount of $3.0 million to the
stockholders of Webco. These notes bear interest at an annual rate of 10.0%. Of
the aggregate principal amount, $500,000 has already been paid. The remaining
$2.5 million is due September 9, 2001 and is subject to set-off for any amounts
for which the former stockholders of Webco may be obligated to indemnify us for
any breaches of their or Webco's representations, warranties and covenants under
the Webco acquisition agreement.
As a broker-dealer, LaBranche & Co. LLC is subject to regulatory
requirements intended to ensure the general financial soundness and liquidity of
broker-dealers and requiring the maintenance of minimum levels of net capital,
as defined in SEC Rule 15c3-1. LaBranche & Co. LLC is required to maintain
minimum net capital, as defined, equivalent to the greater of $100,000 or 1/15
of aggregate indebtedness, as defined. NYSE Rule 326(c) also prohibits a
broker-dealer from repaying subordinated borrowings, paying cash dividends,
making loans to any parent, affiliates or employees, or otherwise entering into
transactions which would result in a reduction of its total net capital to less
than 150% of its required minimum capital.
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At March 31, 2001, LaBranche & Co. LLC had net capital of $430.9 million,
which was $429.5 million in excess of its required net capital of $1.4 million.
As clearing brokers, pursuant to SEC Rule 15c3-1, our Henderson Brothers
and RPM subsidiaries are required to maintain a minimum net capital of $250,000.
As of March 31, 2001, the combined net capital of these subsidiaries was $21.1
million and exceeded requirements by $20.4 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. After our
acquisition of RPM, our net liquid asset requirement is $405.0 million, which
represents the previous combined net liquid assets of the two firms as separate
entities. As of March 31, 2001, our actual net liquid assets were approximately
$442.0 million.
Failure to maintain the required net capital and net liquid assets may
subject us to suspension or revocation of SEC registration or suspension or
expulsion by the NYSE.
We currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our anticipated working capital,
regulatory capital and capital expenditure requirements through the end of 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A majority of our specialist related revenues are derived from trading as
principal. We also operate a proprietary trading desk separately from our NYSE
and American Stock Exchange ("AMEX") specialist operations, which represented
(0.6)% of our total revenues in the three months ended March 31, 2001 and 1.8%
of our total revenues in the same period in 2000. We may incur trading losses as
a result of these trading activities. These activities involve primarily the
purchase, sale or short sale of securities for our own account. These activities
are subject to a number of risks, including risks of price fluctuations and
rapid changes in the liquidity of markets. In any period, we may incur trading
losses in our specialist stocks for a variety of reasons, including price
fluctuations of our specialist stocks, lack of trading volume in our specialist
stocks and the performance of our specialist obligations. From time to time, we
have large position concentrations in securities of a single issuer or issuers
engaged in a specific industry. In general, because our inventory of securities
is marked to market on a daily basis, any downward price movement in these
securities will result in a reduction of our revenues and operating profits.
We have developed a risk management process, which is intended to balance
our ability to profit from our specialist activities with our exposure to
potential losses. In addition, we have trading limits relating to our
proprietary trading activities.
Although we have adopted risk management policies, we cannot be sure that
these policies have been formulated properly to identify or limit our risks.
Even if these policies are
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formulated properly, we cannot be sure that we will successfully implement these
policies. As a result, we may not be able to manage our risks successfully or
avoid trading losses.
Henderson Brothers' and RPMs' clearance activities involve settlement and
financing of various customer securities transactions on a cash or margin basis.
These activities may expose Henderson Brothers and RPM to off-balance sheet risk
in the event the customer or other broker is unable to fulfill its contractual
obligations and Henderson Brothers and RPM has to purchase or sell securities at
a loss. For margin transactions, Henderson Brothers and RPM may be exposed to
significant off-balance sheet risk in the event margin requirements are not
sufficient to fully cover losses that customers may incur in their accounts.
Henderson Brothers and RPM seek to control the risks associated with
customer activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. Henderson Brothers
and RPM monitor margin levels daily and pursuant to such guidelines, requires
customers to deposit additional collateral or to reduce positions when
necessary.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
10.1 Agreement and Plan of Merger, dated as of January 18, 2001, by and
between the Company and ROBB PECK McCOOEY Financial Services,
Inc.(1)
10.2 Amendment to Agreement and Plan of Merger, dated as of February 15,
2001, by and between the Company and ROBB PECK McCOOEY Financial
Services, Inc.(1)
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
(i) On January 19, 2001, we filed a Form 8-K, dated January 18, 2001,
with respect to the execution of the Agreement and Plan of Merger,
dated January 18, 2001, by and between LaBranche & Co Inc. and ROBB
PECK McCOOEY Financial Services, Inc., under Item 5 of Form 8-K.
(ii) On March 22, 2001, we filed a Form 8-K, dated March 15, 2001, with
respect to our acquisition of ROBB PECK McCOOEY Financial Services,
Inc., under Item 2 of Form 8-K.
All other items of this report are inapplicable.
--------
(1) Previously filed as an exhibit to the company's Report on Form 8-K dated
March 15, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 15, 2001 LABRANCHE & CO INC.
By: /s/ Harvey S. Traison
-----------------------------
Name: Harvey S. Traison
Title: Chief Financial Officer
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