SECURITIES AND EXCHANGE COMMISSION
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 June 30, 2003
OR
| o | 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.
| Delaware | 13-4064735 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One Exchange Plaza, New York, New York 10006
(212) 425-1144
Not Applicable
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares of the registrant’s common stock outstanding as of August 12, 2003 was 59,556,605.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION |
3 | |||||
Item 1. Financial Statements |
3 | |||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
3 | |||||
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION |
4 | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
6 | |||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
8 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 | |||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
30 | |||||
PART II OTHER INFORMATION |
36 | |||||
SIGNATURES |
40 | |||||
CERTIFICATIONS |
41 | |||||
-2-
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)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||
REVENUES: |
|||||||||||||||||||
Net gain on principal transactions |
$ | 60,103 | $ | 72,731 | $ | 111,906 | $ | 161,855 | |||||||||||
Commissions |
24,859 | 22,420 | 47,375 | 43,393 | |||||||||||||||
Other |
2,542 | 2,957 | 4,857 | 15,540 | |||||||||||||||
Total revenues |
87,504 | 98,108 | 164,138 | 220,788 | |||||||||||||||
EXPENSES: |
|||||||||||||||||||
Employee compensation and related benefits |
25,096 | 31,080 | 50,915 | 62,153 | |||||||||||||||
Interest |
12,207 | 12,848 | 23,928 | 25,684 | |||||||||||||||
Exchange, clearing and brokerage fees |
10,936 | 9,203 | 21,598 | 16,980 | |||||||||||||||
Lease of exchange memberships |
6,186 | 6,398 | 12,655 | 13,107 | |||||||||||||||
Depreciation & amortization of intangibles |
3,279 | 3,359 | 6,589 | 6,689 | |||||||||||||||
Other |
7,767 | 6,996 | 15,147 | 14,435 | |||||||||||||||
Total expenses |
65,471 | 69,884 | 130,832 | 139,048 | |||||||||||||||
Income before minority interest and provision for income taxes |
22,033 | 28,224 | 33,306 | 81,740 | |||||||||||||||
MINORITY INTEREST |
127 | — | 127 | — | |||||||||||||||
Income before provision for income taxes |
21,906 | 28,224 | 33,179 | 81,740 | |||||||||||||||
PROVISION FOR INCOME TAXES |
10,316 | 13,283 | 16,062 | 39,147 | |||||||||||||||
Net income |
$ | 11,590 | $ | 14,941 | $ | 17,117 | $ | 42,593 | |||||||||||
Series A Preferred dividends and discount accretion |
942 | 1,741 | 2,109 | 3,817 | |||||||||||||||
Net income available to common stockholders |
$ | 10,648 | $ | 13,200 | $ | 15,008 | $ | 38,776 | |||||||||||
Weighted average shares outstanding: |
|||||||||||||||||||
Basic |
59,525 | 58,859 | 59,510 | 58,782 | |||||||||||||||
Diluted |
60,256 | 59,991 | 60,284 | 59,995 | |||||||||||||||
Earnings per share: |
|||||||||||||||||||
Basic |
$ | 0.18 | $ | 0.22 | $ | 0.25 | $ | 0.66 | |||||||||||
Diluted |
$ | 0.18 | $ | 0.22 | $ | 0.25 | $ | 0.65 | |||||||||||
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 | |||||||||
| June 30, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
| (unaudited) | (audited) | ||||||||
ASSETS |
|||||||||
Cash and cash equivalents |
$ | 377,208 | $ | 77,033 | |||||
Cash and securities segregated under federal regulations |
20,946 | 16,012 | |||||||
Securities purchased under agreements to resell |
11,000 | 26,000 | |||||||
Receivable from brokers, dealers and clearing organizations |
223,420 | 145,387 | |||||||
Receivable from customers |
6,518 | 12,425 | |||||||
United States Government obligations |
— | 395,840 | |||||||
Securities owned, at market value: |
|||||||||
Corporate equities |
221,549 | 106,295 | |||||||
Exchange-traded funds |
233,538 | 21,455 | |||||||
Options |
59,585 | 61,478 | |||||||
Commissions receivable
|
4,836 | 4,379 | |||||||
Exchange memberships contributed for use, at market value
|
18,000 | 26,176 | |||||||
Exchange memberships owned, at cost (market value of $58,826 and $78,337, respectively) |
77,828 | 77,815 | |||||||
Office equipment and leasehold improvements, at cost,
less accumulated depreciation and amortization of $7,904 and $6,987, respectively |
5,330 | 6,089 | |||||||
Intangible assets, net of accumulated amortization: |
|||||||||
Specialist stock list |
376,768 | 381,956 | |||||||
Trade name |
25,011 | 25,011 | |||||||
Goodwill |
470,537 | 470,598 | |||||||
Other assets |
56,528 | 58,853 | |||||||
Total assets |
$ | 2,188,602 | $ | 1,912,802 | |||||
-4-
| As of | ||||||||||
| June 30, 2003 | December 31, 2002 | |||||||||
| (unaudited) | (audited) | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Liabilities: |
||||||||||
Payable to brokers and dealers |
$ | 32,667 | $ | 16,417 | ||||||
Payable to customers |
14,022 | 21,971 | ||||||||
Securities sold, but not yet purchased, at market value: |
||||||||||
Corporate equities |
287,836 | 106,685 | ||||||||
Exchange-traded funds |
141,239 | 4,359 | ||||||||
Options |
54,981 | 63,695 | ||||||||
Accrued compensation |
39,896 | 55,185 | ||||||||
Accounts payable and other accrued expenses |
50,245 | 52,268 | ||||||||
Income taxes payable |
11,880 | 13,201 | ||||||||
Deferred tax liabilities |
180,358 | 179,924 | ||||||||
Long term debt |
355,253 | 354,948 | ||||||||
Subordinated liabilities
|
||||||||||
Exchange memberships, at market value |
18,000 | 26,176 | ||||||||
Other subordinated indebtedness |
28,285 | 28,285 | ||||||||
Total liabilities |
1,214,662 | 923,114 | ||||||||
Minority Interest |
127 | — | ||||||||
Preferred stock, liquidation value of $1,000 per share; 10,000,000 shares
authorized; 39,186 and 63,836 shares issued and outstanding as of June 30, 2003
and December 31, 2002, respectively |
37,985 | 61,361 | ||||||||
Common stock, $.01 par value, 200,000,000 shares authorized;
59,551,645 and 59,504,148 shares issued and outstanding as of June 30, 2003 and
December 31, 2002, respectively |
596 | 595 | ||||||||
Additional paid-in-capital |
681,206 | 679,601 | ||||||||
Retained earnings |
254,550 | 249,065 | ||||||||
Unearned compensation |
(524 | ) | (934 | ) | ||||||
Total stockholders’ equity |
973,813 | 989,688 | ||||||||
Total liabilities and stockholders’ equity |
$ | 2,188,602 | $ | 1,912,802 | ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
-5-
LaBRANCHE & CO INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(000’s omitted)
| Six Months Ended | |||||||||||
| June 30, 2003 | June 30, 2002 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||||||
Net income |
$ | 17,117 | $ | 42,593 | |||||||
Adjustments to reconcile net income to net cash used in operating activities: |
|||||||||||
Depreciation and amortization of intangibles |
6,589 | 6,689 | |||||||||
Amortization of bond discount and debt issuance costs |
1,053 | 1,044 | |||||||||
Minority interest in income of consolidated subsidiary |
127 | — | |||||||||
Compensation expense related to stock-based compensation |
1,801 | 1,618 | |||||||||
Deferred tax provision |
1,153 | 4,738 | |||||||||
Acceleration of preferred stock discount accretion |
918 | 1,485 | |||||||||
Tax benefit related to employee stock transactions |
61 | 3,733 | |||||||||
Change in assets and liabilities: |
|||||||||||
Cash and securities segregated under federal regulations |
(4,934 | ) | 54,252 | ||||||||
Securities purchased under agreements to resell |
15,000 | 47,094 | |||||||||
Receivable from brokers, dealers and clearing organizations |
(78,034 | ) | (89,594 | ) | |||||||
Receivable from customers |
5,906 | 3,844 | |||||||||
United States Government obligations |
395,840 | 5,491 | |||||||||
Securities owned, Corporate equities |
(115,254 | ) | (41,878 | ) | |||||||
Securities owned, Exchange-traded funds |
(212,083 | ) | — | ||||||||
Securities owned, Options and other |
1,894 | (6,847 | ) | ||||||||
Commissions receivable |
(457 | ) | (392 | ) | |||||||
Other assets |
1,577 | (5,536 | ) | ||||||||
Payable to brokers and dealers |
16,250 | (19,539 | ) | ||||||||
Payable to customers |
(7,949 | ) | (29,505 | ) | |||||||
Securities sold, but not yet purchased, Corporate equities |
181,151 | 67,401 | |||||||||
Securities sold, but not yet purchased, Exchange-traded funds |
136,880 | — | |||||||||
Securities sold, but not yet purchased, Options |
(8,715 | ) | 6,073 | ||||||||
Accrued compensation |
(15,289 | ) | (264 | ) | |||||||
Accounts payable and other accrued expenses |
(1,030 | ) | (18,573 | ) | |||||||
Income taxes payable |
(2,041 | ) | (16,004 | ) | |||||||
Net cash provided by operating activities |
337,531 | 17,923 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||||||
Payments for office equipment and leasehold improvements |
(641 | ) | (1,779 | ) | |||||||
Payments for exchange memberships |
(13 | ) | — | ||||||||
Net cash used in investing activities |
(654 | ) | (1,779 | ) | |||||||
-6-
| Six Months Ended | ||||||||||
| June 30, 2003 | June 30, 2002 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||
Proceeds from the exercise of stock options |
216 | 4,196 | ||||||||
Payment of common stock dividends |
(9,523 | ) | — | |||||||
Payment of preferred stock dividends |
(2,745 | ) | (4,300 | ) | ||||||
Payment for preferred stock buyback |
(24,650 | ) | (28,164 | ) | ||||||
Net cash used in financing activities |
(36,702 | ) | (28,268 | ) | ||||||
Increase/(Decrease) in cash and cash equivalents |
300,175 | (12,124 | ) | |||||||
CASH AND CASH EQUIVALENTS, beginning of the period |
77,033 | 52,043 | ||||||||
CASH AND CASH EQUIVALENTS, end of the period |
$ | 377,208 | $ | 39,919 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR: |
||||||||||
Interest |
$ | 21,555 | $ | 22,485 | ||||||
Income taxes |
16,193 | 48,960 | ||||||||
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES: |
||||||||||
Net increase in additional paid-in capital related to stock based awards |
2,016 | 5,811 | ||||||||
The accompanying notes are an integral part of these condensed consolidated statements.
-7-
LaBRANCHE & CO INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The condensed consolidated financial statements include the accounts of LaBranche & Co Inc., a Delaware corporation (the “Holding Company”), and its subsidiaries, LaBranche & Co. LLC, a New York limited liability company (“LaBranche”), LaBranche Financial Services, Inc., a New York corporation (“LFSI”), LaBranche Structured Products, LLC, a New York limited liability company (“LSP”), LABDR Services, Inc., a Delaware corporation (“LABDR”), and LaBranche & Co. B.V., a Netherlands private limited liability company (“BV” and collectively with the Holding Company, LaBranche, LFSI, LSP and LABDR, the “Company”). The Holding Company is the sole member of LaBranche and LSP, the 100% stockholder of LFSI and LABDR, and the sole owner of BV. LaBranche is a registered broker-dealer and operates primarily as a specialist in equity securities and rights listed on the New York Stock Exchange (the “NYSE”) and in equity securities on the American Stock Exchange (the “AMEX”). LFSI is a registered broker-dealer and a member of the NYSE and other exchanges, and provides securities clearing, securities execution and other related services to its own retail customers, customers of introducing brokers and institutional customers, including traders, professional investors and broker-dealers. LFSI also provides direct-access floor brokerage services to institutional customers. LSP is a registered broker-dealer and operates as a specialist in options, Exchange Traded Funds (“ETFs”) and futures on the AMEX and the New York Board of Trade (“NYBOT”) and acts as a market-marker in ETFs on several exchanges. LABDR was recently incorporated to provide disaster recovery services and back-up facilities to other Holding Company subsidiaries. BV represents LaBranche in European markets and provides client services to LaBranche’s European listed companies.
2. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL INFORMATION
The unaudited interim condensed consolidated financial information as of June 30, 2003 and for the six months ended June 30, 2003 and 2002 is presented in the accompanying condensed consolidated financial statements. The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial information. The unaudited interim condensed consolidated financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for such periods. This interim condensed consolidated financial information as of June 30, 2003 should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2002 included in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 20, 2003. Results of the interim periods are not necessarily indicative of results to be obtained for a full fiscal year.
-8-
3. GOODWILL AND OTHER INTANGIBLE ASSETS
With the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002, which was issued by the Financial Accounting Standards Board (“FASB”), the acquired trade name and goodwill are no longer amortized. The acquired specialist stock lists, however, will continue to be amortized over their respective lives. The Company tests the acquired trade name, goodwill and specialist stock lists for impairment at least annually or when events and circumstances indicate impairment testing may be necessary by applying a fair-value based test in accordance with SFAS No. 142 and No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” It is possible that in the future, after periodic testing, the Company may incur impairment charges related to the carrying value of acquired goodwill and intangible assets recorded in its financial statements.
The gross carrying amount, accumulated amortization and net carrying amount of the Company’s acquired specialist stock lists are set forth below (000’s omitted):
| As of June 30, 2003 | As of December 31, 2002 | |||||||
Gross carrying amount |
$ | 406,190 | $ | 406,190 | ||||
Accumulated amortization |
(29,422 | ) | (24,234 | ) | ||||
Net carrying amount |
$ | 376,768 | $ | 381,956 | ||||
Amortization expense associated with the Company’s acquired specialist stock lists was $2.6 million and $5.2 million for each of the t