LABRANCHE & CO INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended DECEMBER 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
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LaBRANCHE & CO INC.
-------------------
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 13-4064735
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(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) (Zip Code)

(212) 425-1144
--------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par
value $0.01 New
York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

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The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based upon the last sale price of the Common Stock reported on
the New York Stock Exchange on March 14, 2002, was approximately $622,000,000.

The number of shares of Common Stock outstanding as of March 14, 2002 was
59,116,678.

DOCUMENTS INCORPORATED BY REFERENCE

As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement for the registrant's 2002 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Annual Report
on Form 10-K.

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PART I

THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED BY
REFERENCE CONTAIN FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT THE REGISTRANT'S INDUSTRY, MANAGEMENT'S BELIEFS AND CERTAIN
ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," VARIATIONS OF SUCH WORDS
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO
PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. UNLESS REQUIRED BY LAW, THE
REGISTRANT UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
HOWEVER, READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER
REPORTS OR DOCUMENTS THE REGISTRANT FILES FROM TIME TO TIME WITH THE SECURITIES
AND EXCHANGE COMMISSION.

ITEM 1. BUSINESS.

OVERVIEW

LaBranche & Co Inc. ("LaBranche") is a holding company that is the sole
member of LaBranche & Co. LLC and owns all the outstanding stock of LaBranche
Financial Services, Inc. ("LFSI"). Founded in 1924, LaBranche & Co. LLC is one
of the oldest and largest specialist firms on the New York Stock Exchange
("NYSE"). We also act as a specialist in stocks and options on the American
Stock Exchange ("AMEX"). Our LFSI subsidiary is a clearing broker for customers
of introducing brokers and provides direct access floor brokerage services to
institutional customers, securities clearing and other related services to
individual and institutional clients, including traders, professional investors
and broker-dealers. In addition, LFSI also provides front-end order execution,
analysis and reporting solutions for the wholesale securities dealer market. As
of December 31, 2001, our former subsidiaries Henderson Brothers, Inc.
("Henderson Brothers") and Internet Trading Technologies, Inc. ("ITTI") were
merged with and into our ROBB PECK McCOOEY Clearing Corporation subsidiary ("RPM
Clearing Corporation"). RPM Clearing Corporation changed its name to LFSI in
January 2002 and continues to be a registered broker-dealer and NYSE member
firm.

As a 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 investors 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 have increased from approximately $49.9 million in 1996 to $424.1
million in 2001, representing a compound annual growth rate of 53.4%. We have
accomplished our growth both internally and

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through acquisitions. For example, since the NYSE implemented its new specialist
allocation process in March 1997, as described in "Industry Background-The NYSE
Specialist," we have been selected by 87 new listed companies, resulting from
178 listing interviews through December 31, 2001. In addition, we have acquired
ten specialist operations since 1997, adding over 550 NYSE and AMEX common
stocks and 107 AMEX-listed options for which we act as the specialist. During
the past five years, we have also increased the scope of our business, as
illustrated by the following data:

o the annual dollar volume on the NYSE of stocks for which we acted as
specialist increased to $2.5 trillion in 2001, from $201.4 billion
in 1996. Based on these dollar volumes, we were the largest
specialist firm in 2001 as compared to the sixth largest in 1996;

o the annual share volume on the NYSE of stocks for which we act as
specialist increased to 76.0 billion in 2001, from 5.6 billion in
1996. Based on these share volumes, we were the largest specialist
firm in 2001 as compared to the fourth largest in 1996; and

o the total number of our common stock listings increased to 591 as of
December 31, 2001, from 132 as of December 31, 1996. Based on the
number of our NYSE common stock listings, we were the largest
specialist firm as of December 31, 2001 as compared to the fourth
largest as of December 31, 1996. In addition, we acted as the
specialist for 266 other NYSE-listed securities (e.g., preferred and
convertible securities) and for 57 stocks and 122 options on AMEX.

As of December 31, 2001, our listed companies included:

o 104 of the S&P 500 Index companies; and

o nine of the 30 companies comprising the Dow Jones Industrial
Average. Our Dow stocks are American Express Company, AT&T, DuPont,
Eastman Kodak, ExxonMobil, Merck, Minnesota Mining & Manufacturing,
Philip Morris 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 $6.8 trillion at December 31, 1996 to approximately $11.9 trillion
at December 31, 2001, representing a compound annual growth rate of 11.8%.

The NYSE's average daily trading volume increased from 178.9 million
shares in 1991 to 1.2 billion shares in 2001, as illustrated by the following
graph:

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NYSE AVERAGE DAILY TRADING VOLUME FROM 1991 TO 2001
(SHARE VOLUME IN MILLIONS)

EDGAR REPRESENATION OF DATA POINTS USED IN PRINTED GRAPHIC

1991 179
1992 202
1993 265
1994 291
1995 346
1996 412
1997 527
1998 674
1999 809
2000 1042
2001 1240

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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 $2.2
million as of February 28, 2002. To become a member, each prospective applicant
must also pass an examination covering NYSE rules and regulations.

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 NYSE SPECIALIST

All trading of securities on the NYSE is conducted through an auction
process. The auction process for each security is managed by the exclusive
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 has decreased
from 37 at December 31, 1996 to nine at December 31, 2001. A recently announced
transaction, if consummated, would further reduce the number of specialist units
on the NYSE to eight. Of the nine specialist units, the three largest specialist
units as ranked by their number of specialist stocks were responsible for
approximately 56.0% and 69.6% of the average daily trading volume in 2000 and
2001, respectively.

A specialist firm is granted a franchise by the NYSE to conduct the
auction in each of its NYSE-listed stocks. 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.

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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:

o 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;

o 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;

o 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

o a principal using its own capital to buy or sell stocks for its own
account.

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 significantly impacted 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:

o an increase in the number of households investing in stocks;

o an increase in the amount of assets managed through retirement
plans, mutual funds, annuity and insurance products, index funds and
other institutional investment vehicles;

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o the increased popularity and use of computerized trading, hedging
and other derivative strategies;

o an increase in NYSE-listed stocks due to:

o transfers from Nasdaq;

o an increase in listings of foreign companies; and

o initial public offerings and spin-offs;

o higher equity portfolio turnover by individuals and institutional
investors as a result of lower commission rates and other
transaction costs;

o trading in decimal price increments;

o an increase in the amount of shares traded due to stock splits and
stock dividends; and

o on-line trading.

These factors have, in turn, been influenced by low interest rates and low
levels of inflation.

In January 2001, the NYSE commenced trading in decimals. Although the NYSE
average daily trading volume for 2001 increased over prior years, the full
effects of decimalization on the marketplace and specialist profitability are
still uncertain. The NYSE also has increased the window for providing
commission-free execution of trades to five minutes from two minutes. The NYSE
is also considering the following additional changes:

o longer trading days; and

o trading of foreign stocks in ordinary form side by side with their
American Depository Receipts .

These additional changes, if instituted, 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 2001, specialist firms handled approximately 83.6% of
trades in NYSE-listed stocks. Trades in NYSE-listed stocks also are generally
effected as follows:

o some stocks are listed on multiple exchanges, such as regional
exchanges, and trades take place on those exchanges;

o NYSE members may trade NYSE-listed stocks off the NYSE in the
over-the-counter market; and

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o 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, called ATSs, such as electronic communications
networks, or 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 82.5% to 83.7% 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 substantial capital, better access to technology and
direct access to investors. As a result, these parties may be well positioned to
direct trading to ATSs. These alternative trading methods may account for a
growing percentage of the trading volume of NYSE-listed stocks.

The accelerating growth of trading volume, the increase in stock prices on
the NYSE in the 1990s and the more recent increased volatility of stock prices
have increased the demands upon specialists. In order to fulfill their
obligations, specialists are required to execute a greater number of trades in
shorter periods of time with greater price volatility. In addition, specialists
are called upon to take larger positions in their stocks. These factors have led
to a consolidation of specialist units in the past five years. The NYSE
specialist market has become dominated by a number of large, well-capitalized
firms that 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:

o 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. Trading in the stocks for
which we acted as specialist during 2001 accounted for 27.6% of the
dollar volume on the NYSE and 28.5% of the share volume. Based on
these percentages, we were the largest specialist firm on the NYSE.
We are continuing to develop our relationships with ATSs and to
embrace new technologies in trading platforms.

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o 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.
Acting as specialist in the stocks of industry leaders should
benefit us as these leading companies continue to expand their
businesses through internal growth and acquisitions.

o STRONG MARKET-MAKING SKILLS. We utilize our strong market-making
skills to actively trade as principal in our specialist stocks. In
our opinion, we significantly improve liquidity in our specialist
stocks, particularly during periods of market volatility. In 2001,
approximately 33.4% of our trades were as principal as compared to
an average of approximately 30.6% for all NYSE specialists.

o 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 our listed companies
to discuss the trading in their stock. In addition, we were the
first specialist firm to:

o host an annual listed company conference;

o publish a company newsletter; and

o commission customer satisfaction surveys from our listed
companies.

o COMPLETED ACQUISITIONS. Since 1997, we have acquired the following
ten specialist operations, solidifying our position as one of the
leading NYSE specialist firms, as well as establishing and expanding
our presence on the AMEX:

o a portion of the specialist operations of Stern Bros., LLC
(July 1997);

o Ernst, Homans, Ware & Keelips (August 1997);

o Fowler, Rosenau & Geary, LLC (July 1998);

o Henderson Brothers, Inc. (March 2000);

o Webco Securities, Inc. (March 2000);

o the assets and operations of an AMEX options specialist unit
that acted as the specialist in the options of 21 common
stocks (December 2000);

o ROBB PECK McCOOEY Financial Services, Inc. (March 2001);

o the assets and operations of an AMEX specialist firm, Cranmer
& Cranmer, Inc. (August 2001);

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o the remaining interest that we did not previously own in the
specialist business conducted as a joint account by us, R.
Adrian & Company, LLC and Freedom Specialist Inc. (September
2001); and

o Bocklet & Company, LLC (October 2001).

o OTHER ACQUISITIONS. In March 2001, we also acquired ITTI , a company
providing front-end order execution, analysis and reporting
solutions for the wholesale securities dealer market.

Our objective is to continue the growth in our revenues and profits by
continuing 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, 2001, we participated in 178 allocation pools for listed
companies and were selected in 87 of them by management of the listed companies.

ACQUISITIONS DURING 2001

INTERNET TRADING TECHNOLOGIES, INC.

On March 13, 2001, we 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. We operated ITTI as a
separate subsidiary until December 31, 2001, when it was merged with and into
our RPM Clearing Corporation subsidiary.

ROBB PECK MCCOOEY FINANCIAL SERVICES, INC.

On March 15, 2001, we acquired ROBB PECK McCOOEY Financial Services, Inc.
("RPM") for approximately 6.9 million shares of our common stock and 100,000
shares of our Series A preferred stock. Each share of our Series A preferred
stock delivered to the former RPM stockholders 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. Approximately 54,500 shares of our
Series A preferred stock issued to the RPM stockholders are currently held in
escrow in order to secure the RPM stockholders' indemnification obligations to
us. In connection with our acquisition of RPM, each formerly outstanding RPM
option was converted into an immediately exercisable option to purchase 98.778
shares of our common stock. We also assumed RPM's liabilities and obligations
under the RPM Deferred Compensation Plan which provides for the payment on or
before December 15, 2007 of approximately $30.2 million, plus interest at 8% per
year, to the former RPM option holders. We also assumed RPM's liabilities and
obligations under RPM's retention bonus pool, which requires the payment of $9.0
million as bonus compensation on March 15, 2004 to as many as 31 former
employees of RPM, subject to certain service requirements.

In connection with the RPM acquisition, we:

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o acquired an additional 27 NYSE memberships, of which 10 were owned
by RPM, pursuant to A-B-C agreements, 15 were leased from third
parties and two seats were owned by RPM employees and contributed to
RPM for its use;

o hired an additional 215 employees, including 120 employees in RPM's
clearing operations and 95 employees in RPM's specialist operations,
of which 27 are specialists and 68 are trading assistants. In
addition, nine former RPM employees became managing directors; and

o acquired an additional 42,300 square feet of office space.

CRANMER & CRANMER, INC.

On August 13, 2001, LaBranche & Co. LLC acquired all the assets relating
to the AMEX stocks and options specialist operations of Cranmer & Cranmer, Inc.
("Cranmer") for an aggregate of approximately $9.2 million, 100,000 shares of
our common stock and an amount equal to the equity capital of Cranmer, including
the net value of Cranmer's open security positions on the closing date of the
acquisition.

FREEDOM SPECIALIST INC, R. ADRIAN & COMPANY, LLC AND LABRANCHE & CO. LLC JOINT
BOOK

On September 20, 2001, LaBranche & Co. LLC acquired the interests in the
Freedom Specialist Inc. ("Freedom"), R. Adrian & Company, LLC ("Adrian") and
LaBranche & Co. LLC Joint Book (the "Joint Book") which it did not previously
own for an aggregate of approximately $13.6 million in cash, 54,750 shares of
our common stock and an amount equal to Freedom's and Adrian's respective shares
of the equity capital of the Joint Book on the closing date of the acquisition.
Simultaneously with this acquisition we transferred the specialist operations of
the Joint Book to our subsidiary LaBranche & Co. LLC.

BOCKLET & COMPANY, LLC

On October 18, 2001, LaBranche & Co. LLC acquired Bocklet & Company, LLC
("Bocklet") for an aggregate of $20.0 million in cash, of which $5.0 million was
paid at the closing, $5.0 million was paid on January 18, 2002 and $5.0 million
is payable on each of April 18, 2002 and July 18, 2002 and 1,100,000 shares of
our common stock. In addition, an amount equal to the equity capital of Bocklet
on the closing date of the acquisition will be paid in three equal installments
of which approximately $1.4 million was paid January 18, 2002 and the remaining
amount will be paid six and nine months from the closing date.

SPECIALIST COMPANIES

As of December 31, 2001, we acted as specialist for 591 common stocks listed on
the NYSE. Our listed companies operate in a variety of industries including
financial services, media, oil and gas, retail, technology and
telecommunications. They range in market capitalization from some of the
smallest on the NYSE to some of its largest and well-known corporations. Of our
NYSE common stock listings, 123 and 69 were foreign listings as of December 31,
2001 and

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December 31, 2000, respectively. As of February 28, 2002, we represented 126
foreign listings on the NYSE. The following is a list of our top 50 listed
companies in terms of market capitalization as of February 28, 2002 in order of
their respective global market capitalization (read in descending order from top
to bottom, left to right):

Exxon Mobil Corporation Wachovia Corporation
GlaxoSmithKline plc Federal Home Loan Mortgage Corp.
Merck & Co., Inc. U.S. Bancorp
SBC Communications Inc. Diageo plc
Philip Morris Companies Inc. Banco Bilbao Vizcaya Argentaria S.A.
HSBC Holdings plc Lowes Companies, Inc.
TOTAL Fina Elf S.A. Enel S.p.A.
Nokia Corporation Schlumberger Limited
Novartis AG PetroChina Company Ltd
Toyota Motor Corporation Koninklijke Philips Electronics N.V.
Bristol-Meyers Squibb Company First Data Corp.
Wells Fargo & Company The News Corporation Limited
Kraft Foods Inc. National Australia Bank Limited
United Parcel Service, Inc. Ford Motor Corp.
Tyco International Ltd. Clear Channel Communications, Inc.
AT&T Corp. ABN Amro Holding N.V.
Taiwan Semiconductor Manufacturing Company Emerson Electric Co.
Medtronic, Inc. Household International, Inc.
Morgan Stanley Dean Witter & Co. United Microelectronics Corporation
Nippon Telegraph and Telephone Corporation AT&T Wireless Group, Inc.
Schering-Plough Corp. Lucent Technologies Inc.
American Express Company Fox Entertainment Group, Inc.
Du Pont (E.I.) de Nemours and Company SunTrust Banks, Inc.
ING Groep N.V. The Kroger Co.
Minnesota Mining & Manufacturing Company Compaq Computer Corporation

OPERATIONS

NYSE RULES GOVERNING OUR SPECIALIST ACTIVITIES

Under 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,

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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 $49.75, and the best public offer (to
sell) on the book is $50.25. A broker who wants to buy 100 shares at the
market in this instance without a specialist would purchase at $50.25, the
offer price. Similarly, a broker seeking to sell 100 shares without a
specialist would receive $49.75, 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
$50.0625 from the specialist, as opposed to buying the same amount of
shares from the best offer of $50.25, 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 $49.75, 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:

o 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.

o 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.

o 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.

o The specialist does not charge commissions for trades in which it
acts as a principal.

o 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.

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o 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 participation by 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, Anthony M. Corso, Alfred O. Hayward, Jr., Robert
M. Murphy and James G. Gallagher. 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
Anthony M. Corso, Alfred O. Hayward, Jr., Robert M. Murphy, John McGraner,
Michael Nichols, Thomas G. McLaughlin and Eugene McCarthy. 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 policies for our firm 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 21 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 on a real-time basis 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

15

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 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, along
with the NYSE, in real-time, on-line systems which give management instant
access to specific trading information at any time during the trading day,
including:

o our aggregate long and short positions;

o the various positions of each of our trading professionals;

o our overall position in a particular stock;

o capital and profit-and-loss information on an aggregate, per
specialist or per issue basis; and

o 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.
Effective January 2, 2001, 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 19 full-time employees 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:

o daily reports on the trading results of their stock;

o real-time data regarding intra-day trading activity in their stock;
and

16

o 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, 2001, 118
NYSE memberships were used or available for use in our business. As of February
28, 2002, our 112 specialists owned or leased NYSE memberships under the
following arrangements:

o 10 memberships were owned directly by 10 of our employees, and we
paid these employees at prevailing market rates for the use of their
memberships;

o 34 were owned by specialists, who acquired their memberships through
financing provided by us pursuant to A-B-C agreements; and

o 68 were leased by specialists from other individual members, and we
pay and guarantee the lease payments.

Additionally, LaBranche & Co. LLC has financed the acquisition of two
additional NYSE memberships that are available for use by its employees. Our
LFSI subsidiary also has financed the acquisition of two NYSE memberships that
are available for use by its employees. Two additional memberships are directly
owned and used by two LFSI employees, and LFSI pays these employees at
prevailing market rates for the use of their memberships.

AMEX OPTIONS SPECIALIST UNIT

In December 2000, we purchased the assets and operations of an AMEX
options specialist unit and, in August 2001, we expanded our AMEX specialist
activities by purchasing the assets and operations of Cranmer, another AMEX
specialist firm. Our AMEX specialist business is conducted by our LaBranche &
Co. LLC subsidiary. As of December 31, 2001 this unit acted as the specialist in
57 stocks and 122 options on the AMEX. As of February 28, 2002 this unit acted
as specialist in 56 stocks and 125 options on the AMEX. In our view, these
acquisitions enhance our commitment to the listed auction market and are
important steps in the implementation of our growth strategy. As of December 31,
2001, eight of the nine AMEX memberships utilized by our AMEX specialist unit
were leased by eight specialist employees of that unit, and one membership was
owned directly by an employee. LaBranche & Co. LLC pays and guarantees the
rental payments due under the leases of AMEX memberships and pays its
employee for the use of his AMEX membership.

17

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. As of February 28, 2002, we
cleared an average of approximately 126,000 principal trades per day. We also
conduct clearing operations involving trades for third parties through our LFSI
subsidiary.

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 a back-up disaster recovery center in New Jersey. The back-up
system operates as a mirror image of our primary computer system in New York
City through a direct connection between the two sites which we utilize to
back-up all data on an hourly basis. We also test both systems on a regular
basis to assure that they are fully operational. Subsequent to the September 11
disaster, our operations group utilized our New Jersey site to clear our
specialist business, as our primary facilities were inaccessible. Due to the
effectiveness of our back-up facility, our operations were not materially
impacted. We are reevaluating our business continuity processes and are
formalizing a comprehensive plan. We also are in the process of securing a
second back-up facility in another New York state location so that all aspects
of our operations are safeguarded from potential business interruption.

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.

CLEARING OPERATIONS

Our LFSI clearing subsidiary provides services to individual and
institutional clients, including traders, professional investors, institutions
and broker-dealers. These services include clearing and custody services,
customer account maintenance and customized data processing services. The use of
new technologies at our LFSI subsidiary has enhanced its ability to handle an
increasing volume of transactions. These technologies allow our LFSI subsidiary
to provide customized and detailed account information and implement
straight-through processing

18

solutions to better serve customers. Before conducting business with a
prospective customer, we review such factors as the prospective customer's
experience in the securities industry, financial condition and personal
background.

Our LaBranche & Co. LLC subsidiary acts as a self-clearing broker-dealer
for our NYSE and AMEX equity specialist business. All trades made in connection
with our NYSE and AMEX equity specialist business are cleared by LaBranche & Co.
LLC.

DIRECT ACCESS BUSINESS

The Institutional Client Group division of our LFSI subsidiary places its
customers in direct contact with the NYSE. Utilizing easy-to-use web-based
technology, this division provides its institutional customers with the choice
of two conduits for sending their order flow directly to the point of sale on
the floor of the NYSE. Orders that require special attention can be sent to one
of this division's licensed floor brokers for customized handling. Otherwise,
customers can send their orders directly to the specialist's order book using
the NYSE's Super-Dot system. The Institutional Client Group division's brokers
take advantage of the NYSE's advanced wireless technology to communicate
directly with its trading customers. By employing the advanced technology, its
customers receive extremely fast trade executions and confirmations. All
customer orders are treated with strict confidentiality and anonymity, allowing
for the best execution with the least market impact. In addition, the
Institutional Client Group division's customers are given all the benefits of
straight-through, seamless trade processing. Our LFSI subsidiary also clears and
delivers the trades directly to its customers' depository accounts.

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 maintained intra-day and not held overnight. During 2001
our five traders focused primarily on stocks listed on the NYSE. In 2001, we
derived 0.3% 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.
Proprietary traders who are employees of LaBranche & Co. LLC are not permitted
to trade in stocks for which we act as specialist. As of January 1, 2002, three
of our proprietary traders became employees of our LFSI subsidiary, and are now
permitted to trade stocks for which we act as specialist.

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 more than
75-year history as a specialist firm and a general overview of the specialist
industry.

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REGULATORY MATTERS

GENERAL

The securities industry in the United States, including all
broker-dealers, is subject to regulation under both federal and state laws. In
addition, the SEC and the NYSE require 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 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 negative 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, 2001, our net capital, as defined by
this rule, was $484.2 million and exceeded minimum requirements by $481.4
million.

The NYSE generally requires its specialist firms to maintain a minimum
dollar regulatory capital amount in order to establish that they can meet, with
their own net liquid assets, their position requirement. Under changes to Rule
104, effective October 30, 2000specialist units that exceed five percent in any
of the NYSE's four concentration measures must 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 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 requires any

20

new specialist entities that result from a merger, acquisition, consolidation or
other combination of specialist entities 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. As of December 31, 2001, LaBranche & Co.
LLC's net liquid asset requirement was $446.0 million, and its actual net liquid
assets were approximately $491.5 million. 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 registered broker-dealers and member firms of the NYSE, our former
subsidiary Henderson Brothers and our RPM Clearing Corporation subsidiary were
also subject to SEC Rule 15c3-1 as adopted and administered by the NYSE and the
SEC. Under the alternative method permitted by this rule, the minimum required
net capital for each of these subsidiaries as of December 31, 2001 was equal to
the greater of $250,000 or 2% of aggregate debit items as defined. As of
December 31, 2001, the combined net capital of these subsidiaries as defined
under SEC Rule 15c3-1 was $20.5 million which exceeded minimum requirements by
$19.7 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.

NEW PROPOSED REGULATORY LEGISLATION

On October 26, 2001, President Bush signed the USA PATRIOT Act, aimed at
giving the government new powers in the war on terrorism. Title III of the new
legislation, the International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001, imposes significant new anti-money laundering
requirements on all financial institutions, including domestic banks and
domestic operations of foreign banks, broker-dealers, futures commission
merchants and investment companies. We do not currently know the full effects of
this legislation, but it will result in additional reporting and disclosure
requirements.

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:

o the strength of our capital base;

o our willingness to commit our own capital and trade for our own
account while conducting our specialist operations; and

o the ancillary services we offer our specialist companies, such as
providing information on the trading activities in their stocks.

The following are the remaining specialist units as of February 28, 2002,
listed in descending order based on number of common stock listings:

21

o LaBranche & Co. LLC

o Spear, Leeds & Kellogg Specialist

o Fleet Meehan Specialists, Inc.

o Wagner Stott Bear Specialists, LLC

o Van Der Moolen Specialists USA

o Performance Specialist Group, LLC

o Susquehanna Specialists, Inc.

o Walter N. Frank & Co. 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 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.

EMPLOYEES

As of December 31, 2001, we had 545 full-time employees, including 53
managing directors. As of February 28, 2002, we had 550 full time employees,
including 63 managing directors with:

o 123 specialists, including 55 managing directors and 11 AMEX options
specialists;

o 245 trading assistants;

o 19 corporate relations department employees;

o 52 clearing operations employees;

o 22 individuals employed as proprietary traders, floor brokers and
registered representatives; and

o 89 management, administration and finance staff, including 8
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.

22

ITEM 2. PROPERTIES.

Our offices are located at One Exchange Plaza, New York, New York, where
we lease approximately 45,000 square feet under three separate leases, with
9,000 square feet expiring in January 2003 and approximately 36,000 square feet
expiring in January 2008. We also lease approximately 45,000 square feet at 120
Broadway, New York, New York, under a lease expiring in March 2006. In addition,
we lease four trading posts on the floor of the NYSE. We lease approximately
21,000 square feet of additional space at locations in New York and New Jersey
under leases expiring between September 2002 and July 2004. We intend to renew
the lease that expires in September 2002. 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.

ITEM 3. LEGAL PROCEEDINGS.

We are not a party to any material legal proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of security holders during the
fourth quarter of our fiscal year ended December 31, 2001.

23

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION AND HOLDERS

Our common stock is quoted on the NYSE under the symbol "LAB." The
following table sets forth the range of high and low closing sales prices for
our common stock on the NYSE for the periods indicated:

As of March 14, 2002, we had approximately 150 stockholders of record of
our common stock and an estimated 4,299 beneficial owners. The closing sale
price of our common stock on March 14, 2002 was $33.30 per share.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. We do not expect to
declare or pay any dividends on our common stock in the foreseeable future, but
instead intend to retain all earnings, if any, to invest in our operations. The
payment of future dividends is within the discretion of our board of directors
and will depend upon our future earnings, if any, our capital requirements,
financial condition and other relevant factors.

In connection with 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

24

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). Dividends on the issued and outstanding shares of
Series A preferred stock are preferred and cumulative and accrue from the date
on which they were originally issued. On February 19, 2002, we repurchased
approximately 28,164 shares of our Series A preferred stock at $1,000 per share
plus accrued and unpaid dividends through the date of purchase, pursuant to a
tender offer commenced on January 18, 2002.

RECENT ISSUANCE OF UNREGISTERED SECURITIES

In connection with our acquisition of the assets and operations of Cranmer
on August 13, 2001 we issued 100,000 shares of our common stock to Cranmer in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933. We subsequently registered these shares for resale in
November 2001.

In connection with our acquisition on September 20, 2001 of the remaining
interest in the Joint Book that we did not already own we issued 54,750 shares
of our common stock to Adrian in reliance on the exemption from registration
contained in Section 4(2) of the Securities Act of 1933.

In connection with our acquisition of Bocklet on October 18, 2001, we
issued 1,100,000 shares of our common stock to the members of Bocklet in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933. We subsequently registered these shares for resale in
November 2001.

25

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The selected consolidated financial data set forth below for the years
ended December 31, 2001, 2000 and 1999 and as of December 31, 2001 and 2000 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 filing. The selected consolidated financial data set forth
below for the years ended December 31, 1998 and 1997 and as of December 31,
1999, 1998 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 filing. 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 filing.

(1) Excludes subordinated liabilities related to contributed exchange
memberships.

QUARTERLY RESULTS (UNAUDITED)

The following represents the firm's unaudited quarterly results for 2001
and 2000. These quarterly results were prepared in accordance with accounting
principles generally accepted in the United States and reflect all adjustments

ITEM 7. 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 FILING. 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 INCLUDING, BUT NOT LIMITED TO THOSE
DISCUSSED IN "RISK FACTORS" ATTACHED HERETO AS EXHIBIT 99.1. OUR ACTUAL RESULTS
COULD DIFFER

27

MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS. 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

Organized in 1999 in connection with the reorganization of LaBranche & Co.
from partnership to corporate form and the related initial public offering of
our common stock, LaBranche & Co Inc. is the sole member of LaBranche & Co. LLC
and the sole stockholder of LFSI. Our subsidiary LaBranche & Co. LLC is one of
the oldest and largest specialist firms on the NYSE, as well as a specialist on
the AMEX. LFSI provides clearing, prime brokerage and execution services to both
individual and institutional clients, including traders, professional investors
and broker-dealers, direct access floor brokerage services. In addition, LFSI
provides front-end order execution systems, analysis and reporting solutions for
the wholesale securities market.

Our business has grown considerably during the past five years. We have
accomplished this growth both internally and through acquisitions. Our revenues
increased from $49.9 million in 1996 to $424.1 million in 2001, representing a
compound annual growth rate of 53.4%. During the same period, we increased the
number of our NYSE common stock listings from 125 to 591.

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 and clearance activities. Net gain on principal
transactions represents trading gains net of trading losses and SEC transaction
fees, and are earned by us when we act as principal buying and selling our
specialist stocks and options. These revenues are primarily affected by changes
in share volume and fluctuations in price of our specialist stocks and options.
Commissions revenue consists primarily of fees we earn when our specialists act
as agents to match buyers and sellers for limit orders executed by us on behalf
of brokers after a specified period of time; we do not earn commissions when we
match market orders. In addition, commissions revenue includes fees charged to
customers for execution and clearance by our clearing subsidiaries, Henderson
Brothers and RPM Clearing Corporation. Other revenue consists of interest
income, fees charged to customers for use of the front-end order execution
system developed by ITTI, proprietary trading revenues and earnings or losses
from investments in a hedge fund and two joint specialist books. For the year
ended December 31, 2001, net gain on principal transactions represented 80.4% of
our total revenues, commissions revenue represented 14.8% of our total revenues,
and other revenue represented 4.8% of our total revenues. The respective
percentages for the prior year were 82.1%, 13.2% and 4.7%.

EXPENSES

Our largest operating expense is employee compensation and related
benefits, which primarily consist of salaries and wages and profitability-based
compensation. Profitability-based

28

compensation includes compensation and benefits paid to managing directors,
trading professionals and other employees based on our profitability.

Prior to our reorganization from partnership to corporate form in August
1999, 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 the interest of LaB Investing Co.
L.L.C., formerly the general partner of LaBranche & Co., 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 related benefits expense. Therefore,
historical income before managing directors' compensation, limited partners'
interest in earnings of subsidiary and provision for income taxes for 1999 and
years prior, understates our operating costs when compared to our present
corporate structure.

REORGANIZATION TRANSACTIONS

In August 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. became a holding corporation whose
assets consisted primarily of ownership interests in LaBranche & Co. and LaB
Investing Co. L.L.C. As of June 30, 2000, LaB Investing Co. L.L.C. was merged
with and into LaBranche & Co. and on the same date, LaBranche & Co. converted
into a limited liability company and changed its name to LaBranche & Co. LLC. As
a result, LaBranche & Co Inc. became, and continues to be, the sole member of
our specialist subsidiary, LaBranche & Co. LLC.

As of December 31, 2001 our Henderson Brothers and ITTI subsidiaries were
merged with and into our RPM Clearing Corporation subsidiary. RPM Clearing
Corporation then changed its name to LFSI in January 2002, of which LaBranche &
Co Inc. is the sole shareholder.

INCOME TAXES

As a partnership, we were 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.

29

COMPLETED ACQUISITIONS

On March 13, 2001, we acquired all the outstanding capital stock of ITTI,
a company that provides front-end order execution systems, analysis and
reporting solutions for the wholesale securities dealer market. The results of
the operations of ITTI have been included in our financial statements since
March 14, 2001. The excess of purchase price over fair value of net tangible
assets of approximately $4.3 million was allocated to goodwill.

On March 15, 2001, we acquired RPM for an aggregate of approximately 6.9
million shares of our common stock and 100,000 shares of nonconvertible Series A
preferred stock. In addition, each formerly outstanding RPM option was converted
into an immediately exercisable option to purchase 98.778 shares of our common
stock. The adjusted excess of purchase price over fair value of net tangible
assets of approximately $434.7 million was allocated to specialist stock list
and goodwill. The results of the operations of RPM have been included in our
financial statements since March 16, 2001. 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 $16.2 million for the year
ended December 31, 2001.

On August 13, 2001, LaBranche & Co. LLC acquired all the assets relating
to the AMEX stocks and options specialist operations of Cranmer for an aggregate
of approximately $9.2 million, 100,000 shares of our common stock and an amount
equal to the equity capital of Cranmer, including the net value of Cranmer's
open security positions on the closing date of the acquisition. The excess of
purchase price over fair value of net tangible assets of approximately $14.0
million was allocated to specialist stock list and goodwill. The results of the
AMEX specialist operations formerly conducted by Cranmer have been included in
our consolidated financial statements since August 14, 2001.

On September 20, 2001, LaBranche & Co. LLC acquired the interests in the
Joint Book which it did not previously own for an aggregate of approximately
$13.6 million in cash, 54,750 shares of our common stock and an amount equal to
Freedom's and Adrian's respective shares of the equity capital of the Joint Book
on the closing date of the acquisition. The excess of purchase price over fair
value of net tangible assets of approximately $15.0 million was allocated to
specialist stock list and goodwill. The results of the operations formerly
conducted by the Joint Book in which we previously did not own an interest have
been included in our consolidated financial statements since September 21, 2001.

On October 18, 2001, LaBranche & Co. LLC acquired Bocklet for an aggregate
of $20.0 million in cash, of which $5.0 million was paid at the closing,$5.0
million was paid on January 18, 2002 and $5.0 million is payable on each of
April 18, 2002 and July 18, 2002 and 1,100,000 shares of our common stock. In
addition, an amount equal to the equity capital of Bocklet on the closing date
of the acquisition will be paid in three equal installments of which
approximately $1.4 million was paid January 18, 2002 and the remaining amount
will be paid six and nine months from the closing date. The excess of purchase
price over fair value of net tangible assets of approximately $53.4 million was
allocated to specialist stock list and goodwill. The results of

30

the operations formerly conducted by Bocklet have been included in our financial
statements since October 19, 2001.

RECENT DEVELOPMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
addresses financial accounting and reporting for goodwill and other intangible
assets acquired in a business combination, requiring that the purchase method of
accounting be used in all business combinations initiated after June 30, 2001.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets acquired individually or with a group of assets. The
statement provides that intangible assets with indefinite useful lives will no
longer be amortized, effective for fiscal years beginning after December 15,
2001 for intangible assets existing at June 30, 2001 or effective immediately
for intangible assets acquired after June 30, 2001. Rather, these assets will be
tested at least annually for impairment by applying a fair-value based test. In
addition, intangible assets with finite useful lives continue to be amortized
over their useful lives, which are no longer limited to 40 years. The provisions
of SFAS No. 142 are effective for fiscal years beginning after December 15,
2001. Accordingly, commencing January 2002, we will cease amortization of
recorded goodwill and intangible assets with indefinite useful lives and the
amortization expense for these intangible assets will no longer be included in
our results of operations. We do not anticipate incurring any impairment charges
upon implementation of SFAS No. 142. However, it is possible that in the future,
after periodic testing, we may incur impairment charges related to the carrying
value of goodwill and intangible assets recorded in our financial statements.

In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We
do not believe the implementation of SFAS No. 144 will have a material impact on
our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

All of our principal securities transactions and the related revenues and
expenses are recorded on a trade date basis. Customer securities transactions
and the related revenues and expenses are recorded on a settlement date basis,
which does not differ materially from 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.

Our balance sheet contains significant intangible assets. These intangible
assets are comprised of our specialist stock lists, trade name and goodwill
acquired in connection with our various acquisitions and the limited partner
buyout that occurred in connection with our reorganization from partnership to
corporate form in August 1999. The specialist stock lists and trade name are
being amortized on a straight-line basis over 15 to 40 years and the goodwill is
being amortized on a straight-line basis over 15 years. The allocations of
purchase price and determinations of useful lives were based upon independent
appraisals for all acquisitions

31

through March 2001. In addition, the useful lives of the acquired specialist
stock lists were determined based upon analysis of historical turnover
characteristics of the specialist stocks comprising these lists. For
acquisitions subsequent to March 2001, the allocations of purchase price and
determinations of useful lives were based upon management analysis of revenues,
consideration paid, common stock listings as well as other relevant data and
ratios. This information was analyzed and compared to the results of the
independent appraisals conducted on acquisitions prior to March 2001.

As discussed under "Recent Accounting Pronouncements", with the
implementation of SFAS No. 142 we will no longer amortize goodwill and
intangible assets with indefinite useful lives, which includes goodwill and
trade name. Application of the non-amortization provisions of SFAS No. 142 is
currently expected to result in an increase in results from operations of
approximately $28.2 million. Commencing 2002, we will perform periodic
impairment tests on these assets to determine if there is a need to write them
down. We do not anticipate incurring any impairment charges upon implementation
of SFAS No. 142, but it is possible that in the future the carrying value of our
goodwill and intangible assets may be reduced.

REPURCHASE OF OUR PREFERRED STOCK

On January 18, 2002, we offered to repurchase up to 30,000 shares of our
outstanding Series A preferred stock for $1,000 per share, plus accrued and
unpaid dividends up to but not including the date of purchase. On February 15,
2002, the offer expired, and on February 19, 2002, we purchased all the
approximately 28,164 shares that had been tendered for approximately $28.5
million, including accrued but unpaid dividends. As a result of the purchase, we
recorded a one-time expense due to the acceleration of the discount accretion on
the shares purchased of approximately $1.5 million.

TRUST DECS OFFERING

On February 8, 2002, certain managing directors of LaBranche & Co. LLC
entered into prepaid forward contracts with DECS Trust IX, a statutory business
trust , pursuant to which the trust agreed to purchase from the participating
managing directors, on a date which is expected to be February 8, 2005 , an
aggregate of 3,800,000 shares of our common stock owned by these managing
directors, subject to the terms and conditions set forth in the contracts. The
trust concurrently sold 3,800,000 trust securities , known as DECS, to
investors. We did not receive, nor will we receive, any portion of the proceeds
from the sale of shares pursuant to the contracts or from the sale of the DECS.
The participating managing directors bore responsibility for payment of the
expenses incurred by them in connection with this transaction.

RESULTS OF OPERATIONS

The following table sets forth the statement of operations data for the
years indicated as a percentage of total revenues:

32

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

REVENUES

Total revenues increased 23.0% to $424.1 million for 2001, from $344.8
million for 2000, principally due to the increase in revenue from net gain on
principal transactions. Net gain on principal transactions increased 20.5% to
$340.8 million for 2001, from $282.9 million for 2000. This increase was due to
the RPM, Joint Book and Bocklet acquisitions in March, September and October
2001, respectively, as a result of which we became the specialist for 218
additional common stock listings. In addition, increased share volume in
principal trading in our specialist stocks traded on the NYSE also contributed
to the increase in revenue. Our share volume as principal increased 51.1% to
27.2 billion shares for 2001, from 18.0 billion shares for 2000.

Commissions revenue increased 38.5% to $62.9 million for 2001, from $45.4
million for 2000. This increase was primarily due to an increase in commissions
and clearance revenue earned by our Henderson Brothers and RPM Clearing
Corporation subsidiaries. The share volume executed by us as agent in our
specialist stocks increased 10.7% to 6.2 billion shares for 2001, from 5.6
billion shares for 2000. Despite the increase in share volume, competitive price
pressures within the marketplace mitigated the increases in our clearance
revenue.

Other revenue increased 24.2% to $20.5 million for 2001, from $16.5
million for 2000. This increase was primarily due to the revenues earned by our
ITTI and RPM Clearing Corporation subsidiaries, as well as an increase in our
interest income due to the investment of

33

additional funds. These gains were offset by losses incurred by our investments
in a hedge fund, joint trading books as well as other non-marketable
investments.

EXPENSES

Total expenses before managing directors' compensation, limited partners'
interest in earnings of subsidiary and provision for income taxes increased
50.1% to $267.4 million for 2001 from $178.2 million in 2000.

Employee compensation and related benefits increased 24.8% to $110.8
million for 2001, from $88.8 million for 2000. This increase was due to the RPM,
Bocklet and other 2001 acquisitions , which increased our average headcount for
the year by approximately 226 individuals. As a percentage of total revenues,
employee compensation increased to 26.1% of total revenues for 2001, from 25.7%
of total revenues for 2000.

Interest expense increased 24.1% to $52.0 million for 2001, from $41.9
million for 2000. This increase was primarily due to the assumption of
approximately $17.4 million and $9.0 million of promissory notes and secured
demand notes, respectively, in connection with the RPM acquisition. As of
December 31, 2001, approximately $14.1 million of the promissory notes were
outstanding as the result of scheduled repayments throughout the year. The
issuance of $16.4 million of subordinated indebtedness in connection with the
Bocklet acquisition also contributed to the increase. In addition, the increase
was due to a full year of interest expense on $250.0 million of indebtedness,
incurred in connection with the Henderson Brothers and Webco acquisitions. As a
percentage of total revenues, interest expense increased to 12.3% of total
revenues for 2001, from 12.2% of total revenues for 2000.

Depreciation and amortization of intangibles expense increased 113.5% to
$39.5 million for 2001, from $18.5 million for 2000. Amortization of intangibles
increased as a result of the $434.7 million of intangible assets recorded as a
result of our acquisition of RPM. As a percentage of total revenues,
depreciation and amortization of intangibles expense increased to 9.3% of total
revenues for 2001, from 5.4% of total revenues for 2000.

Exchange, clearing and brokerage fees expense increased 339.2% to $22.4
million for 2001, from $5.1 million for 2000. This increase was primarily due to
a new NYSE allocation fee, requiring specialist firms to share the cost of newly
allocated listings on the NYSE, an increase in NYSE regulatory fees based on
exchange seat use, an increase in exchange and brokerage fees related to our
expanded execution and clearing business and an increase in trading volumes as a
result of the RPM, Bocklet and other 2001 acquisitions. As a percentage of total
revenues, exchange, clearing and brokerage fees expense increased to 5.3% of
total revenues for 2001, from 1.5% of total revenues for 2000.

Lease of exchange memberships expense increased 88.1% to $20.5 million for
2001, from $10.9 million for 2000. This increase was due to the increase in the
number of our NYSE leased memberships from 50 to 80, and to an increase in the
average annual leasing cost of a membership from approximately $276,000 to
$312,000. In addition, we also leased eight AMEX seats during 2001 as a result
of the Cranmer acquisition. As a percentage of total revenues lease

34

of exchange memberships expense increased to 4.8% of total revenues for 2001,
from 3.2% of total revenues for 2000.

Legal and professional fees increased 163.2% to $5.0 million for 2001,
from $1.9 million for 2000. This increase was primarily the result of
professional fees incurred by our acquired subsidiaries ITTI and RPM Clearing
Corporation, as well as an increase in legal, accounting and other professional
fees in our existing businesses.

Communications expense increased 220.0% to $4.8 million for 2001, from
$1.5 million for 2000. This increase was primarily the result of additional
telephone, data retrieval and informational services utilized due to the growth
of our business.

Occupancy expense increased 200.0% to $3.9 million for 2001, from $1.3
million for 2000. This increase was primarily the result of additional leased
office space acquired in connection with the RPM acquisition as well as the
general expansion of our business.

Other expenses increased 2.4% to $8.5 million for 2001, from $8.3 million
for 2000. This increase was primarily due to an increase in advertising and
promotional costs, and increased charitable contributions.

INCOME BEFORE MANAGING DIRECTORS' COMPENSATION, LIMITED PARTNERS' EARNINGS IN
INTEREST OF SUBSIDIARY AND PROVISION FOR INCOME TAXES

Income before managing directors' compensation, limited partners' interest
in earnings of subsidiary and before provision for income taxes decreased 5.9%
to $156.7 million for 2001, from $166.6 million for the same period in 2000.
This decrease was primarily due to an increase in employee compensation and
related benefits expense, depreciation and amortization of intangibles,
exchange, clearing and brokerage fees and other expenses as a result of our
acquisitions in 2001, which was offset by an increase in revenues as a result of
those acquisitions.

INCOME TAXES

Provision for income taxes increased 0.5 % to $85.1 million for 2001, from
$84.7 million for 2000, due to an increase in nondeductible amortization of
intangibles -- despite a decrease in income before provision for income taxes.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUES

Total revenues increased 71.5% to $344.8 million for 2000, from $201.0
million for 1999, principally due to the increase in revenue from net gain on
principal transactions. Net gain on principal transactions increased 87.4% to
$282.9 million for 2000, from $151.0 million for 1999. This increase was
primarily due to the Henderson Brothers and Webco acquisitions in March 2000, 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
specialist stocks traded on

35

the NYSE. Our share volume as principal increased 87.5% to 18.0 billion shares
for 2000, from 9.6 billion shares for 1999.

Commissions revenue increased 22.0% to $45.4 million for 2000, from $37.2
million for 1999. This increase was primarily due to the increase in the number
of our common stock listings as a result of the Henderson Brothers and Webco
acquisitions and to increased share volume in our specialist stocks traded on
the NYSE in which we acted as agent. The share volume executed by us as agent in
our specialist stocks increased 36.6% to 5.6 billion shares for 2000, from 4.1
billion shares for 1999.

Other revenue increased 28.9% to $16.5 million for 2000, from $12.8
million for 1999. This increase was primarily due to an increase in our interest
income, which was also offset by a decrease in our proprietary trading revenues
and other investments.

EXPENSES

Total expenses before managing directors' compensation, limited partners'
interest in earnings of subsidiary and provision for income taxes increased
167.6% to $178.2 million for 2000 from $66.6 million for 1999.

Employee compensation and related benefits increased 158.9% to $88.8
million for 2000, from $34.3 million for 1999. This increase was primarily due
to the inclusion of managing directors' salary, incentive-based compensation and
related benefits in employee compensation subsequent to our reorganization, and
due to the Henderson Brothers and Webco acquisitions that resulted in our
employment of 97 additional individuals as of the respective acquisition dates.
As a percentage of total revenues, employee compensation increased to 25.7% of
total revenues for 2000, from 17.0% of total revenues for 1999.

Interest expense increased 404.8% to $41.9 million for 2000, from $8.3
million for 1999. This increase was primarily 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. In addition, the
increase was due to the issuance of $116.4 million of indebtedness, in
connection with our reorganization, that began accruing interest from August 24,
1999. As a percentage of total revenues, interest increased to 12.2% of total
revenues for 2000, from 4.1% of total revenues for 1999.

Depreciation and amortization of intangibles expense increased 262.8% to
$18.5 million for 2000, from $5.1 million for 1999. Amortization of intangibles
increased as a result of the $233.7 million of intangible assets recorded as a
result of our acquisition of Henderson Brothers and Webco and incurring a full
year of amortization of intangibles in 2000 related to the redemption of limited
partnership interest in 1999. As a percentage of total revenues, depreciation
and amortization of intangibles increased to 5.4% of total revenues for 2000,
from 2.5% of total revenues for 1999.

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.

36

Exchange, clearing and brokerage fees expense increased 41.7% to $5.1 million
for 2000, from $3.6 million for 1999. This increase was primarily due to the
increased trading volumes as a result of the Henderson Brothers and Webco
acquisitions.

Lease of exchange memberships expense increased 29.8% to $10.9 million for
2000, from $8.4 million for 1999. This increase was due to the increase in the
number of leased memberships from 44 to 50, and was also due to an increase in
the average annual leasing cost of a membership from approximately $192,000 to
$276,000. As a percentage of total revenues, however, lease of exchange
memberships decreased to 3.2% of total revenues for 2000, from 4.2% of total
revenues for 1999.

Legal and professional fees increased 18.8% to $1.9 million for 2000, from
$1.6 million for 1999. This increase was primarily the result of increased legal
and filing fees associated with various filings and acquisitions.

Communications expense increased 25.0% to $1.5 million for 2000, from $1.2
million for 1999. This increase was primarily the result of additional
telephone, data retrieval and informational services utilized due to the growth
of our business.

Occupancy expense increased 30.0% to $1.3 million for 2000, from $1.0
million for 1999. This increase was primarily the result of the leasing of
additional office space due to the Henderson Brothers and Webco acquisitions.

Other expenses increased 176.7% to $8.3 million for 2000, from $3.0
million for 1999. This increase was primarily due to additional fees incurred in
connection with the increase and extension of our line-of-credit with a U.S.
commercial bank, increased charitable contributions, 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, limited partners' interest
in earnings of subsidiary and before provision for income taxes increased 23.9%
to $166.6 million for 2000, from $134.5 million for the same period in 1999.
This increase was primarily due to the additional revenues generated by the
Henderson Brothers and Webco acquisitions which was offset by the inclusion of
managing directors' salary and incentive-based compensation in employee
compensation and related benefits and the additional interest and amortization
of intangibles expense as a result of the acquisitions.

INCOME TAXES

Provision for income taxes increased 254.4% to $84.7 million for 2000,
from $23.9 million for 1999, as a result of a full year of federal, state and
local income taxes to which we are subject as a result of our reorganization
from partnership to corporate form in 1999 and our increased profitability.

37

LIQUIDITY

As of December 31, 2001, we had $2,000.8 million in assets, of which
$189.5 million consisted of cash and short-term investments primarily in
government obligations and commercial paper maturing within three months, cash
and securities segregated under federal regulations and overnight repurchase
agreements. As of December 31, 2000, we had $1,004.1 million in assets, of which
$287.6 million consisted of cash and short-term investments primarily in
commercial paper maturing within three months and overnight repurchase
agreements.

In January 2001, LaBranche & Co. LLC extended our $200.0 million
line-of-credit with a U.S. commercial bank until February 1, 2002 and extended
it again in February 2002 until February 27, 2003. Amounts outstanding under the
U.S. commercial bank credit facility would be secured by our inventory of
specialist stocks and bear interest at the U.S. commercial bank's broker loan
rate. To date, we have not utilized this facility. In order to maintain the
availability of funds under this credit facility, we must comply with certain
customary covenants.

As of December 31, 2001 and 2000, the subordinated indebtedness of
LaBranche & Co. LLC aggregated $66.0 million and $41.9 million (excluding
subordinated liabilities related to contributed exchange memberships),
respectively. The $66.0 million of outstanding subordinated indebtedness of
LaBranche & Co LLC on December 31, 2001 consisted of the following:

o $35.0 million in senior subordinated notes,

o $20.0 of which were privately placed pursuant to note purchase
agreements, mature on September 15, 2002 and bear interest at
an annual rate of 8.17%, payable on a quarterly basis; and

o $15.0 million of which were privately placed pursuant to note
purchase agreements, mature on June 3, 2008 and bear interest
at an annual rate of 7.69%, payable on a quarterly basis.

o $31.0 million in junior subordinated notes,

o $8.0 million of which were issued to former limited partners,
family members of former employees and former equity owners of
Bocklet and their respective family members. These notes
mature on varying dates between the second half of 2002 and
the first half of 2003 and bear interest at annual rates
between 8.0% and 10.0%, payable on a quarterly basis;

o $9.0 million in secured demand note obligations which were
assumed by LaBranche & Co. LLC in connection with our
acquisition of RPM, $1.0 million matures in April 2003 and
$8.0 million matures in June 2003 and bear interest at
adjusting variable rates, payable monthly; and

o $14.0 million in secured demand note obligations to two former
members of Bocklet, which were incurred in connection with our
acquisition of

38

Bocklet, bear interest at an annual rate of 10% and mature in
October 2002.

The junior subordinated notes have automatic rollover provisions , which
extend the maturities for an additional year, unless the lender provides at
least seven months' advance notice prior to maturity. LaBranche & Co. LLC is
also entitled to prepay the junior subordinated notes and the secured demand
note obligations without penalty under the terms of the agreements relating
thereto.

As of December 31, 2001, we had an aggregate of $14.1 million
ofindebtedness outstanding, which we had assumed in connection with the RPM
acquisition and which consisted of:

o $3.0 million in subordinated notes issued to family members of
former employees of RPM maturing between the first half of 2002 and
the first half of 2006 and bearing interest at an annual rate of
between 9.0% and 12.5%, payable on a quarterly basis;
o a $295,000 promissory note which 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, and which bears
interest at an annual rate of 9.0% payable on a quarterly basis;
o $8.5 million in promissory notes issued to former RPM employees and
their family members. These notes are payable in equal annual
installments on the anniversaries of issuance, mature between the
second half of 2002 and the first half of 2005, and bear interest at
annual rates ranging from 8.0% to 12.0%, payable on a quarterly
basis; and
o $2.3 million in notes representing deferred compensation owed to
former RPM employees. These notes are payable in equal annual
installments on the anniversaries of issuance, mature between the
second half of 2002 and the second half of 2004 and bear interest at
annual rates ranging from 9.5% to 10.0%payable on a quarterly basis.

In connection with our acquisition of RPM, we issued 100,000 shares of our
nonconvertible Series A preferred stock to the former stockholders of RPM. Each
outstanding share of our Series A preferred stock entitles the holder to
cumulative preferred cash dividends at an annual rate of 8% 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), with the first payment made on July 1, 2001. Dividends on the
issued and outstanding shares of Series A preferred stock are preferred and
cumulative and accrue daily from the date on which they were originally issued.
On January 18, 2002, we offered to repurchase up to 30,000 shares of our
outstanding Series A preferred stockfor $1,000 per share, plus accrued and
unpaid dividends up to but not including the date of purchase. On February 15,
2002, the offer expired, and on February 19, 2002 we

39