** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C.20549

** **

**FORM10-K/A**

**(AmendmentNo. 1)**

 

| **ý** | ** ** | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                             |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                  |
|       |       | **for the fiscal year ended December 31, 2004**                                                                                                                                                                                                                                                                                       |
|       |       | ** **                                                                                                                                                                                                                                                                                                                            |
| **or**     | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                            |
| **o**      | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of   1934**                                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                  |
|       |       | **for the transition period from                        to                        .** |

 

**Commission file number:  001-15251**

 

**LaBRANCHE & CO INC.**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Delaware**                                                    | ** ** | **13-4064735**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**One Exchange Plaza, New York, NewYork 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý    No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2.  Yes  ý    No o

 

 

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**Explanatory Note:**

 

LaBranche & Co Inc. (the “Company”) is filing this Amendment to itsAnnual Report on Form 10-K filed with the Securities and Exchange Commission onMarch 16, 2005 (the “Original Report”) solely to revise Item 6. “SelectedFinancial Data” on page 34 of the Original Report and the first paragraph ofthe “Executive Overview” section of Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” on page 35 of theOriginal Report in order to (i) reflect the correct amount of our pro forma netincome available to common stockholders for the full year 2004, which excludes theLava sale and the charges for exchange membership impairment, debt repurchase,goodwill impairment and acceleration of preferred stock discount accretion, as$16.5 million, or $0.27 per diluted share, rather than $16.7 million, or $0.28per diluted share, as reflected in the Original Report, and (ii) provide areconciliation of this non-GAAP financial information to the Company’s reportedresults under U.S. GAAP, which was inadvertently omitted from the OriginalReport. The Company previously furnished this required reconciliation ofnon-GAAP financial information to U.S. GAAP results in its report on Form 8-Kdated January 21, 2005 in connection with its issuance of a press releaseannouncing its financial results for the fourth quarter and full year endedDecember 31, 2004.  The reconciliation includedherein also corrects an error included in the previously furnishedreconciliation. No other changes in the Original Report are being made by meansof this filing.

 

2

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**PART II**

 

# **Item 6.**                                   SELECTED FINANCIAL DATA.

# ** **

The selected financial data set forth below for theyears ended December 31, 2004, 2003 and 2002 and as of December 31,2004, 2003 and 2002 have been derived from our consolidated financialstatements, which have been audited by KPMG LLP, independent auditors, and areincluded elsewhere in this annual report. The selected financial data set forthbelow for the years ended December 31, 2001 and 2000 and as ofDecember 31, 2001 and 2000 have been derived from our consolidatedfinancial statements, audited by Arthur Andersen LLP, independent publicauditors, which are not included elsewhere in this annual report. The selectedfinancial data set forth below should be read in conjunction with theconsolidated financial statements and related notes thereto and with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”which are included elsewhere in this filing.

 
| ** **                                                                       | ** ** | **For Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **(000’s omitted)**                                                         | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **STATEMENT  OF OPERATIONS DATA:**                                               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                        |       |                            |       |   |   |   |   |   |   |   |   |
| Net gain on  principal transactions                                              |       | $                               | 182,535    |   | $ | 202,207 |   | $ | 342,400 |   | $ | 340,795 |   | $ | 282,948 |   |
| Commissions                                                                      |       | 96,045                          |       | 94,443 |   | 92,044 |   | 62,866 |   | 45,381 |   |
| Realized gain  from sale of Lava investment                                      |       | 24,900                          |       | — |   | — |   | — |   | — |   |
| Other                                                                            |       | 15,567                          |       | 9,339 |   | 18,401 |   | 20,469 |   | 16,480 |   |
| Total revenues                                                                   |       | 319,047                         |       | 305,989 |   | 452,845 |   | 424,130 |   | 344,809 |   |
|                                                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Expenses:                                                                        |       |                            |       |   |   |   |   |   |   |   |   |
| Employee  compensation and benefits                                              |       | 99,310                          |       | 99,123 |   | 131,511 |   | 110,832 |   | 88,759 |   |
| Interest                                                                         |       | 63,789                          |       | 48,188 |   | 48,589 |   | 52,049 |   | 41,893 |   |
| Restitution and  fines                                                           |       | —                          |       | 63,519 |   | — |   | — |   | — |   |
| Goodwill  impairment                                                             |       | 37,600                          |       | 170,302 |   | — |   | — |   | — |   |
| Exchange  memberships impairment                                                 |       | 18,327                          |       | 515 |   | — |   | — |   | — |   |
| Debt repurchase  premium                                                         |       | 49,029                          |       | — |   | — |   | — |   | — |   |
| Other                                                                            |       | 106,461                         |       | 109,416 |   | 106,621 |   | 104,538 |   | 47,580 |   |
| Total expenses                                                                   |       | 374,516                         |       | 491,063 |   | 286,721 |   | 267,419 |   | 178,232 |   |
|                                                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Income (loss)  before minority interest and provision (benefit) for income taxes |       | $                               | (55,469    | ) | $ | (185,074 | ) | $ | 166,124 |   | $ | 156,711 |   | $ | 166,577 |   |
|                                                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Net income  (loss)                                                               |       | $                               | (43,780    | ) | $ | (179,389 | ) | $ | 87,226 |   | $ | 71,587 |   | $ | 81,923 |   |

 

3

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| ** **                       | ** ** | **As of December 31,** | ** ** |
|----------------------------------|------------|------------------------|------------|
| **(000’s omitted)**         | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **BALANCE  SHEET DATA:**         |       |                   |       |   |   |   |   |   |   |   |   |
| Total assets                     |       | $                      | 2,055,097  |   | $ | 1,963,090 |   | $ | 1,912,802 |   | $ | 2,000,837 |   | $ | 1,004,122 |   |
| Total long term  obligations (1) |       | 498,733                |       | 275,891 |   | 383,233 |   | 429,205 |   | 397,828 |   |
| Stockholders’  equity       |       | $                      | 692,986    |   | $ | 772,964 |   | $ | 989,688 |   | $ | 928,358 |   | $ | 370,901 |   |

 

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(1)                                  Includesobligations under our subordinated debt (excluding those related to contributedexchange memberships).

 
| ** **                           | ** ** | **For Year Ended December 31,** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **COMMON  SHARE DATA:**              |       |                            |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per  share (diluted) |       | $                               | (0.77      | ) | $ | (3.08 | ) | $ | 1.34 |   | $ | 1.13 |   | $ | 1.69 |   |
| Cash dividends  declared per share   |       | —                          |       | $ | 0.24 |   | — |   | — |   | — |   |
|                                      |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

# ** **

The following schedule provides a reconciliation ofour U.S. GAAP results to pro forma results for the periods presented. In evaluating our financialperformance, we review operating results from operations, which excludesnon-operating charges and other non-recurring items.  Pro forma earnings (loss) per share is anon-GAAP performance measure, but we believe that it is useful to assistinvestors in gaining an understanding of the trends and operating results forour core business.  Pro forma earnings(loss) per share should be viewed in addition to, and not in lieu of, ourreported results under U.S. GAAP.

 
| ** **                                                                       | ** ** | **For Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| **(000’s omitted)**                                                         | ** ** | **2004**                        | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| **OTHER  DATA —Reconciliation:**                                            |       |                            |       |   |   |   |   |   |   |   |   |
| Total revenues                                                                   |       | $                               | 319,047    |   | $ | 305,989 |   | $ | 452,845 |   | $ | 424,130 |   | $ | 344,809 |   |
| Less: Lava realized gain (1)                                                     |       | (24,900                         | )          | — |   | — |   | — |   | — |   |
| Pro forma  revenues                                                              |       | 294,147                         |       | 305,989 |   | 452,845 |   | 424,130 |   | 344,809 |   |
|                                                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Total expenses                                                                   |       | 374,516                         |       | 491,063 |   | 286,721 |   | 267,419 |   | 178,232 |   |
| Less:                                                                            |       |                            |       |   |   |   |   |   |   |   |   |
| Restitution and fines (2)                                                        |       | —                          |       | (63,519 | ) | — |   | — |   | — |   |
| Goodwill impairment (3)                                                          |       | (37,600                         | )          | (170,302 | ) | — |   | — |   | — |   |
| Exchange memberships impairment (4)                                              |       | (18,327                         | )          | (515 | ) | — |   | — |   | — |   |
| Debt repurchase premium and related costs (5)                                    |       | (55,858                         | )          | — |   | — |   | — |   | — |   |
| Acceleration of discount on preferred stock  repurchase (6)                 |       | (496                            | )          | — |   | — |   | — |   | — |   |
| Pro forma expenses                                                               |       | 262,235                         |       | 256,727 |   | 286,721 |   | 267,419 |   | 178,232 |   |
|                                                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Income (loss) before minority interest and provision (benefit) for  income taxes |       | (55,469                         | )          | (185,074 | ) | 166,124 |   | 156,711 |   | 166,577 |   |
| Minority interest                                                                |       | 356                             |       | 322 |   | — |   | — |   | — |   |
| Income (loss) before provision (benefit)  for income taxes                  |       | (55,825                         | )          | (185,396 | ) | 166,124 |   | 156,711 |   | 166,577 |   |
| Effect of pro forma adjustments                                                  |       | 87,381                          |       | 234,336 |   | — |   | — |   | — |   |
| Pro forma income before provision for  income taxes                         |       | 31,556                          |       | 48,940 |   | 166,124 |   | 156,711 |   | 166,577 |   |
|                                                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Provision (benefit) for income taxes                                             |       | (12,045                         | )          | (6,007 | ) | 78,898 |   | 85,124 |   | 84,654 |   |
| Tax effect of pro forma adjustments                                              |       | 24,800                          |       | 28,634 |   | — |   | — |   | — |   |
| Pro forma provision for income taxes                                             |       | 12,755                          |       | 22,627 |   | 78,898 |   | 85,124 |   | 84,654 |   |
|                                                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Net income (loss) applicable to common stockholders                              |       | (46,033                         | )          | (183,403 | ) | 80,285 |   | 64,115 |   | 81,923 |   |
| Net effect of pro forma adjustment                                               |       | 62,581                          |       | 205,702 |   | — |   | — |   | — |   |
| Pro forma net income available to common stockholders                            |       | $                               | 16,548     |   | $ | 22,299 |   | $ | 80,285 |   | $ | 64,115 |   | $ | 81,923 |   |
|                                                                             |       |                            |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per share:                                                       |       |                            |       |   |   |   |   |   |   |   |   |
| Diluted                                                                          |       | $                               | (0.77      | ) | $ | (3.08 | ) | $ | 1.34 |   | $ | 1.13 |   | $ | 1.69 |   |
| Net effect of pro forma adjustments                                              |       | 1.04                            |       | 3.45 |   | — |   | — |   | — |   |
| Diluted—pro forma                                                           |       | $                               | 0.27       |   | $ | 0.37 |   | $ | 1.34 |   | $ | 1.13 |   | $ | 1.69 |   |

 

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(1)   Reflects the gain on sale of our investmentin Lava Trading Inc.

(2)   Reflects the previously-disclosedregulatory settlement.

(3)   Relates to the write-down of thecarrying value of our goodwill to reflect the results of our goodwillimpairment evaluation under SFAS No. 142.

(4)   Reflectsthe write-down to our estimate of the fair value of our NYSE and AMEX exchangememberships.

(5)   Reflectsexpenses and the premium paid related to our repurchase of a substantialportion of our previously outstanding $100.0 million Senior Notes and $250.0million Senior Subordinated Notes.

(6)   Representsthe acceleration of the discount accretion on the remaining Series B preferredstock repurchased by us.

 

# **Item 7.**                                   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.

# ** **

*You should read the following discussion of ourfinancial condition and results of operations together with the financialstatements and the notes to such statements included elsewhere in this annualreport. This discussion contains forward-looking statements based on ourcurrent expectations, assumptions, estimates and projections about us and ourindustry. These forward-looking statements involve risks and uncertainties including,but not limited to those discussed in “Risk Factors” set forth in Item 1 ofthis annual report. Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of certain factors.We undertake no obligation to update publicly any forward-looking statementsfor any reason, even if new information becomes available or other events occurin the future.*

** **

## **Executive Overview**

## ** **

For the year ended December31, 2004, we reported a loss of $46.0 million, or $0.77 per share, which includeda $24.9 million gain on the sale of our investment in Lava Trading, Inc., anexchange membership impairment charge of $18.3 million, a debt repurchasecharge of $55.9 million, a goodwill impairment charge of $37.6 million and apreferred stock discount accretion charge of $0.5 million.Excluding the Lava sale and the exchangemembership impairment, debt repurchase, goodwill impairment charges andpreferred stock discount accretion, our net income available to common stockholders for the fullyear 2004 was $16.5 million, or $0.27 per diluted share. See Item 6. “SelectedFinancial Data – Other Data” for a reconciliation of these non-GAAP pro-formaresults to our reported U.S. GAAP results.

 

The key drivers thatcontributed to the decreased revenues at our NYSE equity specialist subsidiaryfor 2004 included declining principal share volume and dollar value traded,lower market volatility and an increasing rate of program trading as apercentage of total trading

 

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volumeon the NYSE. The decline in market volatility and rise in program tradingresulted in fewer market imbalances, which lowered our rate of capitalparticipation. Although this caused a 19.3% decrease in principal tradingrevenues at our LaBranche & Co. LLC subsidiary in 2004 versus 2003, our LSPand LSPS subsidiaries’ principal trading revenues grew 95.3% through expansioninto new marketplaces and diversification of its specialist and market-makingproduct offerings.

 

Throughout 2004, wecontinued to improve operational efficiencies by reducing headcount and relatedoperating expenses and further enhancing our compliance and trading systems. Webelieve these changes have streamlined our organization without sacrificing ourability to respond to developments in the marketplace. If implemented, weanticipate that theNYSE’s proposed changes to its automated trade execution system and the SEC’sproposed market structure changes will provide more challenges. We areconfident that our organization will successfully adapt to meet its futureneeds.

 

During 2004, we successfullycompleted a refinancing of certain of our indebtedness by repurchasing asubstantial portion of our then-outstanding senior and senior subordinatednotes and issuing $460.0 million aggregate principal amount of 9.5% seniornotes due 2009 (the “Original 2009 Notes”) and 11.0% senior notes due 2012 (the“Original 2012 Notes” and collectively with the Original 2009 Notes, the “OriginalSenior Notes”).  Although thisrefinancing increased the aggregate principal amount of our outstandingindebtedness, the interest rates on the Original Senior Notes and thethird-quarter repurchase of all remaining shares of our outstanding Series Bpreferred stock with a portion of the proceeds of the Original Senior Notesissuance have enabled us to extend the maturities of our debt withoutincreasing our overall combined after-tax annual interest and dividendsexpense.

 

On March 29, 2004, weentered into an agreement with the NYSE and the SEC to settle theirinvestigations concerning our NYSE specialist trading activity.  This settlement resolved the NYSE and the SECinvestigations of our NYSE specialist trading activity for all periods through2003. As part of the settlement with the NYSE and the SEC, we have agreed tocomply with the following undertakings:

 

•                                          implementation of systems and procedures toensure appropriate follow-up and review with regard to information provided toLaBranche & Co. LLC on a daily basis by the NYSE with regard to specialists’override of the Principal Inhibitor function, which identifies specialist principal trades that may have been effected whilean executable agency order was reflected in the order book on the same side ofthe market;

 

•                                          creation of a committee, including LaBranche& Co. LLC’s chief compliance officer and at least two members of seniormanagement, specifically charged with meeting periodically (no less frequentlythan monthly) to evaluate specialist rule compliance;

 

•                                          development and/or enhancement of systems andprocedures to track and maintain records identifying the individuals acting asspecialist and clerk for each security at all times throughout each tradingday;

 

5

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•                                          annual certification, through LaBranche &Co. LLC’s chief executive officer, that a review has been conducted by thechief compliance officer of trading in LaBranche & Co. LLC’s principalaccount for the purpose of detecting interpositioning, trading ahead and unexecutedlimit order violations;

 

•                                          bi-annual assessment of, and reports on, theadequacy of the resources devoted to LaBranche & Co. LLC’s compliancefunction, and devotion of adequate funds and staffing to the compliancedepartment; and

 

•                                          retention of anindependent consultant to review and evaluate LaBranche & Co. LLC’scompliance systems, policies and procedures reasonably designed to ensure thatLaBranche & Co. LLC is in compliance with federal securities laws and NYSErules with regard to specialist trading.

 

We are complying with these undertakings and do notexpect these changes or enhancements to adversely affect our principal tradingrevenues. Instead, our fulfillment of these undertakings should enhance ourrisk management activities related to our specialist trading activity.

 

**NewAccounting Developments**

** **

In December 2003, the FASB issued FIN 46(R), “Consolidationof Variable Interest Entities, An Interpretation of ARB No. 51.” FIN 46(R)requires a company to consolidate a variable interest entity (“VIE”) if thecompany has variable interests that give it a majority of the expected lossesor a majority of the expected residual returns, or both, of the entity. FIN46(R) was effective no later than the end of the first reporting period thatended after March 15, 2004. As of December 31, 2004, we have determined thatnone of our investments are considered a VIE under the guidance provided in FIN46(R), and therefore, the implementation of FIN 46(R) has had no impact on ourconsolidated financial statements.

 

In December 2004, the FASB issued a revision to SFASNo. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123(R), “ShareBased Payment.” SFAS No. 123(R) will require compensation costs related toshare-based payment transactions to be recognized in the financial statementsover the period that an employee provides service in exchange for the award.SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” SFAS No. 123(R) will be effective for our thirdquarter of fiscal 2005. We are currently evaluating the effect of adoption ofSFAS No. 123(R), but we do not expect it to have a material effect on ourfinancial condition, results of operations or cash flows.

 

**CriticalAccounting Estimates**

** **

*Goodwill and Other IntangibleAssets*

* *

We determine the fair value of each of our reportingunits and the fair value of each reporting unit’s goodwill under the provisionsof Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill andOther Intangible Assets.”  In determiningfair value, we use standard analytical approaches to business enterprisevaluation (“BEV”), such as the market comparable approach and the incomeapproach. The market comparable approach is based on comparisons of the subjectcompany to similar companies engaged in an actual merger or

 

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acquisition or to publiccompanies whose stocks are actively traded. As part of this process, multiples of value relative to financialvariables, such as earnings or stockholders’ equity, are developed and appliedto the appropriate financial variables of the subject company to indicate itsvalue.  The income approach involvesestimating the present value of the subject company’s future cash flows byusing projections of the cash flows that the business is expected to generate,and discounting these cash flows at a given rate of return. Each of these BEVmethodologies requires the use of management estimates and assumptions. For example,under the market comparable approach, we assigned a certain control premium tothe public market price of our common stock as of the valuation date of our2004 third quarter impairment test, as well as our 2004 year-end impairmenttest, in estimating the fair value of our specialist reporting unit.  Similarly, under the income approach, weassumed certain growth rates for our revenues, expenses, earnings beforeinterest, income taxes, depreciation and amortization, returns on workingcapital, returns on other assets and capital expenditures, among others.  We also assumed certain discount rates andcertain terminal growth rates in our calculations. For our third quarter andyear-end 2004 goodwill impairment tests, we engaged an independent businessvaluation firm to assist us in our BEV analyses.  Given the subjectivity involved in selectingwhich BEV approach to use and in determining the input variables for use in ouranalyses, it is possible that a different valuation model and the selection ofdifferent input variables could produce a materially different estimate of fairvalue of our goodwill.

 

We review the reasonableness of the carrying value ofour goodwill on an annual calendar basis (i.e., December 31) unless an event orchange in circumstances would require an interim reassessment ofimpairment.  During the nine months endedSeptember 30, 2004, certain changes in circumstances occurred, which managementbelieved necessitated goodwill impairment testing. The two primary factors weanalyzed, which indicated a need for us to reassess the reasonableness of thecarrying value of our goodwill at September 30, 2004, were the prolongeddownward trend in our principal trading revenues at our Specialist reportingunit and the continued decline in the public trading price of our common stockthrough September 30, 2004.  In our thirdquarter 2004 SFAS No. 142 test, we compared the fair value of our Specialistreporting unit and the fair value of our Specialist reporting unit’sgoodwill—based on the methods described above—to their respective carryingvalues in two separate steps under SFAS No. 142 guidelines to arrive at the$37.6 million impairment charge we recognized during the third quarter.Notwithstanding our interim valuation of goodwill as of September 30, 2004,SFAS No. 142 requires us to test goodwill on an annual calendar basis.Accordingly, we updated our valuation models through and including our annualtesting date, or December 31, 2004, and noted no further impairment of ourgoodwill. We cannot provide assurance that future goodwill impairment testingwill not result in impairment charges in subsequent periods.

 

Our other intangible asset, as defined under SFAS No.142, is our trade name. We determine the fair value of our trade name byapplying the income approach using the royalty savings methodology. This methodassumes that the trade name has value to the extent we are relieved of theobligation to pay royalties for the benefits received from it.  Application of this methodology requiresestimating an appropriate royalty rate, which is typically expressed as apercentage of revenue. Estimating an appropriate royalty rate includesreviewing evidence from comparable licensing agreements and consideringqualitative factors affecting the trade name. Given the subjectivity involvedin selecting which BEV approach to use and in determining the

 

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input variables for usein our analyses, it is possible that a different valuation model and theselection of different input variables could produce a materially differentestimate of fair value of our trade name.

 

We review the reasonableness of the carrying amount ofour trade name on an annual basis in conjunction with our goodwill impairmentassessment. As of September 30, 2004, the fair value of our trade name— determinedin accordance with the methodology described above— exceeded its carryingamount. During our 2004 fiscal fourth quarter, no events or changes incircumstances occurred that required us to reassess the fair value of our tradename. Therefore, no impairment of our trade name exists at December 31, 2004.We cannot provide assurance that future trade name impairment testing will notresult in impairment charges in subsequent periods.

 

*Non-Marketable Securities*

* *

The use of fair value to measure certainnon-marketable investments is a critical accounting estimate.  Investments in non-marketable securitiesconsist of investments in equity securities of private companies, limitedliability company interests and limited partnership interests, which do nothave readily available price quotations. Certain investments in non-marketablesecurities are initially carried at cost, as an approximation of fairvalue.  Adjustments to carrying value aremade if there are third-party transactions evidencing a change in value.  For certain other investments innon-marketable securities, we adjust their carrying value by applying theequity method of accounting, and for our investment in a limited partnershipinterest, we adjust its carrying value by recognizing our share of thepartnership’s quarterly results of operations. In addition, if and whenavailable, management considers other relevant factors relating tonon-marketable investments in estimating their fair value, such as thefinancial performance of the entity, its cash flow forecasts, trends withinthat entity’s industry and any specific rights associated with ourinvestment—such as conversion features—among others.

 

Given management’s judgment involved in valuingcertain of our non-marketable securities, it is possible, as of a given pointin time, that a third-party could reach a different conclusion of fair valueutilizing the same variables as we have in our analysis.

 

*Other-Than-Temporary Impairmentof Exchange Memberships*

** **

The determination of the fair value of our exchangememberships is a critical accounting estimate. Exchange memberships owned by usare originally carried at cost, pursuant to the American Institute of CertifiedPublic Accountants (“AICPA”) *Audit and AccountingGuide—Brokers and Dealers in Securities*.  Adjustments to carrying value are made if wedeem that an “other-than-temporary” decline in value, as defined in EmergingIssues Task Force (“EITF”) Issue No. 03-1, *The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments,*and in SectionM of Topic 5 of the SEC staff accounting bulletin series (“SAB No. 59”), has occurred. In determining whether thevalue of our owned exchange memberships is impaired (*i.e*.,fair market value is below cost) and whether such impairment is temporary orother-than-temporary, we consider many factors, including, but not limited to,information regarding recent sale and lease prices of exchange memberships,historical trends of sale and lease prices of memberships on a particularexchange and their duration, the current

 

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conditionof the particular exchange’s market structure, legal and regulatorydevelopments affecting the particular exchange’s market structure and earningscapability, trends in new listings on the particular exchange, general globaland national economic factors and our knowledge and judgment of the specialistand execution and clearing industries and the securities market as a whole.

 

As a result of our analysis of the above-mentionedfactors for the three and six month periods ended December 31, 2004, thedifference between the fair value of our NYSE exchange memberships and theircarrying value at December 31, 2004 is deemed temporary.  For the years ended December 31, 2004 and2003, we recorded other-than-temporary impairment charges of $18.3 million and$0.5 million, respectively, to reduce the carrying value (or cost basis) of ourNYSE (fiscal 2004) and AMEX (fiscal 2003) exchange memberships.

 

We cannot provide assurance that the consistentapplication of this accounting policy to future reporting periods will notresult in further adjustments to the carrying value of our exchangememberships.

 

**OffBalance Sheet Arrangements**

** **

LFSI, through the normal course of business, entersinto various securities transactions as agent. The execution, settlement andfinancing of these transactions can result in off-balance sheet risk andconcentration of credit risk.  LFSI’sexecution and clearing activities involve settlement and financing of variouscustomer securities transactions on a cash or margin basis. These activitiesmay expose LFSI to off-balance sheet risk in the event the customer or otherbroker is unable to fulfill its contractual obligations and LFSI has topurchase or sell securities at a loss. For margin transactions, LFSI may beexposed to significant off-balance sheet risk in the event margin requirementsare not sufficient to fully cover losses that customers may incur in theiraccounts.

 

**May2004 Refinancing of Our Indebtedness**

** **

On May18, 2004, in connection with the refinancing of certain of our indebtedness, werepurchased approximately $93.1 million of our then-outstanding$100.0 million aggregate principal amount 9.5% senior notes due 2004 (the “2004Notes”) and approximately $236.4 million of our then-outstanding$250.0 million aggregate principal amount 12.0% senior subordinated notesdue 2007 (the “2007 Notes” and, together with the 2004 Notes, the “Old Notes”),and paid for related consents delivered by the holders of the Old Notes on orprior to April 19, 2004.  The aggregatepurchase price we paid for the Old Notes was approximately $386.9 million,which included the purchase price, premium and consent payments ofapproximately $49.0 million and accrued but unpaid interest on the Old Notes upto, but not including, the settlement date. Upon the completion of thisrefinancing, the indentures governing the remaining outstanding Old Notes werestripped of substantially all restrictive covenants, certain events of defaultand other related provisions.

 

Inorder to fund the repurchase of the Old Notes, we issued the OriginalSenior Notes. Theindenture governing the Original Senior Notes contains provisions similar tothe indentures that governed the Old Notes prior to their amendment. For a morecomplete description of the

 

9

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restrictive covenants inthe indenture governing the Original Senior Notes, please see “—Liquidity andCapital Resources.”

 

In connection with our purchase of the Old Notes andour payment for the related consents that were delivered on or prior toApril 19, 2004, we recorded a charge of approximately $55.9 millionin the second quarter of 2004 for premium and consent payments, accelerateddebt issuance cost amortization and discount accretion and other related fees.In connection with the issuance of the Original Senior Notes, we capitalizedcertain costs in the aggregate amount of approximately $12.7 million, andare amortizing these costs over the life of these notes.

 

**Repayment of Remaining 2004 Notes**

** **

On August 16, 2004, we repaid the $6.9 millionaggregate principal amount of 2004 Notes that remained outstanding after ourMay 2004 refinancing, plus all accrued and unpaid interest thereon, for anaggregate of $7.2 million.  No 2004 Notesremain outstanding and the indenture governing the 2004 Notes was terminated.

 

**Completed Exchange Offer**

** **

On September 10, 2004, pursuant to a registrationrights agreement between the initial purchaser of the Original Senior Notes andus, we offered to exchange(i) our 9.5% Senior Notes due 2009 that have been registered under theSecurities Act of 1933, as amended (the “2009 Senior Notes”), for an equalprincipal amount of outstanding Original 2009 Notes and (ii) our 11.0% Senior Notes due2012 that have been registered under the Securities Act of 1933, as amended(the “2012 Senior Notes,” and together with the 2009 Senior Notes, the “SeniorNotes”), for an equal principal amount of outstanding Original 2012Notes.

 

The exchange offer expired on October 22, 2004, withthe holders of 98.5%, or $197.0 million aggregate principal amount, of Original2009 Notes having tendered their Original 2009 Notes for exchange, and theholders of 100.0%, or $260.0 million aggregate principal amount, of theOriginal 2012 Notes having tendered their Original 2012 Notes for exchange. TheSenior Notes represent the same indebtedness as the Original Senior Notes thatwere exchanged and have been issued under the same indenture.  All subsequent references in this Report tothe term “2009 Senior Notes” shall include the $3.0 million principal amount ofOriginal 2009 Notes that were not tendered in the exchange offer and remainoutstanding.

 

**Completed Excess Proceeds Offer**

** **

**To the extent we did not use thenet proceeds of the sale of the Original Senior Notes to repurchase Old Notesin connection with the May 2004 debt refinancing, repurchase thethen-outstanding shares of our Series B preferred stock before September 15,2004 and pay related fees and expenses, the Senior Notes indenture required usto offer to use such “excess proceeds” to repurchase an equal principal amountof Senior Notes at a price of 101.0%, on a pro rata basis.**

** **

Based on the aggregate principal amount of Old Notesthat we repurchased in May 2004, the repurchase of our Series B preferred stockin July 2004 (see “—Completed Preferred Stock Exchange Offer and SubsequentRepurchase”) and the fees and expenses incurred in connection therewith, the “excessproceeds” amount was approximately $18.2 million. Accordingly, on

 

10

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November 1, 2004, wecommenced an offer to purchase Senior Notes in the aggregate principal amountof up to approximately $18.2 million. This excess proceeds offer expired onDecember 1, 2004, with approximately $0.1 million principal amount, includingaccrued and unpaid interest, of 2009 Senior Notes having been tendered.

 

**CompletedPreferred Stock Exchange Offer and Subsequent Repurchase**

** **

On January 21, 2004, we completed an exchange offerpursuant to an exemption from registration under Section 3(a)(9) of theSecurities Act of 1933, as amended, pursuant to which we exchanged one share ofa newly-created Series B preferred stock for each share of our then-issued andoutstanding Series A preferred stock. In the exchange offer, all of theapproximately 39,186 shares of Series A preferred stock were exchanged by thefourteen holders of record for shares of our Series B preferred stock.  Issuance of the newly-created shares ofSeries B preferred stock was contingent upon the tender for exchange of 100% ofthe issued and outstanding shares of Series A preferred stock.

 

On June 14, 2004, we commenced an offer to purchaseany and all of the approximately 39,186 then-outstanding shares of our Series Bpreferred stock.  On July 12, 2004, theoffer expired with 100% of the then-outstanding shares of Series B preferred stockhaving been tendered.  On July 13, 2004,we purchased all of the tendered shares at a price of $1,000 per share, plusaccrued and unpaid dividends up to but not including the date of purchase forapproximately $42.6 million and all then-outstanding shares of our Series Bpreferred stock were retired.  As aresult of the purchase, we recorded an expense in the third quarter of 2004 ofapproximately $0.5 million due to the acceleration of the discount accretion onthe shares that were purchased.

 

Of the approximately 39,186 then-outstanding shares ofour Series B preferred stock, approximately 9,760 shares had been held inescrow in order to secure the indemnification obligations of the formerstockholders of ROBB PECK McCOOEY Financial Services, Inc. (“RPM”) inconnection with our acquisition of RPM in March 2001.  In connection with the completion of theoffer to purchase all then-outstanding shares of our Series B preferred stock,this escrow arrangement was terminated in order to facilitate our objective ofrepurchasing and retiring all outstanding shares of our Series B preferredstock without forfeiting any material right to indemnification under the mergeragreement governing our acquisition of RPM.

 

## **Results of Operations**

## ** **

# **SpecialistSegment Operating Results**

 
| ** **                          | ** ** | **For the Years Ended December 31,** | ** ** | **2004 vs. 2003  Percentage** | ** ** | **2003 vs. 2002  Percentage** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **(000’s omitted)**            | ** ** | **2004**                             | ** ** | **2003**                      | ** ** | **2002**                      | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                |       |                                 |       |                          |       |                          |       |   |   |   |   |
| **Revenues:**                       |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Net gain on  principal transactions |       | $                                    | 182,535    |                          | $          | 202,206                       |       | $ | 342,400 |   | (9.7 | )% | (40.9 | )% |
| Commissions                         |       | 48,781                               |       | 47,450                        |       | 50,653                        |       | 2.8 |   | (6.3 | ) |
| Other                               |       | 13,707                               |       | 6,927                         |       | 8,116                         |       | 97.9 |   | (14.7 | ) |
| Total segment  revenues             |       | 245,023                              |       | 256,583                       |       | 401,169                       |       | (4.5 | ) | (36.0 | ) |
|                                |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Operating  expenses                 |       | 148,799                              |       | 144,731                       |       | 176,704                       |       | 2.8 |   | (18.1 | ) |
| Goodwill impairment                 |       | 37,600                               |       | 166,250                       |       | —                        |       | (77.4 | ) | — |   |
| Exchange  memberships impairment    |       | 16,300                               |       | —                        |       | —                        |       | — |   | — |   |
| Restitution and  fines              |       | —                               |       | 63,519                        |       | —                        |       | (100.0 | ) | — |   |
|                                |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Pre-tax income  (loss)              |       | $                                    | 42,324     |                          | $          | (117,917                      | )          | $ | 224,465 |   | 135.9 | % | (152.5 | )% |

 

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Revenues from our Specialist segment consist primarilyof net gain earned from principal transactions in securities for which we actas specialist. Net gain on principal transactions represents trading gains netof trading losses and SEC transaction fees, where applicable, and are earned byus when we act as principal buying and selling our specialist stocks, rights,options, ETFs and futures. Also included in net gain on principal transactionsare net gains and losses resulting from our market-making activities in ETFs,options and futures, the net gains and losses resulting from trading of foreigncurrencies, futures and equities underlying the rights, ETFs and options forwhich we act as specialist, and accrued dividends receivable or payable on ourequity positions. These revenues are primarily affected by changes in sharevolume traded and fluctuations in price of stocks, rights, options, ETFs andfutures in which we are the specialist or in which we make a market.

 

Commissions revenue generated by our Specialistsegment consists primarily of fees earned when our specialists act as agents byexecuting limit orders on behalf of brokers, professional traders and brokerdealers after a specified period of time; we do not earn commissions when wematch market orders or when we act as a market-maker.

 

Other revenue at our Specialist segment consistsprimarily of interest income, proprietary trading gains or losses and gains orlosses from an investment in a hedge fund.

 

***KeyMetrics of our LaBranche & Co. LLC Specialist Business—***When assessing the performance andfinancial results of a specific period, management examines certain metrics toascertain their impact on our LaBranche & Co. LLC specialist’s financialresults. Some of the key metrics that we review, and their values for 2004,2003 and 2002, are as follows: 

 
| ** **                                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2004 vs. 2003  Percentage  Change** | ** ** | **2003 vs. 2002  Percentage  Change** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|---------------------------------------|------------|---------------------------------------|------------|
| NYSE average  daily share volume (in millions)                      |       | 1,456.7  |       | 1,398.4  |       | 1,441.0  |       | 4.2                                   | %          | (3.0                                  | )%         |
| LAB share volume  on the NYSE (in billions)                         |       | 96.1     |       | 94.5     |       | 102.1    |       | 1.7                                   | %          | (7.4                                  | )%         |
| LAB dollar value  on the NYSE (in billions)                         |       | $        | 2,819.1    |     | $          | 2,477.4  |       | $                                     | 2,686.5    |                                  | 13.8       | % | (7.8 | )% |
| Share volume of  principal shares traded (in billions)              |       | 22.3     |       | 27.6     |       | 35.7     |       | (19.2                                 | )%         | (22.7                                 | )%         |
| Dollar value of  principal shares traded (in billions)              |       | $        | 682.7      |     | $          | 725.1    |       | $                                     | 983.4      |                                  | (5.8       | )% | (26.3 | )% |
| Average closing  price of the CBOE Volatility Index                 |       | 15.5     |       | 22.0     |       | 27.3     |       | (29.5                                 | )%         | (19.4                                 | )%         |
| Program trading  as a percentage of NYSE average daily share volume |       | 50.6     |       | 37.5     |       | 37.5     |       | 34.9                                  | %          | 0.0                                   | %          |

 

12

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Generally, an increase in the average daily sharevolume on the NYSE, an increase in volatility (as measured by the averageclosing price of the CBOE’s Volatility Index®, or the “VIX”), an increase inthe dollar value and share volume of our principal shares or a decrease inprogram trading enables the specialist to increase its level of principalparticipation and thus its ability to realize net gain on principaltransactions. While these metrics are monitored by management each period, theyare not the sole indicators or factors in any given period that determine ourlevel of revenues, profitability or overall performance. Other factors, such asextreme price movements, unanticipated company news and events and otheruncertainties may influence our financial performance either positively ornegatively.

 

## **Year Ended December 31,2004 Compared to Year Ended December 31, 2003**

## ** **

The decline in net gain on principal transactions isattributable primarily to our LaBranche & Co. LLC subsidiary, wherespecialist trading revenue decreased to $149.5 million for 2004 from $185.3million for 2003.  The decrease was dueto a decline in principal shares traded as well as a significant decline inmarket volatility, as measured by the average closing price of the VIX. Anotherfactor that has reduced the opportunity for the specialist to participate isthe continuing rise in program trading as a percentage of NYSE average dailyshare volume. Program trading involves reducing large share orders into manysmaller orders, resulting in the orders being matched electronically. Thesefactors offset the benefit from the increases in NYSE average daily sharevolume, and share volume and dollar value traded for stocks in which LaBranche& Co. LLC is the specialist. Net gain on principal transactions generatedby our LSP and LSPS subsidiaries increased to $33.0 million in 2004 from $16.9million in 2003. This revenue growth was the result of an increase in thenumber of products traded, market-maker professionals and exchanges in whichLSP trades.

 

Other revenue earned by our specialist segment washigher primarily due to increased proprietary trading gains, and higherinterest income from our stock borrow transactions—resulting from increasedtrading activity at LSP and LSPS—and from our short to medium term investments.

 

For a discussion of operating expenses see “OurOperating Expenses” below.

 

## **Year EndedDecember 31, 2003 Compared to Year Ended December 31, 2002**

## ** **

In 2003, our net gain on principal transactionsdecreased primarily as a result of decreases in NYSE share and dollar volumestraded for stocks in which we are the specialist, and decreases in NYSE marketshare and volatility. Throughout 2003, the dollar value and share volume ofprincipal shares traded decreased significantly, thereby reducing ouropportunities to trade profitably. The NYSE’s share of consolidated volume oftrades of NYSE-listed stocks decreased to 79.5% for 2003 as compared to 82.0%for 2002. The decline in volatility in the market, as measured by the VIX, alsocontributed to the lower net gain on principal transactions. Of our total$202.2 million and $342.4 million of net gain on principal transactions for theyears ended December 31, 2003 and 2002, respectively, $16.9 million and $0.9million, respectively, were generated from derivative trading activities at ourLSP subsidiary.

 

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Commissions revenue earned by our Specialist segmentdecreased due to a decrease in the share volume executed by us as agent and theeffect of competitive price pressures on our billing structure. The total sharevolume executed by us as agent in our specialist stocks decreased 6.7% to 8.4billion shares for 2003 from 9.0 billion shares for 2002. The share volumeexecuted by us as agent is affected by the share volume of LaBranche & Co.LLC’s specialist stocks on the NYSE, which decreased 7.4% as noted in the keymetrics chart above.

 

For a further discussion of operating expenses see “OurOperating Expenses” below.

 

### *Execution and Clearing SegmentOperating Results*

 
| ** **                       | ** ** | **For the Years Ended December 31,** | ** ** | **2004 vs. 2003  Percentage** | ** ** | **2003 vs. 2002  Percentage** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **(000’s omitted)**         | ** ** | **2004**                             | ** ** | **2003**                      | ** ** | **2002**                      | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                       | ** ** | ** **                           | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES:                        |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Commissions                      |       | $                                    | 47,263     |                          | $          | 46,994                        |       | $ | 41,391 |   | 0.6 | % | 13.5 | % |
| Other                            |       | 753                                  |       | 915                           |       | 3,174                         |       | (17.7 | ) | (71.2 | ) |
| Total segment  revenues          |       | 48,016                               |       | 47,909                        |       | 44,565                        |       | 0.2 |   | 7.5 |   |
|                             |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Operating  expenses              |       | 52,827                               |       | 57,293                        |       | 54,390                        |       | (7.8 | ) | 5.3 |   |
| Goodwill  impairment             |       | —                               |       | 4,052                         |       | —                        |       | (100.0 | ) | — |   |
| Exchange  memberships impairment |       | 2,027                                |       | 515                           |       | —                        |       | 293.6 |   | — |   |
|                             |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Pre-tax loss                     |       | $                                    | (6,838     | )                             | $          | (13,951                       | )          | $ | (9,825 | ) | 51.0 | % | (42.0 | )% |

 

Our Execution and Clearing segment’s commissionsrevenue includes fees charged to customers for execution, clearance anddirect-access floor brokerage activities.

 

Our Execution and Clearing segment’s other revenuesconsist of interest income, proprietary trading net gains or losses and feescharged to customers for use of our proprietary front-end order executionsystem.

 

## **Year Ended December 31,2004 Compared to Year Ended December 31, 2003**

## ** **

Other revenue from our Execution and Clearing segmentdecreased as LFSI ceased providing its proprietary front–end order executionsystem on a service bureau basis, and also decreased due to a decline ininterest income. Interest income decreased as a result of lower balances of ourshort term investments and reduced levels of stock-borrow transactions.

 

For a discussion of operating expenses see “OurOperating Expenses” below.

 

## **Year Ended December 31,2003 Compared to Year Ended December 31, 2002**

## ** **

Commissions revenue from our Execution and Clearingsegment increased primarily due to a full year of revenues from ourinstitutional execution group which commenced operations in July 2002. Thegrowth in our institutional execution group was also the result of the generalgrowth and expansion of its customer base. The increase in institutionalexecution group revenues was partially offset by a decline in direct-access andclearance revenues resulting from

 

14

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the discontinuation ofour prime brokerage business, a decline in clearing customers and a generaldecrease in the volume of direct access executions during 2003.

 

Other revenue from our Execution and Clearing segmentdecreased primarily due to the decline in proprietary trading revenues as wellas a decline in interest income. Interest income decreased as a result ofsignificantly lower interest rates for our short term investments andstock-borrow transactions and the decrease in customer debit account balances.Proprietary trading revenues decreased due to the discontinuation ofproprietary trading during 2003.

 

For a further discussion of operating expenses see “OurOperating Expenses” below.

 

# **OtherSegment Operating Results**

 
| ** **               | ** ** | **For the Years Ended December 31,** | ** ** | **2004 vs. 2003  Percentage** | ** ** | **2003 vs. 2002  Percentage** | ** ** |
|--------------------------|------------|--------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **(000’s omitted)** | ** ** | **2004**                             | ** ** | **2003**                      | ** ** | **2002**                      | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **               | ** ** | ** **                           | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES:                |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Other                    |       | $                                    | 26,008     |                          | $          | 1,497                         |       | $ | 7,111 |   | 1,637.3 | % | (78.9 | )% |
| Total segment  revenues  |       | 26,008                               |       | 1,497                         |       | 7,111                         |       | 1,637.3 |   | (78.9 | ) |
|                     |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Operating  expenses      |       | 67,934                               |       | 54,703                        |       | 55,627                        |       | 24.2 |   | (1.7 | ) |
| Debt repurchase  premium |       | 49,029                               |       | —                        |       | —                        |       | — |   | — |   |
|                     |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Pre-tax loss             |       | $                                    | (90,955    | )                             | $          | (53,206                       | )          | $ | (48,516 | ) | 70.9 | % | 9.7 | % |

 

The portion of our revenues that is not generated fromour two principal business segments consists primarily of unrealized gains orlosses on our non-marketable investments and interest income.

 

## **Year Ended December 31,2004 Compared to Year Ended December 31, 2003**

## ** **

Other revenues increasedprimarily as a result of the $24.9 million realized gain from the sale of ourinvestment in Lava during 2004.

 

 For a discussion of operating expenses see “OurOperating Expenses” below.

 

## **Year Ended December 31,2003 Compared to Year Ended December 31, 2002**

## ** **

Other revenue decreased as a result of a net depreciationin the value of our non-marketable investments in 2003. For 2002, the value ofthese investments had appreciated. The decrease was also due to a decline ininterest income during 2003 as a result of lower interest rates for our shortto medium term investments.

 

For a further discussion of operating expenses see “OurOperating Expenses” below.

 

15

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**Our Operating Expenses**

 
| ** **                                                  | ** ** | **For the Years Ended December 31,** | ** ** | **2004 vs. 2003  Percentage** | ** ** | **2003 vs. 2002  Percentage** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **(000’s omitted)**                                    | ** ** | **2004**                             | ** ** | **2003**                      | ** ** | **2002**                      | ** ** | **Change** | ** ** | **Change** | ** ** |
| ** **                                                  | ** ** | ** **                           | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| EXPENSES:                                                   |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Employee  compensation and related benefits                 |       | $                                    | 99,310     |                          | $          | 99,123                        |       | $ | 131,511 |   | 0.2 | % | (24.6 | )% |
| Interest                                                    |       | 63,789                               |       | 48,188                        |       | 48,589                        |       | 32.4 |   | (0.8 | ) |
| Exchange,  clearing and brokerage fees                      |       | 39,010                               |       | 40,406                        |       | 37,729                        |       | (3.5 | ) | 7.1 |   |
| Lease of  exchange memberships                              |       | 15,565                               |       | 24,773                        |       | 25,939                        |       | (37.2 | ) | (4.5 | ) |
| Goodwill  impairment                                        |       | 37,600                               |       | 170,302                       |       | —                        |       | (77.9 | ) | — |   |
| Exchange  memberships impairment                            |       | 18,327                               |       | 515                           |       | —                        |       | 3,458.6 |   | — |   |
| Debt repurchase  premium                                    |       | 49,029                               |       | —                        |       | —                        |       | — |   | — |   |
| Restitution and  fines                                      |       | —                               |       | 63,519                        |       | 3⁄4                        |       | (100.0 | ) | 3⁄4 |   |
| Other operating  expenses                                   |       | 51,886                               |       | 44,237                        |       | 42,953                        |       | 17.3 |   | 3.0 |   |
|                                                        |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Total expenses  before provision (benefit) for income taxes |       | 374,516                              |       | 491,063                       |       | 286,721                       |       | (23.7 | ) | 71.3 |   |
|                                                        |       |                                 |       |                          |       |                          |       |   |   |   |   |
| Provision  (benefit) for income taxes                       |       | $                                    | (12,045    | )                             | $          | (6,007                        | )          | $ | 78,898 |   | (100.5 | )% | (107.6 | )% |

 

Our Specialist segment’s employee compensation andrelated benefits consists of salaries, wages and profitability-basedcompensation paid to our traders and related support staff. The employeecompensation and related benefits related to our Execution and Clearing segmentconsists of salaries, wages and profitability-based compensation paid to ourexecution and clearing professionals, as well as compensation based oncommissions earned by various trading professionals. Profitability-basedcompensation may include cash compensation and stock-based compensation paid orgranted to managing directors, trading professionals and other employees basedon our profitability.

 

Interest expense is primarily incurred from theindebtedness in connection with our reorganization from partnership tocorporate form in 1999, our acquisitions, the issuance of promissory notes inexchange for our preferred stock and the 2004 refinancing of the majority ofour Old Notes. The interest expense at our Specialist segment is primarily theresult of margin interest expense relating to positions taken at our LSP andLSPS subsidiaries and interest on subordinated indebtedness that has beenapproved by the NYSE for inclusion in the net capital of our LaBranche &Co. LLC subsidiary. Customers’ free credit balances and bank loans generateinterest expense at our Execution and Clearing segment.

 

Exchange, clearing and brokerage fees expense at ourSpecialist segment consists primarily of fees paid by us to the NYSE, AMEX,other exchanges, the Depository Trust Clearing Corporation (“DTCC”) and tothird party execution and clearing companies. The fees paid by us to theseentities are primarily based on the volume of transactions executed by us asprincipal and as agent, a fee based on exchange seat use, an allocation feerequiring specialist firms to share the cost of newly allocated listings,technology fees, a flat annual fee and execution and clearing fees. OurExecution and Clearing segment’s exchange, clearing and brokerage fees expenseconsists of floor brokerage fees paid to direct-access floor brokers and feespaid to various exchanges.

 

16

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## **Year Ended December 31,2004 Compared to Year Ended December 31, 2003**

## ** **

While consolidated employee compensation and relatedbenefits increased slightly for 2004 as compared to 2003, there were materialchanges within the components of employee compensation and related benefits ateach of our segments year over year.  Themain cause of these changes was the increase in profitability-based compensation,salaries and related benefits at our LSP and LSPS subsidiaries resulting fromincreased trading and support personnel, which is a reflection of theircontinued growth. These increases were partially offset by decreases insalaries at our NYSE specialist subsidiary due to a reduction inpersonnel.  The expiration and payment ofa retention bonus plan liability, and a decrease in deferred compensationexpense, both related to a prior acquisition, also contributed to the partialoffset of the overall increase in employee compensation. Salaries andprofitability-based compensation at our Execution and Clearing segment declineddue to a decrease in trading and support personnel**.**Employee compensation and related benefits decreased to 31.1% of revenues for2004 from 32.4% for 2003.

 

Interest expense increased primarily as a result ofthe issuance of the Senior Notes in connection with the repurchase on May 18,2004 of substantially all the then-outstanding Old Notes.  As a result of the repurchase, we recorded$5.5 million of additional interest expense related to the acceleration of debtissuance cost amortization and senior notes discount accretion. The additionalinterest expense on the Original Senior Notes, resulting from the increasedoutstanding indebtedness, also contributed to the increase. The remainingincrease in interest expense was the result of increased margin interestcharges relating to the growth and expansion of trading activity at our LSP andLSPS subsidiaries.  While interestexpense increased to 20.0% of total revenues for the year 2004 from 15.7% for2003, non-tax deductible dividends on preferred stock have been eliminatedeffective July 2004.

 

Exchange, clearing and brokerage fees declinedprimarily due to the decrease in fees at our NYSE specialist subsidiary.  Contributing to the decrease was theelimination of the NYSE technology fee in July of 2003, lower allocation feesfor new listings, and a decrease in NYSE regulatory fees due to a lower numberof NYSE floor personnel. Partially offsetting these decreases was an increasein exchange, clearing and brokerage fees at our execution and clearing segmentrelated to higher LFSI revenues from direct-access floor brokers. Additionally,commissions expense and exchange fees at our LSP and LSPS subsidiariesincreased due to increased trading activity. Exchange, clearing and brokerage fees declined to 12.2% of revenues for2004 from 13.2% for the year 2003.

 

Lease of exchangememberships decreased substantially as a result of the decline in the averageannual lease cost of an NYSE membership and a decrease in the number of ourNYSE leased memberships.  Our averageannual lease cost of an NYSE membership for the year 2004 was approximately$235,000, as compared to approximately $316,000 for 2003.  Additionally, we leased on averageapproximately 11 fewer NYSE seats for 2004 than we did in 2003.  Lease of exchange memberships expensedecreased to 4.9% of total revenues for the year ended December 31, 2004 from8.1% for the same period in 2003.

 

Other operating expenses increased in 2004 as comparedto 2003 primarily due to an increase in legal, audit and other professionalfees incurred primarily in connection with

 

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Sarbanes-Oxley Act compliance, the refinancing of our debt andlitigation. Bank charges also increased due to investment banking fees relatingto our debt refinancing, and fees charged on a committed revolving creditfacility established in the first quarter of 2004, which was terminated uponthe completion of the refinancing of our indebtedness on May 18, 2004.  Additional expenses relating to our debtrefinancing included credit rating service fees, as well as printing and filingfees. An increase in insurance premiums also contributed to the increase.

 

In September 2004, we recorded a goodwill impairmentcharge of $37.6 million, all of which was attributable to our Specialistsegment. SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”)requires entities to test goodwill for possible impairment on an annual basis,or more frequently, if certain events and circumstances exist. We tested ourgoodwill for impairment at December 31, 2003, at which time we recorded animpairment charge of $170.3 million, of which $166.2 million was attributableto our Specialist segment and $4.1 million was attributable to our Executionand Clearing segment. Due to certain changes in circumstances, such as thedecrease in our market capitalization and continued downward trends in ourprincipal trading revenues, we tested our goodwill for impairment as ofSeptember 30, 2004. The impairment charge, which represents the excess of thecarrying value of our Specialist segment’s goodwill over its implied fairvalue, was necessary to properly reflect the carrying value of our goodwill atSeptember 30, 2004.  We updated our thirdquarter 2004 goodwill valuation results at December 31, 2004, per the annualtesting requirement, and noted no further impairment of this asset at thisdate. For a more complete description of our methodology in evaluating thereasonableness of the carrying value of our goodwill, please see “—CriticalAccounting Estimates.”

 

Exchange memberships impairment significantlyincreased in 2004 as compared to 2003 as a result of an $18.3 millionother-than-temporary impairment charge related to our NYSE exchangememberships. Of this total, $16.3 million was attributable to our Specialistsegment and $2.0 million was attributable to our Execution and Clearingsegment. Whereas the 2004 impairment charge was related to the 39 NYSEmemberships we own (each of which is valued at $1.5 million at December 31,2004, compared to $2.0 million at December 31, 2003), the 2003 impairmentcharge was related to an AMEX membership owned by our LFSI subsidiary.

 

We incurred a $49.0million charge in connection with the repurchase of a substantial portion ofour then-outstanding Old Notes.  Thischarge was attributable to a consent payment, which was offered to debt holderswho tendered their 2004 Notes and 2007 Notes by April 19, 2004, and a premiumfor tendering the 2004 Notes and 2007 Notes for purchase prior to theirmaturity.

 

Our benefit for incometaxes increased two-fold in 2004 to approximately $12.0 million. In conjunctionwith this increase, our effective tax rate rose to 21.8% for 2004 from 3.2% for2003 as a result of non-deductible goodwill impairment charge and NYSEpenalties of approximately $179.2 million in 2003, which almost equaled thatfiscal year’s book net loss. By contrast, the non-deductible goodwillimpairment charge of approximately $33.3 million in 2004 represented 59.7% ofthe book net loss for 2004. Accordingly, this permanent difference offsetalmost half of 2004’s statutory tax rate of 46.1%, or approximately 18.0%.

 

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## **Year Ended December 31,2003 Compared to Year Ended December 31, 2002**

## ** **

Employee compensation and related benefits expensedecreased as a result of a reduction in profitability-based compensationaccruals and other employee benefits due to lower revenues in 2003. Thedecrease was partially offset by an increase in employee salaries due to thehiring of additional trading and support personnel for LSP and LFSI. Employeecompensation and related benefits expense increased to 32.4% of total revenuesin 2003, from 29.0% of total revenues in 2002 as a result of lower revenues.

 

In the fourth quarter of 2003, we recorded a goodwillimpairment charge of $170.3 million, of which $166.2 million was attributableto our Specialist segment and $4.1 million was attributable to our Executionand Clearing segment. In determining the goodwill impairment, we first comparedthe fair value of each reporting unit to its carrying value through an analysisof our market capitalization and discounted cash flows techniques.  For the year ended December 31, 2003, weengaged an independent valuation firm to assist us with these fair value tests.Since the carrying value of each reporting unit exceeded its fair value, wethen compared the implied fair value of each reporting unit’s goodwill to itscarrying value. The implied fair value of each reporting unit’s goodwill wasdetermined by valuing all assets and liabilities as if each reporting unit hadbeen acquired in a business combination. The impairment charge, whichrepresented the excess of the carrying value of each reporting unit’s goodwillover its implied fair value, was necessary to properly reflect the carryingvalue of our goodwill at December 31, 2003.

 

During 2003, the NYSE and the SECannounced the commencement of investigations regarding the trading practices ofseveral NYSE specialist firms, including LaBranche & Co. LLC. In February2004, we andLaBranche & Co. LLC agreed in principle with the NYSE and the staff of theSEC, subject to final approval by the SEC, to settle the NYSE and SECspecialist trading investigations. Pursuant to the agreement in principle, anaccrual was made for the $63.5 settlement as of December 31, 2003.

 

## **Liquidity and CapitalResources**

## ** **

As of December 31, 2004, we had $2,055.1 million inassets, of which $545.0 million consisted of cash and short-term investments,primarily in government obligations maturing within three months, cash andsecurities segregated under federal regulations and overnight repurchaseagreements.  To date, we have financedour operations primarily with retained earnings from operations and proceedsfrom our debt and equity offerings. Due to the nature of the securitiesbusiness and our role as a specialist, market-maker and execution agent, theamount of our cash and short-term investments, as well as operating cash flow,may vary considerably due to a number of factors, including the dollar value ofour positions as principal, whether we are net buyers or sellers of securities,the dollar volume of executions by our customers and clearing houserequirements, among others. Certain regulatory requirements constrain the useof a portion of our liquid assets for financing, investing or operatingactivities. Similarly, the nature of our business lines, the capital necessaryto maintain current operations and our current funding needs subject our cashand cash equivalents to different requirements and uses.

 

As of December 31, 2004, the scheduled maturities ofour contractual obligations, without taking into account any availableroll-over provisions, were as follows:

 

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| ** **                      | ** ** | **Total**                | ** ** | **<1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **>5 Years** | ** ** |
|---------------------------------|------------|--------------------------|------------|----------------|------------|---------------|------------|---------------|------------|-----------------|------------|
| ** **                      | ** ** | **(000’s omitted)** | ** ** |
| Short Term and  Long Term Debt* |       | $                        | 483,542    |           | $          | 2,000         |       | $             | 21,642     |            | $          | 199,900 |   | $ | 260,000 |   |
| Subordinated  Liabilities       |       | 17,285                   |       | 5,990          |       | 8,295         |       | 3,000         |       | —          |       |
| Deferred  Compensation          |       | 21,635                   |       | 6,000          |       | 15,635        |       | —        |       | —          |       |
| Operating Lease  Obligations    |       | 6,661                    |       | 2,730          |       | 3,509         |       | 268           |       | 154             |       |
| **Total**                       |       | $                        | 529,123    |           | $          | 16,720        |       | $             | 49,081     |            | $          | 203,168 |   | $ | 260,154 |   |

 

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* Amounts represent aggregate amount to be paid atmaturity and do not include discounts of approximately $0.1 million as ofDecember 31, 2004.

 

The above table includes indebtedness with primarilylong-term maturities, whose interest and principal payments have a significanteffect on the cash available to finance our current and future operations. As of December31, 2004, our most significant long-term indebtedness was the $199.9 millionaggregate principal amount of 2009 Senior Notes, which mature in May 2009, andthe $260.0 million aggregate principal amount of 2012 Senior Notes, whichmature in May 2012.

 

The outstanding senior noteswere issued pursuant to a new indenture that is similar to the indentures thatgoverned the Old Notes prior to their amendment in connection with our May 2004debt refinancing.  The new indentureincludes certain covenants that, among other things, limit our ability to makecertain investments, engage in transactions with stockholders and affiliates,create liens on our assets and sell assets or engage in mergers andconsolidations, except in accordance with certain specified conditions.****In addition, our ability to incuradditional indebtedness (other than certain “permitted indebtedness”), paydividends, redeem stock or repurchase subordinated indebtedness prior tomaturity will be limited if our consolidated fixed charge coverage ratio is ator below a threshold of 2.00:1 on and after December 31, 2004. The “consolidatedfixed charge coverage ratio” reflects a comparison between (1) our consolidatedearnings before interest, taxes, depreciation and amortization expenses, or “EBITDA,”and (2) the sum of our consolidated interest expense and a tax-effectedmultiple of any dividend payments that we might make with respect to preferredstock.  As of December 31, 2004, ourconsolidated fixed charge coverage ratio was approximately 1.80:1.  The indenture governing the Senior Notesprovides for certain exceptions to the limitations on restricted payments,including, for example, the July 2004 repurchase of all then-outstanding sharesof our Series B preferred stock, repurchase of our Senior Notes, and any “restrictedpayments” up to an aggregate of $15.0 million over the life of the indenture.

 

In addition, under the indenture governing the SeniorNotes, if, at any time, our cumulative “restricted payments” since May 18, 2004generally are greater than (i) the sum of (A) 50.0% of our cumulativeconsolidated net income since July 1, 2004 (or, if such calculation is a loss,minus 100.0% of such loss) and (B) 100.0% of the net cash proceeds receivedfrom any issuance or sale of our capital stock since July 1, 2004, plus (ii)$15.0 million, we will not be entitled to make a “restricted payment” at such time.  While we have not made any restrictedpayments since May 18, 2004, we cannot be sure if, when or to what extent thiscovenant will prevent us from making restricted payments in the future.  As of December 31, 2004, since our cumulativeconsolidated net income since July 1, 2004 was negative, we were not entitledto make any restricted payments in excess of the $15.0 million “basket”described above.

 

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The indenture governing theSenior Notes permits us to redeem some or all of the 2009 Senior Notes on orafter May 15, 2007 and some or all of the 2012 Senior Notes on or after May 15,2008 at varying redemption prices, depending on the date of redemption.  In addition, we have the option to redeem upto 33.0% of the aggregate principal amount of the 2009 Senior Notes at aredemption price of 109.5% and up to 33.0% of the aggregate principal amount ofthe 2012 Senior Notes at a redemption price of 111.0% using the proceeds ofcertain equity offerings which we may complete on or prior to May 15,2007.  Under the terms of the indenture,if we sell substantially all our assets or experience specific kinds of changesin control, we will be required to offer to repurchase Senior Notes, on a prorata basis, at a price in cash equal to 101.0% of their principal amount, plusaccrued and unpaid interest, if any, to the date of purchase.

 

After giving effect to ourMay 2004 debt refinancing and the repurchase of all then-outstanding shares ofour Series B preferred stock in July 2004, the after-tax earnings per shareimpact of our ongoing interest obligations with respect to the Senior Notes islower than the combined after-tax earnings per share impact of our interestobligations with respect to the Old Notes and our non-tax deductible dividendobligations with respect to our then-outstanding Series B preferred stock. Tothe extent we repurchase any Senior Notes in connection with future corporatestrategic initiatives, our fixed-term interest payments would be correspondinglyreduced.

 

The remaining $13.6 millionaggregate principal amount of 2007 Notes that we did not repurchase inconnection with our May 2004 debt refinancing will continue to accrue interestat a rate of 12.0% per annum until they mature on March 2, 2007.  To the extent we are not prohibited under theterms of the indenture governing the Senior Notes, we may seek to repurchasesome or all of the remaining 2007 Notes from time to time on the open market.

 

For 2004, our reportedrevenues include a $24.9 million realized gain from the sale of our investmentin Lava. In connection with the sale, we received cash of approximately $39.0million at the closing. Additional consideration of approximately $9.5 millionis being held in escrow to secure our indemnification obligations as astockholder of Lava under the merger agreement and may be released in whole orin part 15 months after the acquisition is consummated, subject to the final determination ofany then-outstanding indemnification claims and any claims regarding taxes.  Under the terms of the indenture governingthe Senior Notes, to the extent we do not use the net after-tax proceeds of theLava transaction to repurchase certain of our secured indebtedness, repay theindebtedness of our subsidiaries or purchase “replacement assets,” we will berequired, on the 361st day following the closing of the Lava transaction, tooffer to purchase Senior Notes in an aggregate principal amount equal to suchnet after-tax proceeds at a price equal to 100.0% of the principal amount ofsuch Senior Notes.

 

A potential source ofliquidity for LaBranche & Co. LLC is the committed line of credit that itmaintains with a bank. In October 2004, LaBranche & Co. LLC extended this$200.0 million committed credit agreement to October 28, 2005 on the same termsand conditions. In connection with the credit agreement, we pay a quarterly feeof 0.25% of the total committed line of credit. Amounts outstanding under thiscredit facility would be secured by our inventory of

 

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specialiststocks and bear interest at the bank’s broker loan rate. This facility can onlybe used to finance inventory requirements at LaBranche & Co. LLC. In orderto maintain the availability of funds under this credit facility, we mustcomply with certain financial and other covenants.

 

As a specialist andmarket-maker, we are required to maintain certain levels of capital and liquidassets as promulgated by various regulatory agencies, which regulate our business.As part of our overall risk management procedures (for further discussion,refer to Part I, Item 3. “Quantitative and Qualitative Disclosures about MarketRisk”), we attempt to balance our responsibility as specialist, market-makerand broker-dealer with our overall capital resources. These requirementsrestrict our ability to make use of cash and other liquid assets for corporateactions, such as repaying our debt, repurchasing stock or making acquisitions.

 

As a broker-dealer,LaBranche & Co. LLC is subject to regulatory requirements intended toensure the general financial soundness and liquidity of broker-dealers andrequiring the maintenance of minimum levels of net capital, as defined in SECRule 15c3-1. LaBranche & Co. LLC is required to maintain minimum netcapital, as defined, equivalent to the greater of $100,000 or 1/15of aggregate indebtedness, as defined. NYSE Rule 326(c) also prohibits abroker-dealer from repaying subordinated borrowings, paying cash dividends,making loans to any parent, affiliates or employees, or otherwise entering intotransactions which would result in a reduction of its total net capital to lessthan 150.0% of its required minimum capital. Moreover, broker-dealers arerequired to notify the SEC prior to repaying subordinated borrowings, payingdividends and making loans to any parent, affiliates or employees, or otherwiseentering into transactions which, if executed, would result in a reduction of30.0% or more of their excess net capital (net capital less minimum requirement).The SEC has the ability to prohibit or restrict such transactions if the resultis deemed detrimental to the financial integrity of the broker-dealer. As ofDecember 31, 2004, LaBranche & Co. LLC’s net capital, as defined, was$455.1 million, which exceeded the minimum requirements by $453.2 million.

 

TheNYSE generally requires its specialist firms to maintain a minimum dollarregulatory capital amount in order to establish that they can meet, with theirown net liquid assets, their position requirement. As of December 31, 2004, LaBranche & Co. LLC’s and LSPS’ requiredcombined dollar amount of net liquid assets, as defined, was $447.0 million. LaBranche & Co. LLC’s actual netliquid assets, as defined, was $458.7 million as of December 31, 2004. LSPS isnot required to perform a net liquid assets calculation because LaBranche &Co. LLC’s actual net liquid assets exceed the combined net liquid assetsrequirement of LaBranche & Co. LLC and LSPS. The NYSE is currentlyreviewing its net liquid asset requirements with an announced view towardreducing the required amounts for specialists such as LaBranche & Co. LLC.The timing and extent of any such reduction, however, has not been finallydetermined. A reduction in LaBranche & Co. LLC’s net liquid assetsrequirement would allow funds no longer needed for net liquid assets purposesto be used for other corporate purposes.

 

The AMEX generally requiresits equity specialist firms to maintain a cash or liquid asset position of thegreater of (a) $1.0 million or (b) an amount sufficient to assume a position ofsixty trading units of each security in which the specialist is registered. Asof December 31, 2004, LaBranche & Co. LLC satisfied the AMEX equityspecialist liquid asset requirements.

 

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As a registeredbroker-dealer and member firm of the NYSE, LFSI also is subject to SEC Rule15c3-1, as adopted and administered by the NYSE and the SEC. Under thealternative method permitted by the rule, the minimum required net capital ofLFSI as of December 31, 2004 was equal to the greater of $1.5 million or 2.0%of aggregate debit items, as defined. As of December 31, 2004, LFSI’s netcapital, as defined, was $12.5 million, which exceeded its minimum net capitalrequirement by $11.0 million.

 

As a clearing broker-dealer,LFSI is subject to SEC Rule 15c3-3, as adopted and administered by the SEC. Asof January 4, 2005, to comply with its December 31, 2004 requirement, cash andU.S. Treasury Bills in the amount of $0.1 million have been segregated in aspecial reserve account for the exclusive benefit of customers exceeding actualrequirements by $0.1 million. As of January 5, 2004, to comply with itsDecember 31, 2003 requirement, cash and U.S. Treasury Bills in the amount of$6.2 million were segregated in a special reserve account for the exclusivebenefit of customers exceeding actual requirements by $4.3 million. Inaddition, the PAIB Calculation is computed in order for correspondent firms toclassify their assets held by LFSI as allowable assets in the correspondents’net capital calculation.  As of January4, 2005, to comply with its December 31, 2004 requirement, cash and U.S.Treasury Bills in the amount of $4.4 million have been segregated in a specialreserve account for the exclusive benefit of customers exceeding actualrequirements by $3.4 million. As of January 5, 2004, to comply with itsDecember 31, 2003 requirement, cash and U.S. Treasury Bills in the amount of$3.7 million were segregated in a special reserve account for the exclusivebenefit of customers exceeding actual requirements by $1.5 million.

 

As a registeredbroker-dealer and AMEX member firm, LSP is subject to SEC Rule 15c3-1, asadopted and administered by the AMEX and the SEC. LSP is required to maintainminimum net capital, as defined, equivalent to the greater of $100,000 or 1/15of aggregate indebtedness, as defined. As of December 31, 2004, LSP’s netcapital, as defined, was $23.8 million, which exceeded its minimum net capitalrequirement by $23.2 million.

 

As a specialist and member of the NYSE, LSPS issubject to the provisions of SEC Rule 15c3-1, as adopted and administered bythe SEC and NYSE. LSPS is required to maintain minimum net capital, as defined,equivalent to the greater of $100,000 or 1/15 ofaggregate indebtedness, as defined. As of December 31, 2004, LSPS’ netcapital, as defined under SEC Rule 15c3-1, was $4.4 million, which exceeded theminimum requirements by $4.3 million.

 

Failure by any of ourbroker-dealer subsidiaries to maintain its required net capital and net liquidassets, where applicable, may subject it to suspension or revocation of its SECregistration or its suspension or expulsion by the NYSE, the AMEX and/or anyother exchange of which it is a member firm.

 

As evidenced by theforegoing requirements, our broker-dealer subsidiaries require a substantialamount of capital. In particular, LaBranche & Co. LLC’s and LSPS’ combinednet liquid asset requirement of $447.0 million limits our ability to utilize asubstantial portion of our liquid assets for other corporate purposes. Althougha portion of the combined net liquid asset requirement of $447.0 million is metby LaBranche & Co. LLC’s and LSPS’ securities positions, pending trades andother assets associated with its equity and ETF specialist activities, a

 

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substantialportion of LaBranche & Co. LLC’s cash and cash equivalents as of December31, 2004 was used to meet their combined net liquid asset requirement.

 

In connection with ouracquisition of ROBB PECK McCOOEY Financial Services, Inc. (“RPM”) in March2001, we assumed its liabilities and obligations under its deferredcompensation plan. The deferred compensation plan provides for the payment, onor before December 15, 2007, of approximately $30.2 million, plus interest at arate of 8.0% per year, to certain former employees of RPM. While the payment ofbenefits under this deferred compensation plan may be accelerated in certaincircumstances, no more than $6.0 million in deferred compensation benefits(including interest) may be paid in any 12 consecutive month period beginningMarch 15, 2001. After taking into account all payments of deferred compensationplan benefits through December 31, 2004, approximately $18.3 million, plusinterest, remains payable under the RPM deferred compensation plan.  If the plan is terminated, the deferredcompensation benefits (including interest) of all participants, to the extent notpreviously paid, must be distributed to the participants in one lump sum.

 

As of December 31, 2004, thesubordinated indebtedness of LaBranche & Co. LLC aggregated $17.3 million(excluding subordinated liabilities related to contributed exchangememberships). This subordinated debt is comprised of senior subordinated notesand junior subordinated notes, which mature, or matured, on various datesbetween February 2005 and June 2008 and bear interest at annual rates rangingfrom 7.7% to 10.0%. Thesenior subordinated notes were originally issued in the aggregate principalamount of $15.0 million, and, in accordance with their terms, $3.0 million inprincipal amount must be repaid on June 3 of each of 2004, 2005, 2006, 2007 and2008.  LaBranche & Co. LLC repaid$3.0 million in accordance with these terms in June 2004.  LaBranche & Co. LLC may prepay, at apremium, all or any part of such senior subordinated notes at any time,provided that the amount prepaid is not less than 5.0% of the aggregateprincipal amount of such senior subordinated notes then outstanding.  Upon the occurrence of a change of control,LaBranche & Co. LLC may, but is not required to, make one irrevocableseparate offer to each holder of the senior subordinated notes to prepay all ofthe senior subordinated notes then held by that holder. The occurrence of achange of control also constitutes an event of acceleration under the seniorsubordinated notes.  Each of thejunior subordinated notes has an automatic rollover provision, which extendsthe maturity for an additional year, unless the lender provides at least sevenmonths advance notice of its intention not to renew at maturity. LaBranche& Co. LLC is entitled to prepay—with written consent from the NYSE—thejunior subordinated notes without penalty under the terms of the agreementsrelating thereto. During the first quarter of 2005, we repaid approximately$1.9 million aggregate principal amount, plus accrued but unpaid interest,relating to these notes.

 

As of December 31, 2004, $10.0 million of ouroutstanding indebtedness consisted of one note for $2.0 million, which maturesin June 2005 and bears interest at an annual rate of 8.0%, and eight separatenotes, each in the principal amount of $1.0 million, which mature in August2007 and bear interest at an annual rate of 9.0%.

 

As of December 31, 2004, we have a taxreceivable of $1.7 million for 2004 and 2003. In addition, we intend to file aFederal carry-back claim for net operating losses generated in 2004**,**which will be carried back against 2002 taxable income.The potential refund

 

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claim is approximately $17.3 million, which is net of a $1.1 million2002 tax audit assessment.

 

Our “Other liabilities” of $12.5 millionreflected on the accompanying 2004 consolidated statement of financialcondition are comprised of legal and tax contingencies. Such contingencies areconsidered long term, as there is no present obligation to pay such liabilitiesin the foreseeable future.

 

Wecurrently anticipate that we will be able to meet our working capital,regulatory capital and capital expenditure requirements through at least thenext twelve months.

 

***CreditRatings***

 

The Original Senior Notes were originallysold in private sales to institutional investors on May 18, 2004, and substantiallyall the Original 2009 Notes and all the Original 2012 Notes were subsequentlyexchanged for substantially identical Senior Notes registered under theSecurities Act of 1933, as amended. The 2004 Notes that remained outstandingafter our May 2004 refinancing, in the aggregate principal amount of $6.9million, were repaid by us at their maturity on August 15, 2004. The 2007 Notesthat remained outstanding after our May 2004 debt refinancing, in the aggregateprincipal amount of $13.6 million, are publicly held but are no longer rated.The following table sets forth the credit ratings on our Senior Notes as ofDecember 31, 2004:

 
| ** **         | ** ** | **Moody’s  Investors Service** | ** ** | **Standard &  Poor’s** | ** ** |
|--------------------|------------|-------------------------------------|------------|---------------------------------|------------|
|               |       |                                |       |                            |       |
| 2009 Senior  Notes |       | Ba1                                 |       | B                               |       |
|               |       |                                |       |                            |       |
| 2012 Senior  Notes |       | Ba1                                 |       | B                               |       |

 

## **Cash Flows**

## ** **

Our cash flows are related primarily to our specialisttrading activities, as well as to our financing activities related to theexpansion of our business.

 

*Year Ended December 31, 2004*—Our cash and cash equivalents decreased$47.4 million to $444.4 million at the end of 2004. The decrease was the resultof $125.4 million used in our operating activities primarily from payment ofthe $63.5 million in restitution and fines in settlement of the prior year’sNYSE and SEC specialist investigation and a $74.0 million increase****in repurchase agreements. This decrease was partially offsetby $79.0 million provided by financing activities due primarily to therefinancing of our indebtedness.

 

*Year Ended December 31, 2003*—Our cash and cash equivalents increasedby $414.9 million to $491.9 million at the end of 2003. This increase wasprimarily the result of investments in U.S. government obligations withoriginal maturities of 90 days or less, as well as our operating activities. Weused net cash of $44.0 million in our investing and financing activitiesprimarily to buy back shares of our then-outstanding preferred stock and to paydividends on our common shares.

 

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*Year Ended December 31, 2002*—Our cash and cash equivalents increasedby $25.0 million to $77.0 million at the end of 2002. This increase resultedmainly from $95.5 million provided by our operating activities, offset by $6.1million used for investing activities, including our acquisition of Hochstin& Company, Inc., a NYSE floor brokerage company, in October 2002. We usednet cash of $64.4 million in financing activities, primarily to repayindebtedness and to repurchase shares of our then-outstanding Series Apreferred stock.

 

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**PART IV**

 

**Item 15.****                           ****EXHIBITS AND FINANCIAL STATEMENTSCHEDULE.**

 

(a) Documents filed as part of this report.

 

(3)                                  *Exhibits*:

 
| 31.3 |   | Certification of George  M.L. LaBranche, IV, Chairman, Chief Executive Officer and President, pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002. |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.4 |   | Certification of Harvey S.  Traison, Senior Vice President and Chief Financial Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.       |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this amendedreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
| April 15, 2005 | **LaBRANCHE & CO INC.** |
|----------------|-----------------------------|
|           |                        |
|           | By:                         | /s/ George M.L. LaBranche, IV |   |
|           |                        |  George M.L. LaBranche, IV |
|           |                        |  Chairman, Chief Executive Officer and  President |

 

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